DoubleVerify Holdings, Inc. (DV) Earnings Call Transcript & Summary

Good morning. Thank you very much for joining us today. I'm Justin Patterson. I lead the Internet and Digital Media research effort at KeyBanc. Really excited to have Nicola Allais here from DoubleVerify. Nicola is the CFO. The company went public this past spring and it's a very unique differentiated play within the digital advertising space. Nicola, welcome.

Thank you, Justin. Very glad to be here.

Of course. Well, to kick things off, we'd love it if you provided an overview of the business. Obviously, you're covering the digital advertising ecosystem, but talk through just what DoubleVerify's value proposition is to its advertisers? What problems are you solving for them?

Sure. So very happy to start there. So what DoubleVerify does is it intends to create a safe and strong environment for our advertisers by helping them verify the quality of the digital ad spend that they put in the ecosystem. And we do that through our software platform that allows us via our technology to make sure that an ad is fraud-free, viewed in GEO and brand safe. And the brand safe part is the part that is right now a hot topic. All brands want to be in an environment that's brand safe. We do this both in the open web and on social platforms. And we do this at a very large scale. We've done this for 3.2 trillion transactions last year. We are integrated with most of the players in the industry, and we allow the advertisers to see how well an ad runs, however they decide they want to run their ad.

Awesome. Thank you for that overview. And hopefully, that spurs some questions from the audience. We do have a chat function up and running. [Operator Instructions] But to go back towards just the overview you provided sounds like you have tremendous scale within there. So would love to hear about just how you conceptualize that TAM, given all of the impressions you're seeing today and how you think that could evolve over time.

Yes. So you're right. We believe the TAM for this product is very large. We are still a small player. We have a few competitors in the market. but the overall amount of the inventory that we can verify is still small. And I'll give you a few pointers as to where we believe the growth will come from. There is, first of all, just verification, which is what I described as our core product. There are 2 vectors there where we see a large TAM opportunity. First, there is international. So verification is a known product in the United States markets, but international is still an opportunity where the awareness of the need for verifying the quality of inventory is growing. Instances of fraud outside of the U.S. are still higher than they are in the U.S. So you have a whole opportunity there for growth outside of the U.S. And just to start giving some stats around the opportunity for Double Verify we think that our international business, about 20% of our business currently, right, very small compared to how much advertisers are spending outside of the U.S. That's partly because of decision that we've made in the past, and we're really investing heavily now internationally to grow that part of the opportunity. Second opportunity is new vectors. Not every digital ad is yet able to be verified. And I'll give you 2 examples. One is in the social walled garden space, we are able to verify some of the inventory, but not yet all of the inventory. Part of it is it requires integrations. And so more and more players are now coming to DoubleVerify and saying, hey, help us verify our inventory. That's one opportunity that's still not fully tapped. And I'll give you a different one, which is even bigger, which is CTV. It's very nascent. Verification in CTV is early stages. That is primarily a U.S. opportunity. But if you think about how much advertising is still happening, terrestrially, $7 billion that will move to digital, that will create another opportunity. The TAM is very large. We are still at the early stages of how much we can verify. And our goal is to verify everywhere, right? So we will grow as the TAM that becomes available for verification.

Got it. And to refine that last point a little bit more where would you characterize TAM penetration today? And then what are the next big steps to increase that penetration rate?

Yes. So we believe that TAM penetration right now is probably 15% or so. It's very low still. The growth drivers, as I described them will be international, and then you'll probably have Social, which will be a factor of sort of opening up more inventory and then CTV. I would say that is the order in which I would put them. Within TAM, I just want to be clear. We've only been talking about verification right now. There is another part of the market, which is performance and measurement that is nascent for us. And here's how we describe it. We spent a lot of time making sure that advertisers are advertising in a safe environment. We are now moving into a space where we can improve the ROI and turn our product into something that's positive targeting, right, custom contextual targeting, authentic attention that moves from just avoidance to positive ROI. That is part of the TAM. We're very early stages there, and that will grow the TAM even more.

Perfect. And that's a great segue for my next question. You've alluded to it a bit, but would love to hear about how you frame the differentiators of your business versus other ad tech companies? I know it's CTV gets talked about a lot, but you have a very different approach than a lot of the other public companies. I think more investors have been familiar with the past few years.

Yes. So we like to say we're more tech then, and that is really how our business model works, right? Like we charge a fixed fee per transaction. We're not tied to the CPM that our advertiser partners are spending on ads. So we feel like we have a technical solution, which is accredited, right, and that gives us even more credibility in the space. So that's the first differentiator for us. The second differentiator for us is we are independent. We're a third-party independent player. And that really matters in the space that we play in. Advertisers want a third party like us to verify the quality of the inventory. Every part of the ecosystem will provide services that are generally free of charge to verify make sure that their inventory is fraud-free, but having a third party is a big deal for the advertisers because they want to get the independent view of what's happening in the ecosystem. The third part that I think is very important to focus on is we don't compete with the platforms, right? We are integrated with The Trade Desk. We are integrated with Facebook, we're integrated with YouTube. We are -- as we provide our service as we improve the ROI of the advertisers, we benefit from them -- from that and the platforms benefit from that as well. We're trying to make it a safer environment for everybody to benefit from. I think those are the 3-key differentiator for us in the ad tech space.

Right. I totally agree. And when you translate that toward the business model itself, one of the impressive parts about Double Verify has always been just the predictability of it. So I'd love to hear you discuss more how just the growth gets dimensionalized between existing customers and new customers?

Sure. So let's start with the model. It's pretty straightforward. It is the media transactions that we measure at times and media transaction fee and the fee is a fixed per transaction, right? So we don't take a take rate on the CPM. So that gives you already a sense for when you say predictability of the model, which is since we don't take a take rate as CPMs go up and down, our revenue pattern is going to be a lot more predictable. And you really are seeing this in the second quarter results of the ad tech world, right, where a lot of people benefited from huge swings from a low point last year, our last year, our lowest point was 20% growth in the second quarter of 2020, which was a very strong quarter by all measures. So we don't -- we're not subject to the wild fluctuations on the CPM. We do want to focus very much on media transaction measured right now to go back to what we said on the TAM, it is so big that what we are trying to do is create a frictionless environment where advertisers will want to clarify everywhere they put their money at play. And so our model right now is to make it so that nobody is going to say, "Hey, look, you know what, I'm going to verify display because it's cheaper than video, right? We want to be able to verify everywhere. That's the model, and that's why it's sort of predictable. And your question around existing versus new customer, our model is to grow with the customers. So once we have the customer and once we're able to verify into more and more sectors, our advertisers will grow into those sectors, and we'll be able to verify more and more. So it all comes down to volume and to growing with our customers. That's the model right now. It doesn't mean that there aren't opportunities to upsell to premium priced products, which we've done, and maybe we'll talk about it as part of your questions. But right now, all that we want to do is to be able to verify everywhere and grow with the volume of our customers.

Great. I'm definitely going to come back to that upsell opportunity. But before we go there, let's talk about recent performance, 44% growth in Q2, very impressive. It sounds like volume was a big piece of that, but would love to hear you just kind of rank order what the big drivers and themes coming out of Q2 were.

Yes. So again, I'll start by setting the stage right, right? We grew 44% in Q2 '21. We had grown 20% in Q2 '20, which is from what we can see, it was extremely good performance in the middle of the pandemic. So how do we get to 44% growth this year? If you were to rank the reasons why we saw that growth in the quarter, I would say the first reason was Authentic Brand Safety, very strong product, it's premium priced. It's on the programmatic side of our business, and that had an over 100% growth year-on-year. This is a product that's been around for 24 months, 2 years and now represents already 25% of our total revenue. Huge success it -- from what we can see in the market, there really isn't a comparable product out there for it. It's premium price, which gives us the notion that we can actually grow not so much just price for the same product, but offer premium price products, right? So over 100% growth in a killer product that we have had in the market for a few years. Second driver of growth is international expansion. We are compared to other players in the market who are most direct peer in the market, which is a company called Integral Ad Science. Our percent of revenue that's outside of the U.S. lags their percentage. And that's because we have come to international later than they have. We've now kind of changed, rethought how we're doing sales because we do see the opportunity there to kind of close that gap. Outside of the U.S. revenue on the post bid side of our business grew 66% in the second quarter. So you have premium price, strong product, international expansion. And then underlayering all of that is obviously new wins. We closed some very large brands in the second quarter. Julie Eddleman, who now runs our commercial operations has come in at the beginning of the year. She came from Google. She has a vision for how we're going to go after global clients and you're already seeing the benefits of it.

And then our Social and CTV growth is also worth mentioning. It's about the direct revenue business. As it grew a 100% in volumes year-over-year in the second quarter, and CTV grew 89% of this volume.

Great. Thank you for that call out, Tejal. Let's go back to ABS for a second and their Authentic Brand Safety. Nicola, you mentioned 25% of revenue and premium pricing. That sounds like the customer penetration would actually be a bit lower than that right now given the premium pricing. How should we think about just the opportunity ahead for ABS and where we are in that penetration curve today?

Yes. So you're right. It doesn't represent 25% of our impressions measured because it's a premium priced product. It is 50% of our programmatic revenue to 25% of our total revenue today. I think the opportunity is on 2 tracks. One is we still have the opportunity to upsell existing customers that just have brand safety too, Authentic Brand Safety. That's one opportunity. The second opportunity that we feel bullish about is all roads, we believe, will lead to Authentic Brand Safety. We don't feel like there is an equivalent product in the market. And so really focusing on that, I think, creates a big opportunity for us to go after new clients with Authentic Brand Safety first rather than doing brand safety and then upselling them to authentic safety. So we feel very strongly that there's still opportunities there. I'll give you another reason why we think there's still growth there as we just launched really Authentic Brand Safety on DV 360, which is our largest programmatic partner. There is just opportunity from the core growing and our idea of going with all roads lead to Authentic Brand Safety should continue to show lots of strong growth in brand safety for us.

Great. And then on the other side, product portfolio, custom contextual, your performance-based product. Could you talk about just how we should expect that to scale up over time. You just mentioned the DSP integrations with ABS. So I'd love to hear how that influences the arc of growth from custom condextual?

Yes. So custom contextual -- for the benefit of the audience, customer retention moves us from pure verification to performance, right? So our history has been use us to make sure that you're not going next to poor content or into an area where you don't want to be putting your ad with that same data, right? So it's not a completely new data set but with that same data, now we're saying, "Hey, now that you know you don't want to be here. Here's where you should be, right? So it's custom contextual for positive ROI and positive returns. We're not the only ones in this space. There are established companies that do custom contextual. We believe the opportunity for us is very strong to be able to gain in that market just because if you think about everything that our customers are already getting from us with our UI and the databases and the Pinnacle, which is where they can really see the results across all platforms across every dollar they spend to add customer contextual to that, we feel is a very powerful opportunity for us to gain even more insight into our customers and allowing them to make even more positive ROI type of investments. It's a long process. Authentic Brand Safety got to where it is today over the course of 24 months. So we don't anticipate this to be a quick switch, but there is a runway here of 12 to 18 months or so where another premium-priced products such as Authentic Brand Safety will show significant growth for us.

Great. And to round out those growth vectors, I wanted to go back to Social and CTV, which Tejal called out. Could you talk about just your positioning in those categories today and how we should think about the growth manifesting over the next 12, 18 months?

Yes, sure. So we -- so it's important to know how we got to where we are on Social. Let's talk about Social for instance because it's got a longer history for us than CTV. So the way we got to where we are in Social is working with the partners to integrate. And that took some time, right? Those are wall gardens or technical discrete environments, right? So it took us a while to integrate working with the partner and the advertisers to see how we could integrate verification in the systems. We're not in a phase where the new players, such as TikTok, for example, are coming to us and saying, "Hey, you please come and help us verify our inventory. It's become a de facto that verification should happen in the social environment. It is -- it's currently about 30% of our post measurement revenue. So about 15% of our total revenue. And the way we think internally about the opportunity there is. At some point, verification and our revenue should mimic where advertisers are spending their dollars, right? Advertisers are spending a lot more than 50% of their dollars on Social. The way we're going to get to that growth is international expansion. So international has 2 benefits. One is we grab large customers outside of the U.S. Within that, outside of the U.S., Social is a larger portion of their spend. So we're going to grow on to those 2 vectors just by continuing to expand internationally. And the second one is, I think, adoption by other -- all of the players in the social ecosystem will allow every Social player to want to verify even more. So I think all boats will rise as we get more integrated with TikTok and Twitter into all the other players as well. So that's Social.