Q2 2025 PubMatic Inc Earnings Call
Speaker #1: Hello, everyone. We will begin shortly. Hello, everyone, and welcome to PubMatic's second quarter 2025 earnings call. My name is Oren, and I will be your Zoom operator today.
Speaker #1: Thank you for your attendance today as a reminder, this webinar is being recorded. I will now turn the call over to Stacie Clements with Blue Shirt Group.
Speaker #2: Good afternoon, everyone, and welcome to PubMatic's earnings call for the second quarter of 2025. This is Stacie Clements with the Blue Shirt Group, and I'll your operator today.
Speaker #2: Joining me on the call are Rajeev Goel, co-founder and CEO, and Steve Pantelick, CFO. Before we get started, I have a few housekeeping items.
Speaker #2: Today's prepared remarks have been recorded after which Rajeev and Steve will host live Q&A. If ou plan to ask a estion, please ensure that ou've set your Zoom name to display your full name and firm and use the raise hand function located at the bottom of your screen.
Speaker #2: A copy of our press release can be found on our website at investors.pubmatic.com. I would like to remind participants that during this call, management will make forward-looking statements, including, without limitation, statements regarding our future performance, market opportunity, growth strategy, and financial outlook.
Speaker #2: Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and future conditions. These forward-looking statements are subject to inherent risks and certainties and changes in circumstances, that are difficult to predict.
Speaker #2: You can find more information about these risks and certainties, as well as other factors, in our reports filed from time to time with the Securities and Exchange Commission. These reports are available at investors.pubmatic.com.
Speaker #2: Including our most recent Form 10-K and our subsequent filings on Forms 10-Q or 8-K. Our actual results may differ materially from those contemplated by the forward-looking statements.
Speaker #2: We caution you, therefore, against relying on any of these forward-looking statements. All information discussed today is as of August 11, 2025, and we do not intend and undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as may be required by law.
Speaker #2: In addition, today's discussion will include references to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net income, cash flow from operations, and free cash flow.
Speaker #2: These non-GAAP asures are presented for supplemental informational purposes only and should not be considered or substitute for financial information presented in accordance with GAAP.
Speaker #2: A reconciliation of these measures to the most directly comparable GAAP measures is available in our press release. And now, I will turn the call over to Rajeev.
Speaker #3: Thank you, Stacie, and welcome, everyone. We delivered a strong second quarter, with revenue and adjusted EBITDA ahead of expectations. Revenue from our underlying business, which excludes the affected DSP and political advertising, grew 19% year over year.
Speaker #3: Importantly, our reported revenue returned to year over year growth at 6%. Outperformance driven by CTV and emerging revenue streams, which includes Activate, sell-side data targeting, and commerce media.
Speaker #3: As clients increasingly turned to the PubMatic platform for greater performance, transparency, and control, over their digital advertising strategies. Once in, our robust business model drove the incremental revenue through to the bottom line.
Speaker #3: We delivered a 20% adjusted EBITDA margin, marking our 37th consecutive quarter of adjusted EBITDA profitability. I'm proud of these results and the value that PubMatic delivers to clients.
Speaker #3: Our journey to transform the business started years ago. Evolving from an SSP provider only to an end-to-end platform serving publishers, ad buyers, commerce media networks, and data providers and curators.
Speaker #3: We pioneered supply path optimization and launched Activate to put more control in the hands of advertisers and agencies. We delivered significant growth with sell-side data targeting and commerce media.
Speaker #3: We expanded relationships with the world's largest streamers with CTV now representing nearly 20% of total revenue, and we recently added a top five US streamer which increased our market penetration to 26 of the top 30 global streamers.
Speaker #3: The execution and the secular growth areas have been strong. And yet our financial results are not yet reflecting where I know they can be.
Speaker #3: Today, our top legacy DSP partners contribute the majority of ad spend on our form. Historically, this strategy has delivered growth and scale. However, platform changes on their end are often done with limited visibility and create revenue headwinds for us while we take steps to mitigate them.
Speaker #3: The most recent example occurred just last month in July and will impact our revenue in the second half of this year, as we work through mitigation initiatives.
Speaker #3: Steve will provide more details in a few minutes. I've seen this industry evolve for two decades, and it's clear that we are at an inflection point.
Speaker #3: The lines between SSPs and DSPs are blurring, and AI is fundamentally changing how advertising is created, transacted, and optimized. Long term, we believe the reshaping of the programmatic ecosystem will be to our advantage.
Speaker #3: The status quo simply won't do. As we look to the second half and beyond, our key priority is to accelerate stronger, more sustainable growth.
Speaker #3: As our model continues to deliver significant efficiencies via AI and software optimizations, we are able to fund, even accelerate investments to match the pace of change we're seeing across the ecosystem.
Speaker #3: This includes diversifying our DSP mix, accelerating investment on the buy side, advancing our leadership in CTV, scaling emerging revenue streams, and integrating AI across our tech stack and operations.
Speaker #3: The good news is that we have already been investing in these areas. We have the team, the tech, the customer relationships, and the financial resources to accelerate the opportunities in front of us.
Speaker #3: My confidence stems from the progress we've already made in these areas. First, we have been actively diversifying our DSP mix over the past couple of years.
Speaker #3: Performance marketers and mid-tier DSPs are gaining share of ad budgets that spend shifts to ROI-based outcomes, including in CTV. We see this on our platform.
Speaker #3: Ad spend from these newer DSPs is growing at 20% plus rates, and we're adding more of these high-growth ad buyers to our platform every quarter.
Speaker #3: Including SMB, CTV ad platforms like Mountain and TV Scientific, and China-based performance DSPs to support their non-China business. Collectively, these DSPs strengthen our platform and bring better demand diversity, buyer resilience, and platform stickiness.
Speaker #3: Second, we are accelerating investment on the buy side. The momentum we are seeing with our direct buying platform, Activate, is a testament that our strategy is working.
Speaker #3: Buying activity more than doubled from Q1 to Q2 as advertisers look beyond legacy platforms for increased performance, control, and transparency. We're seeing success across both brand and agency partners.
Speaker #3: Omnicom Media Group Germany recently used Activate to power a CTV campaign for a leading online marketplace for handmade goods, and was able to exceed their clients' performance benchmarks.
Speaker #3: According to their managing partner, Nikolai Keiland, the collaboration with PubMatic allowed the agency to, ote, "implement an efficient, programmatic setup for the CTV campaign that delivered impressive results in both visibility and brand impact." At the same time, commerce media players are integrating with Activate to power their programmatic advertising businesses.
Speaker #3: PayPal is leveraging Activate to combine their unique transaction-based audience data from over 430 million accounts with PubMatic's premium inventory to streamline campaign execution for advertisers, across multiple formats including CTV.
Speaker #3: This demonstrates how buyers are increasingly turning to PubMatic's ifified platform to improve targeting precision, reduce operational complexity, and scale their programmatic commerce media strategies efficiently.
Speaker #3: I'm excited about the potential this partnership has in the near term but, more importantly, see it as a blueprint for broader adoption across the commerce media landscape.
Speaker #3: As more commerce players seek to activate their data in premium, brand-safe environments, our end-to-end platform provides scalable, programmatic infrastructure that complements their direct sales efforts.
Speaker #3: These integrations unlock high-margin revenue opportunities for PubMatic across data, media, and buying technology, further diversifying and accelerating our growth engine. To support growth, we are adding headcount in our go-to-market teams, with a focus on independent agencies and direct brand relationships.
Speaker #3: This complements our ongoing leadership in supply path optimization, which continues to represent a majority of activity on our platform. To capitalize on this increased demand, our third priority is to advance our leadership position in CTV, as buyers increasingly move budgets from linear to programmatic stream.
Speaker #3: CTV revenue grew over 50% year over year in Q2, indicating continued significant market share gains. International expansion and new innovative formats are driving CTV growth.
Speaker #3: In a recent landmark partnership with Nippon TV, one of Japan's largest broadcast companies, PubMatic is now powering programmatic access to their traditional broadcast TV inventory for the first time.
Speaker #3: This reflects a broader trend among broadcasters globally who are turning to PubMatic to modernize their monetization strategies at scale. We were also selected as the exclusive SSP partner for performance marketing company Wunderkind's launch of POZ ads across their premium CTV inventory.
Speaker #3: Also driving growth in CTV are our curated marketplaces. Most recently, we launched our live sports marketplace, allowing advertisers to access sports inventory from fanserve, MLB, FuboTV, DirecTV, Spectrum Reach, and Roku.
Speaker #3: Our proprietary marketplace solves ad monetization for one of the most underserved and high-potential segments. Fanserve's VP of Demand Partnerships, Ben Goodfriend, explains, "It empowers brands to connect meaningfully at the exact moment that matter most, across every platform they love."
Speaker #3: As our growing live sports footprint expands, related buyer activity in the first half of 2025 was up nearly 3x year over year. Fourth, we continue to scale emerging revenue streams that monetize outside of traditional auction dynamics.
Speaker #3: This includes platform fees from data curation, commerce media, and enterprise software solutions, all of which are high-margin and contribute to the natural flywheel of our existing platform.
Speaker #3: For example, we recently partnered with Trainline, Europe's leading train and coach app, with 27 million active customers worldwide. This commerce-focused company has integrated with our platform to drive incremental performance-based revenue at scale.
Speaker #3: By leveraging our SSP, as well as our Connect and OpenRap offerings, they are monetizing both on-site inventory and off-site activations. This allows us to diversify our revenue via our SSP, data, and software fees.
Speaker #3: Connect is a powerful solution that allows data owners, publishers, and commerce media networks to create curated audience segments using their first-party data. For example, one large digital media company with a diverse portfolio across technology, gaming, and shopping leveraged our platform to unify audience data across their properties.
Speaker #3: This enabled advertisers to tap into an expansive set of high-value audience segments like tech enthusiasts or deal seekers. By offering these holistic, cross-property segments, the publisher is able to drive increased advertiser demand and improve CPMs.
Speaker #3: Plus, they're able to use Activate to monetize that audience across third-party inventory as well. These use cases demonstrate how publishers are moving from selling ad space to selling true audience insight, and how PubMatic is empowering them to do it with full control and transparency.
Speaker #3: All while unlocking revenue streams outside of traditional DSP-controlled auction dynamics. And finally, as we accelerate these priorities, AI is a critical component integrated across our tech stack to further automate decisioning and streamline activation.
Speaker #3: This not only drives cost efficiency for our customers, but enhances campaign performance and optimization. In the past 12 months alone, we've unched multiple AI-powered capabilities that will help drive even greater adoption and usage of our platform.
Speaker #3: Including the PubMatic for buyers, our generative AI media buying solution launched in May that enables advertisers to build optimized campaigns using natural language prompts.
Speaker #3: Our solution lets buyers run campaigns through Activate or their DSP of choice, accelerating setup and improving time to value. PubMatic Assistant, an AI-powered analytics engine, allows publishers and buyers to access insights, troubleshoot issues, and guide campaign decisions through an intuitive chat-based interface.
Speaker #3: Predictive diagnostics that detect yield anomalies in real time and surface optimization opportunities via agentic AI workflows to improve publisher monetization with less manual effort.
Speaker #3: And a dynamic floor yield module, currently in beta, that uses live auction signals to adjust pricing per impression, outperforming static solutions in early testing.
Speaker #3: We have owned and operated our infrastructure for many years, and optimize our integrations with industry-leading technology solutions to deploy high-performance machine arning models that enable increased data ingestion and faster processing, setting us apart from others.
Speaker #3: The scale, premium inventory, and wide variety data sets on our platform allow us to deliver measurable results that give us a differentiated advantage. We're moving fast on the AI front, and it's changing the game.
Speaker #3: It's opening up the market in new ways and deepening our customer engagements. We believe that focusing on these key priorities will ultimately result in a stronger, more sustainable revenue profile for PubMatic over time, and drive better outcomes for our customers and shareholders.
Speaker #3: Further, these priorities are converging with a major inflection point in the industry that we believe could result in significant market share expansion. The recent ruling in the Google Ad Tech Antitrust Trial confirmed what I've long known.
Speaker #3: We've been operating in a monopolistic environment for decades. And yet, PubMatic has grown our market share. Now, with remedies on the horizon, we're ering a new chapter.
Speaker #3: Advertisers and publishers will need trusted, independent technology providers with the scale and innovation to replace what they've relied on in legacy systems. PubMatic is that partner.
Speaker #3: We anticipate that a significant portion of Google's 60% market share will be up for grabs in 2026. Further, we estimate that a 1% market share shift to PubMatic would represent approximately 50 to 75 million in net revenue, with most of that flowing through to our bottom line.
Speaker #3: This is a singular, once-in-a-generation opportunity. On top of that, given our full stack platform and breadth of capabilities, we believe structural changes could unlock multiplicative effects as ad buyers expand adoption of our end-to-end platform.
Speaker #3: Such as adding audience targeting functionality or consolidating buying via Activate and Supply Path Optimization. In closing, our Q2 results reflect strong secular growth and highlight how our platform is meeting the needs of today's digital advertising ecosystem.
Speaker #3: While we are actively addressing the recent disruption related to one our DSP partners and seeing early signs of stabilization, it only reinforces conviction in our strategy.
Speaker #3: To diversify demand and revenue streams, and invest in the highest growth areas. We're building for what we believe will be one of the largest market shifts our ustry has seen in years.
Speaker #3: As a programmatic ecosystem evolves, customers are demanding performance, control, and transparency, all of which is increasingly dependent on AI. We've built a platform that gives buyers and ishers choice and independence, we have the team to deliver, and we are making the investments.
Speaker #3: I'm confident that we are building a stronger, more sustainable growth business that creates long-term value for our customers and shareholders. I'll now turn the call over to Steve for the financial details and outlook.
Speaker #4: Thank you, Rajeev, and welcome, everyone. We delivered a great second quarter and exceeded both revenue and adjusted EBITDA guidance. Driving this performance, we're focused on the growth area, CTV, and emerging revenue.
Speaker #4: We ended the quarter with strong margins and healthy free cash flow. We have made significant progress in transforming our business, and as Rajeev discussed earlier, we are accelerating our efforts.
Speaker #4: We proactively began evolving PubMatic several years ago from an SSP provider to an end-to-end platform. This evolution has significantly increased our total addressable market, accelerated growth in key secular areas, and improved our profit mix.
Speaker #4: Today, I will briefly comment on the second quarter highlights, which underline our confidence in our go-forward strategy. I'll then spend the remaining time outlining our second half plan, anticipated changes, and how it flows through to our outlook.
Speaker #4: Starting with the revenue highlights, omnichannel video revenues grew 34% year over year, and represented 41% of total revenues in the quarter. CTV revenues increased by over 50% year over year for the fourth consecutive quarter, and represented approximately 20% of total revenue in the quarter.
Speaker #4: Emerging revenue streams more than doubled year over year, and accounted for 8% of total revenue in the second quarter. Within this category, Connect, our curation and data business, continued its rapid revenue growth trajectory, growing over 100% year on year as publishers and buyers prioritized sell-side targeting, through a more controlled and transparent environment.
Speaker #4: Our strong momentum is being driven by expanded AI product capabilities, and expanded sales team. Revenue from display was flat year over year, a significant improvement from Q1's year over year decline of 10%.
Speaker #4: As a reminder, we lapped the sizable DSP headwind in the second quarter. And as we had anticipated, this DSP spend returned to year over year growth in July.
Speaker #4: We processed approximately 78 trillion impressions in Q2, which was 28% higher than last year, and a 4% increase versus Q1. I want to give a little more color on the composition of these impressions, to address concerns around AI search traffic, as it relates to our business.
Speaker #4: Nearly 60% of all of these impressions were CTV and mobile app, which are unaffected by AI search. The remaining impressions are largely from web-based premium publishers, which are primarily accessed by a direct navigation rather than search.
Speaker #4: Additionally, with our expanding publisher and streaming partnerships, we have growing access to more high-value traffic from which to choose and process. With respect to Q2 ad spending in aggregate, the top 10 ad verticals grew in the mid-single-digit percentages year over year.
Speaker #4: Health and fitness, technology and computing, travel, and arts and entertainment each increased over 20%. We saw softer trends for shopping, automotive, and business, which declined by single-digit percentages.
Speaker #4: On a regional basis, EMEA and APAC revenues grew 18% and 7%, respectively, while the Americas declined 1%. Dovetailing with Rajeev's comments, we also made progress diversifying DSP spend across our platform.
Speaker #4: In the second quarter, we expanded the share of spending from DSPs outside the top five, as spending from performance marketers and mid-tier DSPs grew over 20% year over year.
Speaker #4: Turning to profitability, our robust leveraged cost model highlights that when we meet or beat our revenue targets, we deliver high incremental flow-through. Our revenue outperformance and continued focus on efficiency enable us to significantly exceed the upper end of adjusted EBITDA expectations by over 15%, inclusive of a significant FX headwind.
Speaker #4: Q2 adjusted EBITDA was 14.2 million, or 20% margin, and was our 37th straight quarter of adjusted EBITDA profitability. Included was a foreign exchange impact of approximately 2 million, due to the weakening US dollar over the quarter.
Speaker #4: Total operating expenses in the second quarter were $50 million, flat with Q1, as ongoing cost savings from AI-driven efficiencies funded investments in high-growth secular areas.
Speaker #4: On a year-on-year basis, we managed our total headcount growth to less than 3%, and realigned our team and resources to the highest growth areas like CTV, emerging revenues, and SPO.
Speaker #4: We increased ur buyer focused sales team members by over 20% compared to Q2 last year, which helped diversify revenue and drive our quarter's top-line results.
Speaker #4: Q2 GAAP net loss was minus 5.2 million, or minus 11 cents per diluted share. Moving to cash and our capital allocation, we have a healthy balance sheet and generate positive cash flow which provides financial stability while at the same time allowing us to consistently invest for revenue growth.
Speaker #4: Over the last four years, since Q2 2021, we have produced approximately 350 million in net cash from operations, and more than 180 million in free cash flow.
Speaker #4: In the second quarter, we generated $14.9 million in net operating cash flows and free cash flow of $9.3 million. We ended the quarter with $117.6 million in cash, marked the most securities, and had zero debt.
Speaker #4: Given the strength, we continue to deploy our capital to maximize shareholder value. Since the inception of our repurchase program in February 2023, through the end of Q2, we have bought back 12.2 million Class A common shares for 178.2 million.
Speaker #4: We have 96.8 million remaining in our repurchase program, authorized through the end of 2026. To recap, through the first half of the year, our results came in well ahead of our expectations, driven by CTV, growth in sell-side data targeting, and Activate.
Speaker #4: We added new publishers and DSPs to the platform, continued to scale commerce media, and are seeing significant growth in Connect. Looking to the second half of the year, we are confident that we will continue to see growth in these secular areas.
Speaker #4: Our end-to-end platform, SPO, and recently launched AI-driven solutions are helping customers scale their ad businesses, while streamlining their operations. At the same time, beginning in July, we saw a headwind emerge from another top DSP buyer, which recently made platform changes.
Speaker #4: As a result, we saw a notable drop in spend in July from this DSP, which has stabilized in August. Given the scale and complexity of our real-time platform, we anticipate it will take us several months to iterate and optimize our activity with this DSP.
Speaker #4: Outside the top five DSPs, all other DSP spend increased over 30% year over year in y. To successfully navigate this headwind and to accelerate the key priorities that Rajeev outlined, we are well-positioned both in terms of our capabilities and financial resources.
Speaker #4: We have a highly disciplined team focused on driving incremental cost efficiencies, led by an AI-first strategy. We will optimize our existing resources and apply them to where we can achieve accelerated, sustainable revenues.
Speaker #4: And our financial discipline combined with our operating capabilities provides a strong foundation to deliver on our priorities. Turning to our outlook for the third quarter, we are taking a conservative approach as it relates to the current impact from the large DSP, and the continued uncertainty in the macro environment.
Speaker #4: Our July revenues came in slightly below last year, and we saw some sequential weakness versus June in several consumer discretionary ad verticals. We expect Q3 revenue to be in the range of $61 million to $66 million.
Speaker #4: As a reminder, Q3 last year included approximately $5 million in political advertising, or 7% of revenue. We expect Q3 operating expenses to be relatively flat with Q2, as we realign resources and work aggressively to diversify our DSP spend and deliver continued growth in key secular areas.
Speaker #4: We expect our Q3 adjusted EBITDA to be in the range of $7 million to $10 million, which also factors in a $1 million-plus incremental impact of continued weakness of the U.S. dollar.
Speaker #4: We are maintaining our full-year CapEx projection at $15 million, which is a year-over-year reduction made possible by optimization efforts and cost-saving measures. In closing, in Q2, we delivered strong growth in key secular areas, continued investing in long-term growth, and benefited from our robust operating model.
Speaker #4: While our outlook includes a reduction in ad spend from one of our top DSP partners, the underlying health of the business remains strong while we mitigate the impact.
Speaker #4: We are optimizing resources to accelerate our key priorities that include diversifying DSP mix, and expanding investment on the buy side. Growing CTV, scaling emerging revenue streams, and integrating AI across our tech stack and operations.
Speaker #4: We have a healthy balance sheet and generate positive cash flow. We are confident in our long-term strategy to drive durable, accelerated growth, increased profitability, and maximize shareholder value.
Speaker #4: I will now turn the call over to Stacie for questions.
Speaker #2: Thank you, Steve. As a reminder, you can ask a question by raising your hand located on the dashboard, or if you're on your phone, please press *9.
Speaker #2: In the interest of time, we ask that you please limit your estion to one and one follow-up. Our first question comes from Matt Swanson at RBC, please go ahead, Matt.
Speaker #5: Hey, guys. Thanks for taking the question. Rajeev, I know sometimes you can't give us all the details, but anything else you can kind of tell us about the nature of the change from the DSP just because we weren't, you ow, hearing this from some peers?
Speaker #5: And then also, so it unds like drop in July, stable in August. What the process is of doing the iterations to optimize activity, and then Steve, if you could just kind of give us the balance between the DSP and the macro and how you were thinking about guidance, that'd great.
Speaker #5: Thank you.
Speaker #3: Yeah, thank you, Matt. So, beginning in July, we saw a headwind emerge from a top DSP buyer, which recently shifted a significant number of clients to a new platform that had valued inventory differently.
Speaker #3: And so the parameters of how they value inventory have changed, and we are working to optimize the inventory that we send to this DSP accordingly.
Speaker #3: In addition, for some of our SPO partners, they did not realize until after the changes were made that their SPO strategies were no longer implemented.
Speaker #3: And so as result, they need to re-implement their SPO settings on this DSP's new platform. And that process takes time. So accordingly, we saw this notable drop in spend in July, and then we've seen that stabilize in August.
Speaker #3: Now, given the scale and complexity of our real-time platform, we anticipate that it will take several months to iterate and optimize the traffic that we send to this DSP.
Speaker #3: And so while we're doing this, our top priority is to accelerate the diversification of ad spend on our platform, away from legacy DSPs. We have been making progress, but we plan to accelerate our strategy.
Speaker #3: So, for instance, in Q2, we expanded the share of spending from DSPs outside of the top five, with performance marketers and mid-tier DSPs growing 20% year over year, such as Mountain and TV Scientific, along with some China-based DSPs.
Speaker #3: In July, that same cohort accelerated to over 30% year over year. And we think generally that there is significant opportunity as advertiser budgets outside of the top 250 advertisers, you know, in their old co-representatives, is growing significantly faster than, you know, the growth rate within that top 250.
Speaker #3: But it's clear that the concentration of our legacy DSP relationships is a significant factor that's constraining our growth, and we intend to address that head-on.
Speaker #3: We'll turn it over to Steve.
Speaker #4: Sure. With respect to the outlook, Matt, the vast majority of the outlook is being influenced by this change, by the DSP in July. Just to give you some additional color, and when providing the range, the way that I look at the bottom end of the range assumes that the latest trends that we're seeing today continue as such, and there's minimal but some consumer softness from the macro.
Speaker #4: And of course, the upper end of the range assumes the mitigation of efforts, you know, take hold, and you know, start to improve that spend.
Speaker #4: And there is limited impact from the macro. I think the key point to note for investors is that, you know, as a business, we are very focused on, you know, moving quickly.
Speaker #4: Obviously, we have a bias towards action, we were surprised, we had limited visibility from this change, but, you know, the team is moving very quickly.
Speaker #4: And as we demonstrated with the DSP change that occurred mid-last year, you know, we worked through that. And as I commented in the prepared remarks, you know, we grew that spend for the first time in July from that DSP.
Speaker #4: So we're confident we're on the right track.
Speaker #5: Thank you.
Speaker #2: Great. Thanks, Steve. Our next estion comes from Jacob Armstrong at KeyBank. Please go ahead, Jacob.
Speaker #5: Take my question. This is Jacob on for Justin Patterson. With SPO now at 55% of activity on the platform, can you discuss how conversations with advertisers have evolved over time?
Speaker #5: And further, how is this impacting your go-to-market approach as you invest more behind direct sales efforts?
Speaker #3: Sure, Thanks for the question. So SPO, as you mentioned, you know, has reached about 55%. And the way that our versations are going are really going deeper in terms of how can we solve more of those advertisers and agencies' problems.
Speaker #3: Right? So the challenges they face are around transition away from cookies into logged-in users or identity, more performance-based solutions. They've got to demonstrate ROI if you're an agency to the client or within the client.
Speaker #3: To a CFO. They're around sell-side targeting and curation. We see a huge shift in that sense in the market. And then we see, you know, mix in s of format growth towards CTV and commerce media.
Speaker #3: So a lot of our conversations are about how can we go deeper with the technology solutions that we built? Things like Activate, which we think are going to be ally important to our growth trajectory going forward.
Speaker #3: As well as commerce media and Connect, our data and curation platform. So all of this, I think, is and our conversations are really about how to compose the right capabilities within our platform as a solution that we can hand to the buyer.
Speaker #3: I do think as we expand, you know, more into the mid-market, where we do see accelerated growth, our SPO metric will be a little bit of a push and pull there, because not all of those deals are going to be SPO-related.
Speaker #3: They may be more related to capabilities or performance or scale with media on our form. And so we may see that that statistic get a little bit more volatile in the ure.
Speaker #5: Thank ou.
Speaker #2: Our next question comes from Shweta Kajari at Wolf. Please go ahead, Shweta.
Speaker #6: Okay, thanks, Stacie. Let me try too, please. Rajeev, is the line between DSPs and SSPs emerging based on your earlier commentary? What's your view on the evolution of the industry?
Speaker #6: Do you think that the standalone DSPs and SSPs today will offer kind of an end-to-end solution? And/or do you think that they create for just standalone DSPs and SSPs are at risk?
Speaker #6: And then the second question I have for either Rajeev or Steve is on the specific inventory changes that caused the headwind in the quarter. So is it fair to assume that PubMatic is still one of the platforms of choice or SSPs of choice?
Speaker #6: There's just a different change that they're making. I just want to understand what exactly that means. And Steve, what is the concentration of DSPs today?
Speaker #6: Thank you.
Speaker #3: Thanks, yeah, weta. So as the industry evolves, right, and specifically around shift towards CTV, shift towards performance, right, whether it's commerce media or outcomes, a shift away from cookies and towards more identity-based targeting or AI to target users, and then even with the early onset of AI and workflows, what we see is that all of these things are driving more towards an end-to-end platform.
Speaker #3: Right? Meaning, you ow, AI, for instance, works better if it's not constrained but instead can optimize, you know, across all aspects of a transaction.
Speaker #3: And so that's exactly in line with what our focus has been over the last couple of years with Activate. And we're seeing great success and traction with that.
Speaker #3: As I mentioned in the script, you know, our Activate growth, Activate activity or spend, more than doubled sequentially from Q1 to Q2. So I do think there is this, you know, blurring of the lines, and I think we're going to see as multiple ad tech ecosystem participants focus on how to drive the best possible outcomes for advertisers, whether it's to gain more share of advertisers' wallet, or by the same token, focusing on those outcomes can drive better yield or better revenue for publishers, I think we're going to see, you know, this continue.
Speaker #3: And I would just say that it's not new, right? We've en platforms like Google, Microsoft with Zander, Yahoo, and others, they've been on both sides of the transaction for some time.
Speaker #3: So we think performance but we also think transparency and control are going to be extremely important going forward. The other part of your question, Shweta, I think was around being a platform of choice.
Speaker #3: So we absolutely continue to see ourselves as a platform of choice. And that's rooted, you know, in the scale of our platform in terms the volume of ad impressions, the omnichannel capabilities that we have, all of the data sets that we have on our platform through our Connect business, as well as our global footprint and scale.
Speaker #3: So we absolutely see our continued investment and growth as being a platform of choice, not only to our existing top DSP partners, but also with the growing cohort of SMB advertisers.
Speaker #3: I'll turn it over to Steve for other part of your estion.
Speaker #4: So, Shweta, so with respect to your question on, you ow, the format mix of this latest DSP change, you know, we took a look , you know, what happened in July, the majority of the impact is being felt in display.
Speaker #4: Both desktop and mobile. We're actually continuing to see really positive results in terms of CTV spending. And so, you know, from where we have been investing and focusing our energies, we're well positioned to continue to, you know, grow and to be successful.
Speaker #4: You know, it is a function of, you know, the areas that we focus on. And, you know, the Q2 results really indicated, you know, the strength that we see in those secular growth areas.
Speaker #4: Now, with respect to the DSP concentration, our top two DSPs represent about half of our overall spending. And as I just commented, notably, while there was some pressure in display, CTV spend from both of these DSPs continued to grow in the double digits.
Speaker #4: And, you know, when we step back, you know, take a look at over time, we see the concentration of these two DSPs declining as other buyers, advertisers, DSPs are upping their spend.
Speaker #4: You know, of the top five, a commerce DSP is growing the fastest, and in July, what we saw for the first time in many years, we have a new number five DSP, you know, that's that we've been nurturing and growing over time, and as picked up the slack.
Speaker #4: So, we're focusing on diversifying the DSP mix, you know, given the timeframe, you ow, and impact that just happened a couple of weeks ago.
Speaker #4: We have some near-term headwinds, but, you know, we're obviously very confident in our strategy and our ability to execute. And so, as we've done before, we're going to execute through this.
Speaker #2: Thanks, Rajeev. Thanks, Steve. Our next question comes from Jason Halstina Oppenheimer. Go ahead, Jason.
Speaker #7: Hey, everybody. At risk of sounding foolish, I'm going to try do this. So, is the best way to understand it that the DSP platform who hit you in July did not like the way you ran the auction for display ads or how you accepted bids?
Speaker #7: Like, is that the, in a layman's term, the best way to understand it?
Speaker #3: No, I don't think it had anything to do with auction dynamics. Rather, it's how they value inventory has changed. And so we need to do a better job, a different job to prioritize across all the hundreds of billions of daily ad impressions that we have, which subset of those impressions that we send to this DSP.
Speaker #3: And if we, you know, that's a normal part of our traffic shaping platform. And when we, you know, revise that, iterate that, and optimize that, then I would expect to see our spend with this DSP normalize.
Speaker #4: Got it. It's because you don't make every impression available, only the ones you choose to make available.
Speaker #3: That's correct. And that's how we operate with the vast majority of DSPs, and that I think is true across the ecosystem, is the just the volume of ad impressions that we take on, you know, across the world and in different formats is such that we need shape that for each of our DSP partners.
Speaker #4: And what made it like, what made it like specific to this DSP like? Yeah, that you understand like, well, viously if your decision on what was valuable inventory was fine for everybody else, why was it not fine for this DSP suddenly?
Speaker #3: Yeah, our view was that it was precipitated by a shift in clients that this DSP has from one platform to a different platform. And that shift corresponded with the quarter border.
Speaker #3: So we saw that impact starting in July.
Speaker #4: Got it. And then just two quick ones then. I mean, are you seeing any retaliation on the DSP side for like your continued effort on Activate?
Speaker #3: No, I don't think we are. And, you know, the reality is MagNite has clear lines, so they're out there with that. We've got Activate; there are obviously buyers, right, whether it's Yahoo with Backstage, Trade Desk with OpenPath, you ow, Vayant with their direct platform.
Speaker #3: So I think we're seeing, you ow, across the ecosystem, in response to advertiser or buyer, you know, desire for more outcomes or more performance, you know, this shift in the ecosystem, as I described earlier.
Speaker #3: So don't think it's really specific to anything that we're doing.
Speaker #4: And then just a follow-up for Steve, just on Shweta's question on DSP concentration, I mean, I know you don't want to give out specific numbers, but if you just say, like, at this point, X percent of revenue is coming from DSPs buying display, and you just think about who the biggest buyers are, like, just a way to kind of quantify, like, I 't know, like, you know, have we gotten past the point of concentration risk?
Speaker #4: We obviously had the issue with that DSP end of last year, right? Or last year, but I guess just how should folks, like, get comfort that they shouldn't worry about DSP concentration risk on display?
Speaker #4: So, I mean, it's a process that we've been working on and undertaking for some time. So, you know, the good news from our pective, desktop display, you ow, legacy format, is now, you know, roughly 20% of all of our revenue, you ow, down from, ou know, 30% approximately two years ago.
Speaker #4: So we're definitely ing in the right direction. And it's a tion of, you know, where we're esting and what advertisers, buyers want. You know, the reality is we still have, you ow, a significant amount of display, but that's sort of, let's call it, you ow, roughly flat.
Speaker #4: As I shared, you know, in the second quarter, our display revenues were flat year over year. Well, you know, CTV, emerging revenues doubled. So it's, you know, a shift over time, and when ou look at the specific DSPs, within, you know, what they're buying, it's absolutely shifting to, you know, the faster secular growing areas.
Speaker #4: But, you ow, at the end of the day, advertisers want to touch consumers wherever they are. So it doesn't mean like display is going to go away, but it's going to grow at different rates.
Speaker #3: Yeah, maybe I can just briefly add to that, Jason. So it's clear that it's really critical for us to diversify our DSP mix. You know, we called out Mountain and TV Scientific as two examples of ad platforms where we're bringing new SMB dollars, small and medium business dollars, to our platform.
Speaker #3: China-based DSPs I think it's also maybe useful to call out as an example, you know, Amazon is a significant relationship for us. Both as an inventory provider as well as a DSP, buyer.
Speaker #3: So we previously shared that we are one of three SSPs, and they're certified supply exchange program. On the sell side, we monetize Fire TV app inventory from almost a dozen different streaming apps.
Speaker #3: We've been monetizing that inventory for many quarters now. And as Amazon is scaling their ad business, we are scaling with them. In fact, in June and July, our Amazon revenues grew very healthy, double digits.
Speaker #4: Great, thank ou.
Speaker #2: Our next question comes from Matt Condon at JMP. Go ahead, Matt.
Speaker #7: Thank you, my questions. My first one is just, as you focus on building more and more buy-side direct relationships, and you think Activate, can you talk about what the differentiation of PubMatic is compared to some of ose other large SSPs in the market?
Speaker #3: Sure. Yeah, I think the key focus with Activate, and by the way, a lot of what we do is about enabling a buyer to transact through their DSP of choice.
Speaker #3: Or through Activate. So, for instance, we launched earlier this year AI-powered curation, where a uyer can come in and, you know, using simple text chat or prompt, they can configure audiences using dozens of different data providers.
Speaker #3: And they can take that deal ID, and they can run that in any DSP of their choice, or in Activate. But really at we're focused on with Activate in terms of differentiation is how to create a much more efficient path for advertisers to be able to improve the outcomes from their business, while at the same time realizing transparency and control.
Speaker #3: And what I mean by that is, in today's ecosystem, you know, with DSPs and SSPs underpinning most of the transactions, there is this, you know, traffic shaping where SSPs have to determine which impressions to send to a DSP.
Speaker #3: There's latency, there's hops, and there are discrepancies that occur between platforms. By unifying all of this in a single platform, we're able to significantly simplify the transaction and deliver better outcomes.
Speaker #3: And so that's a key part of what we're focused on with Activate. At the same time, we're also focused on giving transparency and control so the buyer can come in and make sure they know exactly what inventory they're buying, you know, at is the fee kind of footprint look like, and then be able again to measure those outcomes.
Speaker #3: So that's where really we're seeing significant traction in the growth of Activate in all regions of the .
Speaker #4: And just a quick stat, you know, in the second quarter, we more than doubled our activity on Activate, you know, because of those features that Rajeev just described.
Speaker #4: And we are going to be accelerating the investment behind driving Activate in the coming months and quarters.
Speaker #3: I do think it's important to call out, though, that, you know, our DSP partners, I think we're a very important for them, and they're certainly very important for us.
Speaker #3: And so, you ow, we plan to continue to work very closely with DSPs and I think that that's a key feature of our platform and our business model.
Speaker #4: Great. And then maybe, Steve, just a follow-up, just as you've built out the buyer sales force, just where are we today as as that build-out?
Speaker #4: Is it complete, or are there more investments that need to be made in the back half of the year? Thank you so much.
Speaker #3: Yeah, we think that there's definitely incremental opportunities in the back half of the year. Certainly, you know, in the mid-tier areas that Rajeev described, you know, the performance marketers, mid-tier agencies, as well as putting more sales resources behind our emerging revenues, you know, commerce, connect.
Speaker #3: So we're selectively identifying where we're going to have the greatest impact and, as I called out, you know, we're not doing it by adding incremental costs.
Speaker #3: We are optimizing the base that we have and, you ow, putting those resources in the right area.
Speaker #4: Thank ou.
Speaker #2: Our next question comes from Jane Teeny Jeffries. Please go ahead, James.
Speaker #7: Great, guys. Thanks for the question. Rajeev, I just wanted to ask about generative AI and the potential risks that could present to your display business.
Speaker #7: I'm interested just to hear what you're seeing so far and why you think ou're well positioned to navigate that secular shift.
Speaker #3: Yeah, absolutely. Thanks, James. So look, we believe the exposure to our business is limited as in single-digit percentage of revenue if there was zero search traffic going to our publishers and we took no steps to mitigate it.
Speaker #3: So as Steve shared in the script, roughly 60% of all the impressions we are processing today are for CTV and mobile app. Right? Which is unaffected by AI search.
Speaker #3: Of the remaining business, which is browser-based, where, of course, search is relevant, industry data indicates that search referral traffic is roughly 15%. Given we work in the head of the market, you ow, top publishers rather than the long tail, I would expect that share to be lower because most consumers are, you know, using direct navigation to get to those websites.
Speaker #3: So we think, again, if you kind run through that math, right, 's a single-digit percentage of revenue. But there's also an offensive opportunity. Right?
Speaker #3: Which is that the growing cadre of AI search companies will likely need ad-supported business models to support the growth in their cost base and user growth.
Speaker #3: And I'm not just talking about the large guys like an OpenAI or Perplexity. There's those guys, of course, but they're also B2B services, consumer AI chatbots, you know, retail experiences, I ink there's a wide canvas of, you know, probably thousands of companies and the not very distant future that will likely need ad-supported AI search or chat ad monetization that create significant opportunity for us.
Speaker #4: Great. Thanks. And then maybe, Steve, just a another one for you. Is there anything that you can share just regarding the overall demand environment that ou saw in April?
Speaker #4: Post sort of tariff announcements and how that's progressed through the remainder of the quarter?
Speaker #3: Sure. I an, with respect to the second quarter, there's couple of categories on a year-over-year basis that performed quite well. You know, technology, computing, arts and entertainment, health and fitness, and each of those increased over 20%.
Speaker #3: We did see some softer trends in a couple of areas in the second quarter. Automotive, and business, two notable areas, you know, they did decline.
Speaker #3: Now, in terms of July ad spending, our total top 10 has grown on a year-over-year basis, which is obviously very positive. However, we did see some sequential decline in July versus June.
Speaker #3: In a cohort, you know, that one could argue is sort of consumer discretionary. So food and drink, health and fitness, travel, arts and entertainment.
Speaker #3: Now, it's too early to say if that's sort of a trend. And so, as I called out, you know, incorporated a portion of that into our outlook, but we are not seeing sort of a, you know, a significant decline on a year-over-year basis.
Speaker #3: And it's more sort of on a sequential basis. But, you know, viously, there is a lot of uncertainty out there. And, you know, that's why we're very focused on keep on, you ow, driving our business towards the fastest growing areas that, you know, can, you ow, grow through these challenges.
Speaker #3: And the other point to call out is, you know, at the end of the day, you know, in this environment, you ow, that is uncertain, advertisers are going for performance, controlled transparency, and these are all strengths that we built and continue to evolve, you know, through our various product offerings.
Speaker #3: So in this kind of uncertain environment, we think we're going continue to, you ow, do well and then be well positioned. You know, when this is all in the rearview mirror.
Speaker #4: That's great. Thank ou.
Speaker #2: Our next question comes from Rob Colbert at Evercore. Please go ahead, Rob.
Speaker #8: Great. Thank you for taking our estions. I think the platform shift that you're shift that you're talking about has been going for some time.
Speaker #8: So just wondering if the triggering event in July was maybe incremental changes to that platform or, you know, a large number of your SBO customers finally making that transition.
Speaker #8: Or something else. And then finally, any indication of a step up in activity around direct connects from that DSP? And then, finally, I ess, second question here.
Speaker #8: Would be if you could just revisit the timeline for potential recovery both around getting those SBO instructions back up and running and optimizing the traffic shaping.
Speaker #8: If you could just repeat those, that'd be great. Thank you.
Speaker #3: Sure. Yeah, hey, Rob. So I mean, we certainly saw an uptick or significant increase of this, you know, activity from the DSP causing the drop in spend in July.
Speaker #3: So I can't speak to exactly kind of what, you ow, what was their timeline or all the history of changes that they made. But that's what that's what we observed on our form.
Speaker #3: Which we are again, we've stabilized, but are working to improve. So there are things that we need to do to shape the traffic accordingly from our form.
Speaker #3: More to the liking of that DSP. And so we're heavily engaged in that process. And then I'll turn it over to Steve for the second half of your question.
Speaker #4: Yeah, I mean, just to quickly comment on a ittle bit more on that color. So that DSP that made that change growing, you know, very nicely, double digits in June.
Speaker #4: And then, you know, a notable decline negative year over year in July. So there was clearly a shift on their side in terms of, you know, how they were valuing inventory in terms of, you know, the what it matters to them and how their platform operates.
Speaker #4: And remind me the second part, it was.
Speaker #8: So, just to, you know, the timeline that you have mostly with the stabilization in August indicates that most of your SBO customers have sort of gone back into that platform.
Speaker #8: And at any timeline on the, you know, the optimization of the traffic shaping, how you're thinking about how long it might take to sort of get back to normal.
Speaker #4: Sure. Well, our teams have absolutely been reaching out to all of our SBO partners, letting them know that this has happened, that they need to go into this.
Speaker #4: Platform, and to re-upload their SBO parameters. And so that's just a process that, you know, the SBO partners have to do on this DSP.
Speaker #4: So that's in process and happening. And, you know, it's after letting them know, it's largely in their hands. Now, with respect to, you know, just the mitigation efforts, you know, when we saw the trend start to really decel in July, obviously, we got all the appropriate folks focused on, you know, assessing and, ou know, what we saw when we had this significant change, you know, a year ago, that there's a lot of iteration and testing that needs to be done because this is an incredibly complex, you know, ecosystem.
Speaker #4: You're talking about, you know, hundreds of billions of impressions a day that we ourselves are processing. And so, it takes testing, iterating, and then doing it all over again and seeing what works and doesn't meet the criteria that's been established.
Speaker #4: So our approach is, you know, we're working hard to mitigate it. You know, I incorporated, you know, at the low end of the outlook, an assumption that, you know, the mitigation efforts are relatively limited.
Speaker #4: In terms of effectiveness this quarter, and, ou know, we're going to keep working at it. I would say that, you know, given the important size of this DSP, it's just going to e time.
Speaker #4: And, but, you know, we are well positioned to continue to work through it. And really want to emphasize that if you step back, you ow, this is, you ow, a situation we have experienced doing the big challenge here was we didn't have any visibility in terms of the big decel.
Speaker #4: And so we're viously reacting pretty quickly. Number two, you know, we are in really healthy financial shape. I mean, we have, you know, roughly $120 million in cash, no debt.
Speaker #4: We generate free cash, so we are in this for the long run, and we're confident that we're going to work through this. In the near term, we are going to double down on the fastest growing areas that we have, diversify our DSP mix, etc.
Speaker #4: And so we believe we're on the right track. And, you know, we're going to work through this.
Speaker #8: Got it. Last quick one, just it sounds like OCV has been, you know, relatively unimpacted. So just here, is the implication there that, you know, this DSP is, you know, wants to see as much OCV volume as they can take.
Speaker #8: There's not really a traffic shaping element there or just anything you tell about that.
Speaker #4: Well, what did you mean by OCV, Rob? I just want to make sure I understand.
Speaker #8: On the channel video.
Speaker #4: Oh, got it. Okay.
Speaker #8: Or CTV.
Speaker #4: Yeah. So, and repeat the question. So you're.
Speaker #8: Well, just wondering, ou know, if there if there is potentially an implication where, you know, is traffic shaping happening in your CTV or OCV inventory, or is, you ow, basically, is DSP willing to take as many QPS as they can?
Speaker #4: Yeah.
Speaker #8: Within
Speaker #8: those those growth channels?
Speaker #4: No, I think the the the traffic shaping changes optimization that we are doing in response, applies equally across all formats. Including video. You know, omnichannel video.
Speaker #4: I do think, in general, video is more resilient, just given that that's where advertisers are shifting more of their budgets. So, I see that as a secular growth driver.
Speaker #8: Got it. Thank you so much.
Speaker #2: Our next question comes from Eric Martinuzzi at Lake Street. Please go ahead, Eric. Eric, are you there? We can't hear you.
Speaker #9: Yeah. And now I'm unmuted.
Speaker #2: There you go. The email.
Speaker #9: Given the you guys have seen a etty steady progression. The percentage of revenue coming through the SPO channel, I guess, is there a chance we see a step down while this reconfiguration happens?
Speaker #3: Yeah, I can take that. So, I think more so than this reconfiguration would just be our diversification strategy. Around, you know, more of the mid-market buyers.
Speaker #3: Where those aren't, you know, given their size, they're often not coming in through an SPO equation. And we do see that in general in the market.
Speaker #3: You know, the advertiser segment that is growing the fastest is that mid-market segment as opposed to the, you know, the top 250 or so advertisers.
Speaker #3: So I think that would probably be a bigger impact in, you know, diluting some of that SPO spend. Which n't, doesn't mean we're shrinking the pure dollars, but it's just a little bit of a mix shift.
Speaker #9: Okay. And then a follow-up regarding just the, ou know, the the fact you guys were surprised that this large partner changed how it valued the inventory you were sending it.
Speaker #9: Is there a risk that other DSPs come to this same conclusion? In other words, how close are you to these DSPs, where this kind of comes out of nowhere?
Speaker #3: Yeah, I mean, in general, I think we're pretty close to these DSPs, and it's tainly our goal to be as close to them as possible.
Speaker #3: And I think it behooves the DSP as well. To be, you know, continuously sharing feedback with us on, you know, what they want see more of or what they want to see less of or, you know, how their advertiser requirements and mix is ifting.
Speaker #3: So I think, in general, we do quite good job of being close to these DSPs. In this case, you ow, we are reacting with limited visibility.
Speaker #3: So we need to certainly look into that and figure out how we can do a better job.
Speaker #9: Thank you.
Speaker #2: At this time, there are no more questions in the queue. I'm now going to turn the call back over to Rajeev for closing remarks.
Speaker #4: Thank you, Stacie. And thank you all for joining us today. Through the first half of the year, our results came in well ahead of our expectations, driven by CTV growth, growth in sell-side data targeting, and Activate.
Speaker #4: We added new publishers and DSPs to the platform, continued to scale commerce media, and are seeing significant growth in Connect. We're seeing one the largest market shifts our industry has seen in years play out at a very fast pace.
Speaker #4: And we're positioned extremely well given our differentiated approach. In an end-to-end platform focused performance, and we give buyers control and transparency they need in order to scale their ad business.
Speaker #4: We look forward to seeing many of you at upcoming conferences, including Oppenheimer's virtual tech conference on Wednesday, Rosenblatt's virtual tech summit on August 19th, and Wolf's TMT conference in San Francisco on September 10th.