Q3 2024 Direct Digital Holdings Inc Earnings Call
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Speaker Change: Good day, everyone, and welcome to the Direct Digital Holdings Third Quarter 2024 Earnings Call. At this time, I would like to hand the call over to Mr. Brett Milotte. Please go ahead, sir.
Brett Milotte: Good afternoon, everyone, and welcome to Direct Digital Holdings' third quarter earnings conference call. My name is Brett Milotte, and I'm representing Direct Digital Holdings from ICR.
Brett Milotte: On today's call are Direct Digital Holdings Chairman and Chief Executive Officer Mark Walker and Chief Financial Officer Diana Diaz.
Speaker Change: Information discussed today is qualified in its entirety with the Form 10-Q and accompanying earnings release, which will be filed by Direct Digital Holdings. This will be accessed at the FCC's website and DRCP's website.
Speaker Change: Today's call is also being webcast, and a replay will be posted to DRCT's Investor Relations website.
Speaker Change: Immediately following the speaker's presentation, there will be a question and answer session.
Speaker Change: Please note that this statement is made during the call, including financial projections or other statements that are not historical in nature.
Speaker Change: They constitute forward-looking statements. These statements are made on the basis of DRCT's views and assumptions regarding future events and business performance at the time they are made. We do not undertake any obligation to update these statements.
Speaker Change: Forward-looking statements are subject to risks, which can cause DRCT's actual results to differ from its historical results and forecasts, including those risks set forth in DRCT's filings at the SEC, and you should refer to these for more information. This cost-sharing statement applies to all forward-looking statements made during a call.
Speaker Change: During this call, DRC will be referring to non-GAAP financial measures.
Speaker Change: These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliation of the non-GAAP financial measures and historically comparable GAAP measures is available in the earnings release that DRCC will file in its Form 10-Q. I will now hand the call over to Mark Walker, Chief Executive Officer. Mark?
Mark Walker: Thanks, Brett, and thank you to everyone joining our third quarter earnings call. We are pleased to return to our normal reporting cadence after the submission of our FY 2023, Q1 2024, and Q2 2024 filings last month.
Mark Walker: It goes without saying that it has been a difficult few quarters for Directors O'Holding. On this call, we believe it would be helpful to provide a quick recap to the past few months, the current status of our company, and why we're excited for the path and growth opportunities ahead.
Mark Walker: In late March this year, Direct Digital Holdings released its Q4 and full-year results of 2023, announcing a top-line revenue guidance target for 2024 of $170 million to $190 million, representing 15% year-over-year growth at the midpoint.
Mark Walker: By early May, Direct Digital Holdings supply-side platform Colossus SSP revenues were pacing ahead of the previously stated guidance and the company was well on its way to record quarterly results.
Mark Walker: However, in mid-May 2024, Analytics Research, LLC, a for-profit digital advertising analytics firm run by one individual, published a false and defamatory blog post against Colossus SSP.
Mark Walker: To be clear, this is a false blog post that we have refuted in both the marketplace and in court filings, and the post has been disproven by top experts.
Mark Walker: However, because of the blog post, Direct Digital Holdings had an unexpected business disruption amongst its partners, advertisers, and clients, including a major customer pausing its connection with our supply-side platform, Colossus SSP.
Mark Walker: The connection has now resumed, however, volumes have not yet returned to pre-pause levels, and this has caused a meaningful reduction in our revenues.
Mark Walker: analytics defamatory statements have impacted the business and caused the need to revise guidance downward for FY 2024.
Mark Walker: In May, we filed a defamation lawsuit, which we will continue to vigorously defend in court. However, DDH has been successful in turning on DePaul's customers and volumes through our sell-side platform, our revenue is steadily increasing.
Mark Walker: Throughout these months, we have continued working with our multinational HOCO agencies, our Fortune 500 brand partners, and demand-side partners to resume business, which we already have. While we are confident we will return the company to normalcy, it will take time to rebuild.
Mark Walker: Consequently, the impact was felt in the second and third quarter of 2024, and in Q3, direct digital holdings revenue was $9.1 million, a decrease of $50.4 million, or an 85% decline compared to the $59.5 million in the same period of 2023.
Mark Walker: Colossus SSP saw revenue fall to $2.2 million per Q3 2024 compared to $51.6 million in the same period of 2023, a 96% decrease year over year.
Mark Walker: On our buy side, we saw revenue of $6.9 million compared to $7.9 million in the same period of 2023, a 12% year-over-year decline.
Mark Walker: For the third quarter 2024, gross profit dollars were $3.5 million, compared to $11.8 million for the third quarter 2023, a decrease of 70%.
Mark Walker: Consolidate operating loss for the quarter was $3.7 million compared to operating income of $4.5 million for the same period.
a decrease of 8.2 million or 181% year-over-year.
Mark Walker: Despite a dramatic impact to our revenue and non-recurrent costs of $1.1 million related to the auditor change, we only saw a decrease in operating income of $8.2 million and a decrease in adjusted EBITDA of $8.3 million in the third quarter compared to the same period of 2023.
Mark Walker: This is a testament to our cost-saving initiatives and the company's operating structure, which is able to flex and adapt to shocks across our top line.
Mark Walker: In addition, over the past few months, we have also implemented an optimization strategy diversifying our revenue and conducting a cost-savings review, which will result in a more diversified and efficient business model.
Mark Walker: As part of the optimization strategy, we announced last month that Directorsville Holdings entered into a $20 million equity reserve facility with New Circle Principal Investments.
Mark Walker: an affiliate of New Circle Capital, providing our company access to a fresh source of capital, enhancing our financial liquidity, and strengthening our shareholder equity, enabling the expansion of our technology and strategic capabilities, benefiting both publishers and advertisers.
Mark Walker: Earlier today we were pleased to announce the launch of Colossus Connections, an aggressive initiative we were already executing to accelerate our direct integration efforts with leading demand-side platforms.
Mark Walker: This initiative will optimize supply path efficiency for advertisers, unlocking access to more potential demand and revenue, and will also save them money.
Mark Walker: While this has always been a priority of Direct Digital Holdings, in recent months we have made impressive inroads and are excited to share that we have already signed up two of the leading DSP partners in the marketplace.
Expected to go live later in 2025.
Mark Walker: On the demand side, we recently announced the unification of Direct Digital Holdings' five-side divisions.
Orange 142 and huddle masses.
Mark Walker: This will enable the delivery of new capabilities particularly in helping clients navigate emerging technologies such as artificial intelligence and machine learning as well as emerging high growth channels such as marketing enabled services, connected TV, social media, and retail media.
Mark Walker: Small and mid-sized clients will be a key focus for the combined entity as the clients are increasingly shifting advertising budgets to digital and require support to navigate its complexities and optimize their ad spin.
Mark Walker: Currently the company serves hundreds of small and mid-sized clients, enabling over 2,000 campaigns each year.
Speaker Change: Before our CFO Diana Diaz goes into details on the third quarter, I want to briefly touch on guidance.
Speaker Change: as a result of the prior events and the subsequent recalibration of our business.
Speaker Change: We are providing full-year revenue guidance of $60 to $70 million for FY 2024 and full-year revenue guidance of $90 to $110 million for FY 2025 as we rebuild the previous level.
Speaker Change: With that, I would like to hand over the call to Diana Diaz to discuss our results in more detail. Diana?
Diana Diaz: Thank you, Mark, and thanks everyone for joining. For the third quarter of 2024, revenue was $9.1 million, a decrease of $50.4 million, or an 85% decline compared to the $59.5 million in the same period of 2023.
Diana Diaz: As Mark detailed, Colossus FSP saw revenue fall to $2.2 million for Q3 of 2024 compared to $51.6 million in the same period of last year, a 96% decrease year-over-year.
Diana Diaz: On our buy side, Orange 142 saw revenue of $6.9 million compared to $7.9 million in the same period of 2023, which was a 12% year-over-year decline.
Diana Diaz: For the third quarter of 2024, gross profit dollars were $3.5 million compared to $11.8 million for the third quarter of 2023, a decrease of 70 percent.
Diana Diaz: Gross margins for the third quarter were approximately 39% compared to 23% in the same period of last year. Gross margins were notably higher due to our buy side making up proportionally more of our business mix this quarter.
Diana Diaz: Operating expenses were $7.2 million in the third quarter of 2024 for a decrease of $100,000 over the $7.3 million of expenses in the third quarter of last year.
Diana Diaz: Consolidated operating loss for the third quarter was 3.7 million dollars compared to operating income of 4.5 million dollars in the same period of 2023. This is a decrease of 8.2 million dollars over 181 percent year over year.
Diana Diaz: We also saw a net loss of $6.4 million in the third quarter compared to net income of $3.4 million in the same period of 2023 due to lower operating income.
Diana Diaz: For the third quarter, adjusted EBITDA was a loss of $2.9 million, a 153% decrease from the adjusted EBITDA income of $5.4 million in Q3 of 2023.
Diana Diaz: Now turning to the balance sheet, we ended the quarter with cash and cash equivalents of $4.1 million compared to $5.1 million as of the end of December, December 31st, 2023.
Speaker Change: As Mark mentioned, to accelerate our growth plan, in October we entered into a $20 million equity reserve facility with New Circle Principal Investments.
Speaker Change: Under their agreement, at our sole election, New Circle will purchase, from time to time, shares of our Class A common stock up to an aggregate of $20 million over a period of 36 months, subject to the conditions in the agreement.
Speaker Change: We plan on using proceeds of these sales to reduce debt obligations, strengthen the overall balance sheet, and drive key growth initiatives.
Turning now to guidance as a result of recent events.
Speaker Change: and the subsequent recalibration of our business that Mark mentioned earlier, we are providing full-year revenue guidance of $60 million to $70 million for fiscal year 2024 and full-year revenue guidance of $90 million to $110 million for fiscal year 2025.
Speaker Change: And with that, I'd like to turn it back over to Mark for some closing comments.
Mark Walker: Thank you Diana and thank you everyone for joining us today. We look forward to returning to our normal reporting cadence and continuing to provide long term value for our shareholders through best-in-class advertising services.
Mark Walker: With that stated, we will now take some questions from the analysts. Operator, please open the line.
Speaker Change: Thank you and everyone if you would like to ask a question please press star 1 on your telephone keypad. We'll go first to Dan Kernos, the Benchmark Company.
Thanks, good afternoon, welcome back. Mark, I guess
talk through
confidence in the marketplace.
Speaker Change: with you guys right now. Obviously, you went through quite the tumultuous period.
Speaker Change: the Auditor, the Analytics Report. You clearly have defended yourself in court. A lot of advertisers and publishers can be wary when there's noise. And you guys have gotten past most of it. So just love to get a sense of how the conversations are going as you kind of rebuild.
volumes and, and, or trust in the marketplace.
Speaker Change: Yeah. Yeah, Dan. Hey, and number one, great to hear from you. It's been a long time.
Speaker Change: In regards to confidence in the marketplace, we look at it on two fronts. One, I think in the financial markets, I think getting BDO.
Speaker Change: as our auditor, quickly and efficiently in getting back to public filings in time for Q3.
Speaker Change: I have to tip my hat off to our internal team and the level of work that they were able to do along with BDO and being able to get the filings done for us to be able to have this Q3 call. I think that restores confidence in the marketplace as it relates to us as a company and also in us in regards to our public filings.
Speaker Change: On the second front, actually in the marketplace, the feedback that we received in the marketplace with our major whole-coat companies and also with different brands that we work directly with has been very favorable on the buy side as well as the sell side.
Speaker Change: In regards to the Southside business, the Colossus business, there was a lot of noise in the marketplace. However, we feel like we've definitely been able to overcome that. We're seeing buying patterns starting to pick up momentum and growth month over month. So now it's just really about the rebuild and just continuing to deliver every single day for our clients and for our partners and making sure that we are responding efficiently and effectively to them in 24 to 48 hours.
Speaker Change: whenever there's a request. And so we're starting to see that type of traction. Many of our partners who were partners before all of this began have stuck by us and have shown a vote of confidence and we're seeing spin levels starting to creep up incrementally every single month.
Got it. That's a helpful framework. Thank you.
Speaker Change: You know, you've talked about a diversification strategy. I remember before all this started, we were talking about, you know, kind of a different go to market that had resulted in a revenue forecast reduction, but
Speaker Change: We were talking through IDs. Now you guys are leaning into third-party DSPs a little bit stronger. You've got two signs.
Speaker Change: so far, just help us think through, because the ecosystem has clearly evolved since you've come through this, so just help us think through the opportunity set there, and, you know, relative to where you were before,
Speaker Change: Either how long it takes to get back or what the TAM looks like relative to the marketplace that you were attacking before
Speaker Change: Yeah, I think the TAM looks relatively the same. I don't think the TAM actually changes. I think it's really the mechanism of delivery.
It's what we're focused in on.
Speaker Change: We started the diversification strategy, and I'm going to talk about both sides of our business, on our buy side as well as our sell side. I'm going to lean in on the buy side first.
Speaker Change: We've had a strong leaning into what I would call your education sectors, also your travel and tourism sectors, and then some other ancillary sectors as well. We're looking at different types of markets that we can go after in that space to increase our customer base, which we're pretty confident about. We feel like we have a healthy pipeline built up.
Speaker Change: that will probably be going into more detail when we get into Q1 of 2025 that we'll be discussing at that point.
Speaker Change: As it relates to the sell-side business, we've always had multiple connections, and what we're looking at is expanding those connections even more and working directly with our agency partners and our brand partners to leverage those connections in order to buy the supply and publishers that we actually have access to. And so just like we were before, we're focused in on that strategy, and we're just bringing more attention and light to it to show that we're diversifying on the buy side as well as our sell side of our business. And we feel like that that's going to be very profound for us to continue to grow the business on the foreseeable future.
each other.
Speaker Change: And as publishers come back online, Mark, how do you view, you know, the hot topic this day and age is audience curation, and it's seemingly more and more done on the sell side. I know that
Speaker Change: You're just rebuilding your volume, so it's probably a bit early for me to be asking, but you just talked about different mechanism of delivery, so I'm curious how you view that opportunity.
Speaker Change: Yeah, as you said, audience curation is definitely a hot topic. I think you'll.
Speaker Change: In probably very short order, you'll start seeing us bring more attention to that, roughly around Q1 of 2024. We believe that that's a very important segment for us to be a part of and for us to attack. We think that there are opportunities for us to leverage different partners to help with that curation. And so I think you'll hear about more on that front in the upcoming future from us.
Speaker Change: Perfect and just so I don't hog I'll ask one last question just on your
Speaker Change: Optimization within the company, you know, clearly rebuilding volume is going to take a while to get back for just DBDA to turn positive. You know, how do you think about running a bit leaner, understanding that you also have to lean into growth? When will we get more color on kind of what the cost savings plan ultimately yields?
Diana Diaz: Yeah, and actually for that one I'm actually going to turn that one over to Diana to answer for you. Diana, do you want to talk about our cost optimization? Sure, we talked about this a bit in our public filings. We looked at our staffing in early July. We made some reductions in staff. We paused hiring, which we had, you know,
Speaker Change: I thought we were going to increase our staffing quite a bit.
Diana Diaz: And then we looked at some other areas that were more discretionary spend to reduce in the short term while we rebuilt.
Diana Diaz: and we knew we were going to have some additional costs related to compliance.
Mark Walker, Diana Diaz
Yeah.
Diana Diaz: And I think if you if you remember if you looked at how we first came out to market
Diana Diaz: we were able to be one of probably one of the most efficient ad tech companies on a on a revenue per employee.
Diana Diaz: So we really looked at managed to that number and I think even at the levels that we gave last year for 2020, the remainder of this year, but really into 2025, I think you'll see we'll stay back in alignment with those with those metrics.
Speaker Change: Got it. Super helpful. Thank you. And yes, Mark, good to talk with you again in the public light.
Absolutely.
Up next we'll hear from Michael Kapinski, Noble Capital Markets.
Speaker Change: Thank you and welcome back again for me as well. A couple of questions here. I was wondering, you know, obviously you were in the process of building up your infrastructure to scale up, particularly on the cell side, and I was just wondering if you have the ability on regarding servers and so forth to scale that down. I just wanted to know what the fixed cost ramifications might be in terms of the business that you have with them.
Speaker Change: Yeah, one of the things that I think made our business model very unique is the ability that we have to scale up and scale down based upon demand and need.
Speaker Change: I think that's one of the reasons why, in comparison to some of the other sell-side platforms that you've seen, who have a heavy amount of structured fixed costs. If you look at ours, we actually are pretty flexible in how we can scale up and down.
Speaker Change: That gave us the ability in July, August, September time frame to actually adjust our cost structure so that we can have a lower op-ex for us to get the profitability faster as it relates to the sell-side business. And so the way that our CTO structured the business
Speaker Change: really served us very well and I think it is one of the reasons why you see us here today and we're able to grow into 2025 for next year.
Speaker Change: Gotcha and hopefully as you kind of build in the look toward 2025 and that revenue ramp hopefully you can build back better and I was just wondering if you
Speaker Change: can give us a sense of that revenue guide. Is it largely rebuilding the volume with the one client or are you anticipating that there will be broadening of the revenue outside of that particular client? Just gonna give us a sense of the overall advertising outlook that you're anticipating for 2025.
Speaker Change: Yeah, I think it's actually going to be both. I think diversification on our buy side of our business is important to us. I think you're going to see us being able to continue to grow the buy side business which will allow us to drop more EBITDA to the bottom line and operating cash to the bottom line and then also on the buy side of our business you're going to see diversification on that front as well so that you can see us continue to build that business and grow it.
Speaker Change: So, diversification is the theme of 2025 that we're focused in on, and I think in some of the initiatives we're going to be announcing after Q1, you'll hear us talking more about how we're achieving those results.
Speaker Change: And given the potential mix of revenues as you kind of look towards 2025, you mentioned about buy side and having better margins, obviously, I was just wondering, can you give us a sense of what your thoughts are on the expense side and whether or not you will be adjusted to the positive in 2025? Can you just kind of give us your general thoughts about that?
Diana Diaz: I'm going to turn that over to Diana. Okay. Thanks. So we'll, we'll start to see the EBITDA increasing through the quarters as the, as the revenue builds. I think if you look to the 2022 and the revenue.
Diana Diaz: the revenue structure and the the revenue growth pattern that's kind of what to what to expect and and we will see the EBITDA increasing from quarter to quarter as the volume increases.
Speaker Change: Terrific. Okay, well that's all I have for now. Good luck with you guys. Good luck.
Thanks, Michael.
Speaker Change: And just a reminder, it is star one. If you have a question, we'll pause for just a moment.
And at this time, there are no further questions.
Speaker Change: All right, thank you very much, and I'm looking forward to talking to everyone later.
Speaker Change: And once again everyone that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect