Q4 2024 Direct Digital Holdings Inc Earnings Call
One.
Speaker Change: Thank you for standing by. Welcome to the Direct Digital Holdings, Fort Quarter and the School of Year 2020 for Erding's Call.
Speaker Change: All lines have been faced on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, think to press the store, followed by the number one under telephone keypad. If you would like to enjoy your questions, please press the store one again. Thank you. I would now like to turn the conference over to Brett Milotte investor relations. Thank you, Dan. You may begin. Thank you.
Speaker Change: Good afternoon everyone, and welcome to Direct Digital Holding's fourth quarter and full year of 2024 earnings conference call. My name is Brett Milotte, and I'm representing Direct Digital Holdings from ICR. On today's call, our Direct Digital Holdings chairman and chief executive officer, Mark Walker, and chief finance officer, Diana Diaz.
Speaker Change: Information Discussed today is qualified in its entirety with the form 8K and accompanying earnings release presented by today by Direct Digital Holdings, which will be the access at the SEC's website and DRCT's website. Today's call is also being webcast and a replay we deposed to DRCT's Investor Relations website.
Speaker Change: Video you follow in the speaker's presentation, there will be a question and answer session. Please note that the statements made during the call, including any financial projections or other statements that are not historical in nature, they constitute four looking statements.
Speaker Change: These limits are made on the basis of DRCT's views and assumptions about a future event and business reformers at the time they are made. It would not undertake any obligations update these statements.
Speaker Change: Forlooking Significes of It to Risks, which we call DRCT's actual results to different points of historic results and forecasts, including those risks set forth in DRCT's findings of the SEC. And you should refer to those for more information. This cartridge applies to all Forlooking Statements major in this call.
Speaker Change: During this call, the RCT we've run into non-GAAP financial measures. These non-GAAP measures are not prepared in accordance to generally set the accounting principles. Reconciliation to non-GAAP financial measures, the most directly compatible GAAP measures , is available in the earnings release that the RCT filed in its form a K today.
Speaker Change: I'll now hand the call over to Mark Walker, GP second officer. Mark?
Mark Walker: Thanks, Brett, and thank you to everyone joining our fourth quarter and fourth year of 2024 earnings call.
Mark Walker: For the full year, I'm pleased that we delivered revenue in line with our significant
Mark Walker: 2020-24 proved to be a challenging year for the company to say the least, but I'm incredibly proud of the team for responding quickly, initiating a clear strategy and mobilizing to execute against that strategy.
Mark Walker: Today, Direct Digital is re-scaling with the significantly strengthened business model for customers, partners, and shareholders alike.
Mark Walker: Just to remind everyone, at this time last year, Direct Digital Holdings released its Q4 and full-year results for 2023, announcing a top-line revenue guidance target of 170 million to 190 million representing 15 percent year-over-year growth at the midpoint.
Mark Walker: By early May, Direct Digital holding supply side platform Colossus SSP had achieved revenues far ahead of the previously stated guidance, and the company was well on its way to our record quarterly results.
Mark Walker: At that time, we were fighting what we believed was an ongoing short attack since December of 2023 and believed that the worst was behind us.
Unfortunately, there was a secondary attack.
Mark Walker: A second, false and defamatory blog post against our supply-side platform, Colossus SSP, in mid-May of 2024, caused an unexpected business disruption amongst our partners, advertisers
Mark Walker: due to a major customer pausing its connection with Colossus.
Mark Walker: The connection with this major customer who is in any media area and the digital ecosystem has resumed. However, volumes have not yet returned to pre-pause levels in this cause of meaningful reduction in our FY2024 revenues, and is also expected to impact 2025.
Mark Walker: That said, despite the challenges faced this past year, we delivered fourth quarter results in line with our revised revenue guidance range.
Mark Walker: We have been working diligently with our multinational hold co agency partners, our Fortune 500 brand partners and demand side partners to resume business which many already have.
Mark Walker: Starting last year, we initiated plan two, one, further expand our sources of our revenue to create a more diversified business throughout all segments.
Mark Walker: and two, conduct a cost savings review, which has resulted in significant operating expense reduction sequentially when compared to the first half of the year.
Mark Walker: Concerning our diversification strategy in the 3rd quarter of 2024, we announced the launch of Colossus connections.
Mark Walker: and an aggressive initiative to accelerate our direct integration efforts with leading demand side platforms, and we have already signed up two of the leading partners in the marketplace.
Mark Walker: This initiative will optimize supply-packed efficiency for advertising clients through direct connections with top-demand side platforms, ultimately providing advertisers with improved access to demand and cost savings.
Mark Walker: In addition, we are pursuing alternative intermediaries and pathways to send buyer spend to our publishers.
Mark Walker: We send sequential improvement from existing direct connections, and we are expecting to see greater revenue impacts as we move through 2025. This alternative pathways are solidified and as integrations are completed in the second half of 2025.
Mark Walker: As part of our continuing social strategy, we are dealing with our partners to keep our key social relationships intact, while building back at its previous levels.
Mark Walker: This plan will continue to take shape over time through 2025, as we focus on diversifying, optimizing its future proofing our self-side platform.
Mark Walker: On the by side, since we unified our two divisions, Orange 142 and Huddle masses, we have been keenly focused on small and mid-side clients, who are increasingly shifting advertising budgets to digital and require support to navigate its complexities and optimize their
Mark Walker: Further, we see that small and mid-size brands are looking for more high-touch and tailored client-five-side relationship.
Mark Walker: These clients are a key focus for it and we combine by-side operation.
Mark Walker: Despite the overall decline in revenue gross margin increased from 23% in the prior year to 32% in the fourth quarter of 2024 due to a higher mix of buy side revenue in the current quarter.
Mark Walker: We realized cost savings in operating expenses of $2 1 million in the fourth quarter of 2024, reflecting the flexibility of our cost structure.
Mark Walker: In addition to our focus on building back our top line and as mentioned on our call last quarter, we have undertaken a series of cost savings and operational optimization strategies, which have resulted in a more diversified efficient business model positioning us for success in the coming years.
Mark Walker: We were able to withstand the dramatic impact to our revenue through improved gross margin and operating cost savings, which is a testament to our robust business model and the success of our cost saving initiatives looking.
Mark Walker: Looking forward into 2025, we are encouraged by the growth we're seeing in segments of the AD Tech arena, specifically around curation and data enrichment.
Mark Walker: We are reiterating revenue guidance of 90 million to $110 million for fiscal 2025, underscoring our confidence in our ability to scale up both our buy side and sell side businesses.
Mark Walker: In particular, we expect the second half of the year to deliver strong gains as we experienced the full effect of new direct sell side partners coming online, while our first quarter tends to be slower than the fourth quarter related to seasonality and our sell side business.
Mark Walker: We are seeing sequential improvement in the first quarter 2025 over November and December 2024, we believe our streamlined approach, we will continue to enable us to capture market share and strengthen our leading advertiser marketing technology offerings.
Diana <unk>: I will now hand things over to Diana <unk>, our Chief Financial Officer, who will walk through some of the financial highlights in further detail.
Diana: Thank you Mark I'll start with a few more details related to the fourth quarter 2024 results.
Diana: Related to revenue our fourth quarter 2024 revenue was $9 $1 million, a decrease of $31 $9 million over the $41 million in the same period of 2023.
Diana: Downside revenue fell to $2 7 million for the fourth quarter compared to $33 4 million in the same period of 2023 and.
Diana: As stated before the key driver for this reduction was the suspension by one of our large customers. Following the defamatory article against the company. This customer which is an intermediary in the DSP marketplace ascent restore disconnection and is continuing to scale, making up about 11% of the.
Diana: Fourth quarter sell side revenue in 2024.
Diana: We were pleased to see a one time positive bump in sales side revenue in the fourth quarter of 2024 and about $600000 driven by outsized political spend in October however, we'd like to emphasize that while this was a welcome. This it is not representative of our repositioned business.
Diana: While this was a nonrecurring revenue impact is demonstrate the opportunistic and dynamic nature of our business model, which was able to move and adapt when opportunities arise.
Diana: On our buy side for the fourth quarter, we saw revenue decreased to $6 $4 million compared to $7 $6 million in the same period of 2023.
Diana: The $1 $2 million decrease in buy side revenue for the quarter was due to a $1 $7 million decrease in spending from customers no longer actively purchasing from the company, including about $600000 from completion of certain onetime campaigns in 2023, partially offset.
Diana: By growth from existing and new customers of 8%.
Diana: Due to the decrease in revenue gross profit dollars decreased to $2 $9 million in the fourth quarter from $9 $3 million in the prior year. However, because of the change in mix of buy side and sell side business gross margin for the fourth quarter improved from 23%.
Diana: In 2023% to 32% in 2024.
Diana: Related to operating expenses, our fourth quarter 2024, operating expenses were $7 7 million a decrease of $10 $4 million over the $18 $1 million in the same period of 2023.
Diana: Operating expenses for the fourth quarter were negatively impacted in 2023 by an unusual charge for $8 $8 million related to payments to a few publishers and then 2024 by about $400000 in costs to regain compliance with respect to delinquent SEC filings.
Diana: Excluding these unusual items adjusted operating expenses were $7 $2 million.
Diana: Of 2024, a decrease of $2 1 million or 23% over $9 $3 million in the same period of 2023.
Diana: Adjusted operating expenses, which excludes the unusual compliance cost for the second half of 2024 of $13 $5 million decreased by $1 $9 million or 12% from $15 4 million for the first half of 2024.
Diana: Yeah.
Diana: Operating loss for the fourth quarter was $4 3 million compared to an operating loss of $8 8 million in the same period of 2023.
Diana: The unusual operating expense items contributed $400000 of operating loss for the fourth quarter of 2024, and $8 $8 million of impact to operating income in the same period of 2023.
Diana: Adjusted EBITDA for the fourth quarter of 2024 was a loss of $3 4 million compared to an adjusted EBITDA loss of $6 6 million in the same period of 2023.
Diana: Excluding the unusual operating expense items adjusted EBITDA loss for the fourth quarter was $3 million in 2024 compared to adjusted EBITDA income of $2 2 million in the same period of 2023.
Diana: Turning to the balance sheet, we ended the year with cash and cash equivalents of $1 4 million compared.
Diana: Compared to $5 $1 million as of the end of 2023.
Diana: Total cash plus our accounts receivable balance as of year end was $6 $4 million compared to $42 $3 million as of the end of 2023.
Diana: We are actively advancing multiple funding and equity financing pathways with the goal of that these efforts will restore NASDAQ compliance strengthen the company's financial position and support key growth initiatives.
Diana: Now to touch on our guidance our guidance assumes that the U S economy does not have any major economic conditions to deteriorate or otherwise significantly reduced advertiser demand.
Diana: We plan to offer annual guidance and update it throughout the year.
Diana: With our visibility today, we are reiterating our fiscal year 2025 revenue guidance in the range of $90 million to $110 million underscoring our confidence in our ability to scale up of the buy side and sell side businesses.
Diana: And as Mark said, we expect the second half of the year to deliver strong gains as we experienced the full effect of new direct sell side partners coming online.
Diana: And we continue to refocus the company our lower cost structure.
Diana: Optimize performance and focus on driving efficiencies across the business are key to our accelerated path to return to profitability. We continue to be judicious in adding any new costs and we remain confident in our business to deliver strong performance for our shareholders. This year and I'd like to turn it back over to <unk>.
Mark Walker: Mark for some closing comments.
Mark Walker: Thank you Diana and thank you to everyone for joining us as always we appreciate your interest in direct digital holdings and are looking forward to answering your questions. Operator. Please open the line.
Mark Walker: Thank you we will now begin the question and answer session. If you have dialed in and would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue. If you would like to withdraw your question. Please.
Mark Walker: Star one again.
Mark Walker: Okay.
Unidentified Moderator: And with that our first question comes from the line of Dan Fairness with the benchmark company. Please go ahead.
Dan Fairness: Yes, thanks, good afternoon.
Unidentified Moderator: Just.
Unidentified Moderator: Maybe.
Speaker Change: Several let's just start kind of high level number one just in Q4, we know there was a lot of noise in kind of the TV plus arena, obviously heard from trade desk magnetic problematic everybody.
Speaker Change: Political was kind of a plus you guys are recovering from obviously the attacks, which you successfully defended against but it takes a while to scale back. So I'm just trying to understand.
Speaker Change: Kind of how we should think about the cadence I know you've said strong growth in the back half of this year, but how much was Q4 impacted by kind of post election, malaise, which we sort of heard about and how should we think about these clients. This client spend coming back to you in kind of Q1 and then ramping.
Speaker Change: Yeah No. Good question, Dan good to hear from you as well, yes, I would say.
Speaker Change: For the first time.
Speaker Change: Especially the cycle political represented more of a percentage than it historically has.
Speaker Change: Typically at a business and a 15% at this time that represents probably 50% to 60% range of spin that came through and I think as you know.
Speaker Change: Based upon what you probably heard from your other peers political was very strong all the way through November <unk>.
Speaker Change: <unk> was softer than what we would anticipate for Q4.
Speaker Change: And so we were a little bit surprised by that but what we're seeing and we're kind of in a different cycle right now since the last four years, we've had steady growth consistently occurring.
Speaker Change: We're seeing sequential growth month over month in regards to our overall performance, but for us and how we rebuild back it's really about this a lot about our buyer antenna is not about our publisher, it's not about our publisher inventory, which.
Speaker Change: <unk> seen by the stats the numbers are there, it's really about us for pathways and so we've been working on developing new pathways to connect our buyers and sellers.
Speaker Change: Thats for the direct connection piece, which.
Speaker Change: We are anticipating to see that come to fruition the back half of the year based upon the contracts that we have signed and the other ones that we are currently negotiating and then we're also anticipating having alternative.
Speaker Change: Pathways for our buyers to actually purchase the inventory that we represent.
Speaker Change: Leveraging different deals in Pmt's that we already have established so for US we don't see it as more of a if it comes back it's more about when and timing and the quarter and so we're seeing us getting back to.
Speaker Change: A good healthy run rate.
Speaker Change: For the last half of the year.
Speaker Change: Got it that's helpful. So, let's talk about some of those initiatives right.
Speaker Change: Obviously, a lot of change has happened.
Speaker Change: We're seeing Google pullback on the SSP side as they deal with all the remedies Scott. So the marketplace is kind of in flux P. Max kind of a Max.
Speaker Change: You guys doing the direct connect thing makes a ton of sense, we're seeing a bunch of other folks do that you've talked about top DSP I wonder given your inventory and kind of who you represent of the publisher side. If there is not some kind of niche or middle market guys that you could kind of attack and then so maybe kind of talk through how we should think about how.
Speaker Change: If you stay on the connection side and I would also love to hear about how youre thinking about.
Speaker Change: Curation, it's sort of it's very topical, but we're not seeing a ton of money figure it out in the marketplace. Yet so maybe hit those two topics for us.
Speaker Change: Yeah, absolutely so for us we actually see the opportunity one we have excellent holdco partnership relationships.
Speaker Change: We think we're always going to have access to those to those dollars coming through our pipes and so we definitely will continue to nurture and manage those relationships as we see fit but the opportunity that we also see is it really.
Speaker Change: In the middle market.
Speaker Change: The middle market dollars flowing through our pipes. If you will our SSP, we think that that's actually an opportunity to expand and grow I think you've seen.
Speaker Change: Some some DSP and SSP is really focus on what they call. The premium partnerships. We think that there is a ripe opportunity in the middle market and that's really kind of how we manage the business for the last four years, so actually on the buyer side and also from the sell side, we see that as our sweet spot and where.
Speaker Change: Planning on doubling down into that marketplace. We think it provides us two benefits one.
Speaker Change: Diversification.
Speaker Change: Where there is lack of concentration of dollars. We think that that's a major benefit for US is focus on the middle market. But then also we think it is.
Speaker Change: For additional opportunity and from what we've seen in that middle market has been a little bit slower to actually transition over to.
Speaker Change: The digital space, So we see it as real Greenfield for us.
Speaker Change: And being able to fuel our overall growth strategy and also the repeat of CAGR that we've been able to perform over the last five six years.
Speaker Change: And the curation piece, Mark sorry, because I know, it's a long question in English, yes, no no no.
Speaker Change: No.
Speaker Change: Hey, as it relates to curation, we do think that there is an opportunity for curation and it's something that we're exploring with many of our partners right now.
Speaker Change: We think that there is an opportunity, but we're still working through figuring out what's the best way for us to apply that to our partners on what we are seeing at least at the onset. It's a case by case basis.
Speaker Change: So that's kind of the strategy that we're looking at curation and we'll be talking about that more so in the future.
Speaker Change: Opportunities that we also see as it relates to curation is really with our bank partners.
Speaker Change: We work with about 250 different 200 towards laboratory 50 different Biocide partners, we think there's a curation opportunity with middle market and we think what what sets us.
Speaker Change: Unique and what also makes us have a competitive advantage in serving the middle market is the fact that our buy side.
Speaker Change: Please ourselves employees talk and have the capability of actually leveraging curation as a competitive advantage that we actually take to the marketplace there to interact with our buy side clients. So we think that gives us a unique a unique val.
Speaker Change: The value proposition and selling point and so you'll see us talking more specifically about curation in the middle market to our buy side partners as well as on the sell side has capabilities that we have.
Speaker Change: Super helpful last one I promise just thoughts on attacking video I know, it's not been a huge component historically than we started talking about it.
Speaker Change: The whole CPB markets kind of very top heavy at the moment the bottom side has been challenged but still a great opportunity for programmatic execution. So just curious how youre thinking about attacking kind of that landscape. If you. If that's part of the strategy here.
Speaker Change: Yeah it actually.
Speaker Change: Lee is the what we're seeing specifically on the sell side platform of people, who are looking for lower cost Cps as it relates to the CTV and OTT video space and we think that there is.
Speaker Change: Opportunity for us to provide that into the marketplace. When you think about media buys.
Speaker Change: Excuse me, ladies and gentlemen, please standby your conference will resume momentarily and your lines of business.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: And excuse me, ladies and gentlemen, please proceed to standby your conference will resume.
Speaker Change: Momentarily. Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Yes.
Unidentified Moderator: Ladies and gentlemen, your conference will now resume Mark. Please go ahead.
Speaker Change: Yeah, Hey, Dan I don't know if you finished if it cut off before the curation piece or did you get everything you wanted to hear do I need to repeat it.
Speaker Change: I heard you say youre seeing lower cost CPC on the sell side Youre seeing the clients come in asking for lower cost.
Speaker Change: GPS and the CVV OTT video space, but I didn't hear the rest after that.
Speaker Change: Yeah. So what we're saying is in regards to the partners that we're working with and from what we have seen in the marketplace. There seems to be a demand for lower cost cpm's.
Speaker Change: That are on the mid to lower end of the spectrum and we think that there's opportunity for a colossus SSP indirect digital to be able to fulfill that demand in the marketplace and so many of the things that we're working to do is really to focus in on that we'll provide CTV partners in video partners in OTT partners, they actually fit in that into the space and we think that.
Speaker Change: Would you have a competitive advantage there.
Speaker Change: Got it. Thank you for all the color and I apologize for asking so many questions I, apparently look or phone.
Speaker Change: Get back into queue.
Speaker Change: No. It's all good thank you.
Unidentified Moderator: And your next question comes from the line of Michael Kaplinsky with Noble capital markets. Please go ahead.
Michael Kaplinsky: Good afternoon, everyone a couple of questions.
Michael Kaplinsky: Mark you indicated that some of the revenue initiatives appear to be at least on the buy side of your business and I was wondering if this represents a shift or maybe a rebalancing on your focus on growing your sell side business.
Michael Kaplinsky: Yeah no good question, yes.
Michael Kaplinsky: We definitely have in this has been our strategy for the last two years.
Michael Kaplinsky: We've been focused on bringing on the buy side of our business and really looking at expanding it we made.
Michael Kaplinsky: Some internal investments as it relates to our sales processes and in the marketplace and so what we're starting to see some of the fruition of that come to come to bear.
Michael Kaplinsky: Last year, we put all of our sales teams on specific.
Michael Kaplinsky: CRM system.
Speaker Change: <unk>, that's a lot more uniformed, but they'll also put different sales processes in place in order to try to.
Michael Kaplinsky: Increased demand into our buy side business and so.
Michael Kaplinsky: I think part of what Youre seeing right now is the work to actually go after and continue to grow that piece of the business, especially because it's at a higher margin.
Michael Kaplinsky: We think that in the long run, especially with some of the cost saving measures we've taken in place it will help us.
Michael Kaplinsky: Get back to profitability, but also expand profitability once we get the topline higher as it relates to the buy and the sell side business.
Michael Kaplinsky: So it's not really a recalibration, but it's been a two year focus for us and we're starting to see fruits come from it.
Michael Kaplinsky: Gotcha, and then on the cost side I was wondering if you. Obviously you said that you've taken out some cost can.
Speaker Change: Can you give us a sense of how much the cost savings will be on an annualized basis and im just trying to get a sense of the amount of fixed costs that you've taken out and you are including variable cost in your expectations for 2025.
Speaker Change: Yeah, what I'm going to do is let me give you kind of our overall comprehensive strategy that I will turn it over to Diana to actually get more into the details, but the way that we built our business model and I think you probably have seen it.
Speaker Change: By looking at our balance sheet and our income statement, we have very little capex as it relates it was part of the way that we built is knowing that.
Speaker Change: The ability to scale without increasing your fixed costs was important to us and so part of the reason that we've been able to absorb and defend against some of the attacks that we have been.
Speaker Change: It's just because of the variability that we've been able to build inside of our structure and our overall business.
Speaker Change: So we were able to take cost out without cutting what I would say muscle and bone cutting a little bit of fat.
Speaker Change: As it relates to the end of last year, and we're going to see benefit of that going through 2025 as well in the way that we are operating the way that we set up our operating structure. So I'm going to turn over to Diana to give you some more details around that which he could tell you kind of what that model looks like on a go forward.
Diana: Sure, we refocused and the earnings release and the script on operating expenses because.
Speaker Change: We wanted you to be able to calibrate there.
Speaker Change: We had some costs that will be nonrecurring $1 $7 million of compliance costs related to getting our filings complete and then we had the.
Speaker Change: The first half versus the second half reduction in costs that we wanted to point out so.
Speaker Change: And I would expect there could be another one and a half to $2 million of savings that we would see on a full year basis for 2025.
Speaker Change: So that's that's what we're looking at.
Speaker Change: Thank you for the color and then based on your revenue trajectory in your revenue guidance for 2025 and focus on higher margin buy side.
Speaker Change: Can you kind of give us a sense when do you anticipate you might swing towards positive cash flow.
Speaker Change: As we as we look at the real gains coming in in the second half of the year that that's really where we see us getting back to.
Speaker Change: Our more normal cadence.
Speaker Change: Third and fourth quarter.
Speaker Change: Alright, good luck it sounds great. Thank you.
Speaker Change: Thank you.
Speaker Change: And I'm showing no further questions at this time I would like to turn it back to our CEO Mark Walker for closing remarks.
Speaker Change: Yes.
Speaker Change: There is no more questions then we will see you next quarter.
Speaker Change: Thank you presenters, ladies and gentlemen. This concludes today's conference call. Thank you all for joining you may now disconnect.
Speaker Change: Yeah.
Speaker Change: Thank you.