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

Hey, welcome to our next session. Mark and Nicola, welcome at our [ Barclays ] TMT conference. Mark, since it's the first time at our conference, I start maybe -- there's a little bit more higher level initially than going deeper. Hopefully, okay. If you think about the -- hang on, we have like some voice issues here. Okay. I'll try it again.

Mark, if you think about the industry that you're specializing in, like how did you -- how does this come up like, how -- what was the idea initially to kind of think like, okay, that's something we should kind of really control or do a better job than what like at least [ Oracle ] or Google can do now on their own.

Yes. So I think the business and the whole kind of sector evolves out of the evolution of digital advertising and how digital advertising went from the traditional advertising methodology which was a one buyer to one seller methodology to a one buyer to many, many, many seller methodology, which started as the ad networks and evolved into programmatic technology. And as that buyer got further away from the seller and there became less transparency between what was being bought and sold there became greater challenges around what was happening in that transaction. So advertisers were finding their ads showing up on pornography or their ads then started heading into fraud. Fraud start emerging. So around a dozen years ago or so, it became clear that there needed to be an independent verification solution that would look at these transactions and help provide a better level of transparency between buyers and sellers, so that they knew that their ad was showing up some place saves, that it was being seen by a real human being that it wasn't being spent on fraud when they were buying through a programmatic channel where they had no idea, what is happening. So really, the business was born out of a necessity to create greater transparency between buyers and sellers. And the best parallel that I've seen is kind of what's happened in the traditional retail industry, right? You used to spend your money at a corner store, the person knew you, you knew them, you got a product from them, you transact it. Now you go into it an anonymous store where they don't know you, you don't know them. There's not a lot of security in that transaction. So things like credit card companies came about to protect that transaction, right? And that's what we'd really do. We protect the transaction between a buyer and a seller to create greater transparency and create greater surety in the overall transaction that occurs.

And I'm sure you get that question a lot as well like, why do Facebook, YouTube and start not do it themselves. And I kind of know your answer, but like did they try and it just didn't work? Or it did never come up because it doesn't -- it's just everyone creating their own homework.

Yes. I mean, look, you alluded to the end point here, which is the reason why there's a demand for what we do, but the reason why companies like us do it because of independence and trust, right? I think they both come hand-in-hand and the fact that you can't -- if you're selling media, you can also be the person who's scoring that media or try to protect that media, right? You have a vested interest. You're inherently biased, right? Because if there's a decision to be made of, if this is safe or not safe, if I can sell it. I'll always call it safe, right? That trust factor kind of gets thrown in the wind. And I think, at the end of the day, a lot of these platforms did launch with, the [ Wall Gardens ] did launch with some of their own brand safety solutions and their own fraud solutions. But advertisers, for the most part, have not bought in, right? And they don't trust that someone will score their own hallmark grade. It's kind of like asking, 1975, asking NBC to give you their ratings that they came up with their own programming, right? How would you never trust someone who [ sounds well ] to you. So I think that's the value prop here for us is the independence, the level of trust that we're able to provide across platforms. There's one other thing that's really important. It has nothing to do with the ability to do it or the independence that, when you're creating a metric or a verification factor, you need to have a single metric across all platforms and a single standard across all platforms. So that -- in the same way, I know if I use my American Express in one store versus another, that vendor knows that the same criteria happens in that transaction. Same thing for [ proposal ] they don't want a different fraud or brand safety criteria on YouTube than there is on Facebook than there is on the open web. They want one criteria upon which to judge and evaluate their spend. And I think that's only an independent company, which can look at data from all of these competing platforms and analyze it, has the ability to do it. So there are many drivers here, but at the end of the day, trust, independence and then basic scale across all of the solutions becomes a really big factor.

Yes. And then, you guys -- if you think about it like, because, you're kind of judging if an individual kind of saw an ad or whatever, like are you guys impacted by the cookie changes?

Not in any negative way. And it sounds kind of -- it has many positive impacts on us. So our system looks at the what, the how and the where. What happened in a transaction? How those impressions were delivered? And where they were delivered, the context. We don't look at the who. And a lot of the focus on cookies and IDFAs is all about the who that's tracking the individual on the use. So it's neither part of our technology of how we build and measure things, but it's also not the premise upon which our business is built. We look at the ad transaction, everything around that transaction. So a, it doesn't have a negative impact as cookies and IDFAs go away, but it actually has a potential positive impact as it gets harder and harder to track the individual. And other proxies become more important like context, like engagement and attention, et cetera.

Yes. Okay. Perfect. And then on that note, like one way to kind of deal with this is contextual, like, can you speak to that a little bit like how that's just changing things?

Yes. I mean, look, at the end of the day, all of these things, whether they're -- whether it's audience targeting or contextual data is about helping an advertiser drive an outcome, right. I want to get something done. I want to sell a product, I want to generate a lead. And audiences have always been used, that targeting mails between the ages of 18 and [ 25 ], has always been used as a driver for an outcome. I think what is emerging is that advertisers are finding that there are many different proxies for an outcome. Context is one, right? Audience is one. The context is one. So if I'm in the right environment, does that get me closer to driving the outcome that I want? We believe that attention is going to be the next one, which is, hey, it's great that you're in the right environment, right, the right context. But what actually happened there, right, was the ad engaging? Did it take up enough screen time? Did it run long enough? Was it in a competitive environment, all these things could drive an attention level with the user and that attention level is a great indicator of whether or not you'll be able to drive that outcome. So I do feel that there are going to be numerous kind of emerging proxies for driving outcomes. Now that audience and cookie based, things are going to get hurt. And I think context is one, but attention is definitely another.

And then on that note, like, I'm a software guy, so and a lot of the other people that I talk to are software guys, there's a lot of like acronyms that are kind of more specific to your industry. So then talking about a little bit about MRC. So what's MRC kind of doing there? How does that play into your world?

Yes. The MRC is kind of the good housekeeping seal of approval for analytics, right. It principally -- it's the judge of the judges. So are you -- is what you're saying valid and is how you're calculating the metrics that you're delivering, are they valid? So like basically, they look at your methodology, they look at the data that you have input. And they basically say, give you the stamp of this is good and this is not good. And it's really valuable, because as we start this conversation, we're asking people to trust us, right? We're asking people to trust our data. So who judges the judges? The MRC does. As we've seen, there are no nonsense judges, like, if you don't need their criteria, they will pull their accreditation, which they did with Nielsen earlier this year and basically said your panel is not valid, you don't meet the criteria on which we can honestly say that your data is good and will help drive decision. So it's a big deal, and I can tell you, it's table stakes for a lot of our advertisers. If we don't have MRC accreditation, they will not even look at a solution.

Yes. Okay. Perfect. And then another big picture question, like if I talk with the message, like one of the things that comes up is like and it's -- I apologize for asking it even, but you talk with people that haven't looked at you before, and it's like, oh, this is ad tech. It's like the trade desk and then sort of stuff. And then I have to say, no, it's different trends, and it's like, there's a lot of technology in here to make it possible. Like how do you -- I mean, like how would you compare yourself to the ad tech guys? And yes, you are and you're not like in a way.

Yes. I think the hard part about that is, if you really break it down, we're technology in the advertising space, right. We are advertising technology. The big difference, though, is a lot of what people are really talking about this media tech, right. And that's buying and selling media and making money off that media transaction, right. We are an analytics platform that is in the business of metrics, right, of scoring and metrics. And so a, our business is different. We don't make money off of media transaction. We have no -- we don't arbitrage media. We don't own it. We don't buy it. We don't sell it. All we do is measure. So it's very different, right. It's very different from that point. There's a more distinct difference, I think, and that's why we love having software analysts like you deal with us is because, the relationship that we have with the customer is very different than any of the traditional ad tech companies that play in media space. They're all fighting for a share of wallet, right. They want some share of advertiser excess spend. And they will never get all of it, whether you're trade desk or Google or Facebook, it doesn't matter, or TikTok, you will never get 100% of Procter & Gamble or Mondelez or Unilever's ad spend. It will never happen. You may get a large portion of it, but you will always be fighting somebody else for it. We are a software platform. When we go into an enterprise client, like a sales force installation, there is a very good chance that we will get 100% of that customer's business running through our platform. So in the same way, someone buys sales force to manage all of their CRM data right across all of their divisions and there may be a division here or there that uses their own local tool. But at the end of the day, it becomes an enterprise decision that sales force fights Oracle for it, we're in that same position, where we're not fighting for a percentage of wallet share for a client. We actually go into an RFP, and we go into that space, looking to get 100% of a client's business running through our pipes. And it makes sense for them to do so, because, if we are covering and measuring every place where they spend their money on those other ad tech platforms, so whether it's trade desk or Amazon or what have you, then it makes sense for them to have everything go through our pipe. So broadly speaking sure, we're advertising technology, but we play a very different role, have a very different business model. And at the end of the day, our market opportunity is very different than kind of picking up the scraps and what's left after the things with the part.

Yes. I get it. Yes. I mean, if it is true, I mean, just to give you a point of verification immediately customer diligence calls or still doing it actually, there's not a single customer that is like are using DoubleVerify, something that, it's like you have one or the other. You don't -- nobody is doing both actually, which is interesting, yes. Yes. Okay. I mean, talking about that, like who is the -- can you talk a little bit about the competitive environment for you guys?

Yes. I think, look, it's a competitive environment that's rapidly evolving, and it's how many of winner take most scenarios. So if you were to look at this space a few years ago, there was probably a broader selection of point solutions that were out there, right. Companies that maybe did viewability, some that did fraud, some that did on some platforms to only cover YouTube. Those -- that larger group of competitors, let's say, point solutions have started to slowly kind of consolidate into platform solutions. And at the end of the day, there's really, we say, 2.5 platform solutions out there. There's DoubleVerify, there's [ IIS ] which is a comparable platform. And then rapidly receiving is a company called Moat, which is owned by Oracle. The difference is that when we start looking at what we're verifying against, so fraud, brand safety and suitability, viewability and geography and doing that across [ Wall Gardens ], open market, pre-bid, post-bid, there's really 2 companies that do that at an extensive place, and it's really us and IIS. So like, I think currency type metric businesses, we do believe that this is a winner take most kind of scenario, that point solutions are continuing to be marginalized, the competitive set is getting smaller and smaller, and really, the momentum is in a few hands right now.

Yes. And so if you think about that, like, how do you think about the market growth? I mean, like there's certainly a need here. There's actually more and more opportunities that we haven't talked about in terms of new platforms, now TikTok coming in, CTV, etc. And there's this few competitors. So it's actually -- I mean -- I mean, I would say you, as a CEO, you must like to say that.

Yes. No, we like it a lot. And if anything, you mentioned there's numerous growth drivers. And for us, it's about which growth drivers are we going to focus on. Broadly speaking, we've got geographic growth as an opportunity for us, right. A small percentage of our revenue is outside the US. We've got sector growth. So as we expand into different sectors, so social and then into gaming and audio, et cetera. There's more growth there. Then we've got the tailwind of just volume growth, right. As more dollars come into digital from areas like linear television to CTV, that drives our business as well. And then we've got finally, new product growth. So our ability to launch new solutions to analyze that transaction in multiple different ways or look at other metrics like attention that gives us new growth vectors to go after. I mean, programmatic is a great example of where we are able to build an entirely new revenue stream out of a growing and emerging product set or going to be a sector with a new product set. And it's now half of our revenue comes in what we call [ pre-did ] programmatic while it was $0 in 2016, 2017.

So the market changed quite a bit. Yes, yes. And then you mentioned internationally, and I wanted to get Nicola on as well, like the German and the French talking about it now. Like where are you on that international build out? How many trips home or whatever?

We're still -- this is a rapid growing part of our business. We -- it's basically 20% of our direct business. So it's a small percentage considering what we know is the opportunity out there. We are hiring outside of the US more than we're hiring within the US at this point. And the opportunities are for us for the taking, right. We started with just expanding with our own US customers outside of the US, we're now in markets going for local opportunities. We acquired a company in the third quarter that is based in Germany that allows us to accelerate our penetration in East Germany, in Russia and Poland, et cetera. So it is an opportunity for us for the taking, and we've invested against it this year, and you'll see the growth rates for the outside of the world -- rest of the world growth continuing to grow.

And what's the market maturity there? Like it feels that timing is good for you guys to kind of do international now since it seems to be opening up later than US market.

Correct, correct. It's right for verification services. It's not as mature as the US. So the basic services is what most clients are looking for, right? There is still very much focused on fraud and viewability. The opportunity, obviously, is to get into that market, as that matures towards brand safety, we will be available to provide those services as the markets mature, for sure.

Yes, yes. And then Mark, for you, like, in terms of the other motor product growth drivers, like talk a little bit about like CTV, for example, as a way to think like, okay, there's a whole new market there. I didn't think about like a few years ago.

Yes. I mean, look, the amazing thing about being in the digital space is something always new is emerging as a way for people to spend their time online. And you mentioned CTV, that is a sector which didn't really exist as an advertising sector 5 years ago, right. It really is emerging now, it's siphoning dollars away at one end and I think arguably all television will be CTV at some point. The interesting thing about that is an opportunity for us is linear television had a zero fraud problem, 0% fraud, right. There is no fraud in linear television, you're buying a spot, it slowed up, if it didn't because the guy got waylaid on the way to the station with tape, right. And it was always there. But now we go to CTV. CTV is a target of fraud in the same way that mobile was, in the same way that display was before that. So as things become more digital, it opens up opportunities for bad behavior and lack of transparency, but it also opens up more opportunities for us. And we see CTV as a really interesting opportunity. And then you just have totally new providers and platforms that come out. So TikTok, another one, for example, $1 billion in revenue a quarter in add revenue from $0 a few years ago. And now that is attracting tons of advertiser attention, tons of eyeballs. And so it's an emerging sector in which we're very focused on and will continue to complete. The challenge for us as a business is ensuring that we're ahead of the curve when it comes to what we're verifying, measuring, but not so far ahead that our clients -- we beat our clients there, right. So a good example of something like audio and club house, right. You would have thought a year ago, Clubhouse was going to be, oh, man, you guys better start covering Clubhouse, instead of switching their advertising to go there. And that went like this and like this, right. So for us, the exciting thing is there's always new sectors emerging. The challenge is always understanding, which ones are going to be long-term focused of advertiser dollars. And that's why our relationships directly with the advertisers, understanding where they're spending, what they're interested in, where their dollars are going to go is really critical for us.

Yes, yes. Okay. Yes, it makes sense. And then let's talk a little bit about the business model. So Nicola, what I liked about you guys is you have one of the cleanest IPO models out there. Just maybe talk us through a little bit like monetization, like how do you kind of price for this, et cetera?

Sure. So yes, our model is pretty simple. It's the transactions that we measure, times a fee per transaction. The fee is fixed per service. And so the model is as simple as media transaction measure, it's time the transaction fee. The source of our growth over the last few years has been predominantly on the volume growth. We've been able to measure more and more media transactions. The fee is an opportunity. We like to charge a fixed fee per transaction because it makes it very simple for the advertiser to say, I want to be able to verify everywhere that I am putting my dollars at play. So we're not part of that decision to say, well, it's too expensive, you are not expensive here. And so the vast majority of our growth so far has come from volume. The fee part grows because we provide premium services. So some of our premium services come at a premium price, and we're able to charge a higher fee for that. That's been the core success of one of our products called authentic brand safety, which is 2 to 3 times more expensive than a basic brand safety product. But over the last few years, really, volume is really what's driven our growth. It doesn't mean that we don't have opportunities on the fee to get closer to what each impression actually costs the advertiser. That opportunity is always there. Obviously, as CPM on CTV is much higher than the CPM on display. But for now, we're very much focused on volume.

Yes, yes. And I mean, like have you done work on price elasticity in terms of like it does feel as the market is evolving at the moment, it's probably worth going more for volume than for prices, I would assume.

Yes. I think right now, it's absolutely worth going more for volume than for price. I mean, we had just seen on the RFP process, really, we win on quality of our service, moving on what we can provide. It's really not a pricing decision. So I think we feel good about where we are on that.

Yes. And then, how are we thinking about -- I mean, you also have very decent healthy profitability as part of this. I talked to that a little bit, like maybe to remind the audience on the growth that you're achieving at the moment and the margins go with it because in software, we're talking about a rule of 40, but like you go well past that.

Yes, we are able to display very high revenue growth and very high margins, right. So this year, we're guiding to over 30% growth revenue and over 30% margin. And the reason for that is once we're measured -- last year, we measured 3.2 trillion transactions, the cost of measuring one extra transaction is de minimis. So as volume grows, the incremental margin from that volume is extremely high. The incremental cost to go into a new territory is also pretty small. The technology allows us to measure anywhere around the world from the US. We go into markets to get more customers, but we really don't have to be there to get those customers from a technology perspective. So it's a very high margin business. We -- and this is -- by the way, despite us reinvesting into the business massively, This is not a cost-cutting exercise at all. We're investing very aggressively in the business, and yet we still display very high markets.

Yes, yes. And then last question for me is like, if you -- we are living in a somewhat uncertain world at the moment. If I think about Q4, you kind of -- and you think about the guidance that you gave there, you talked a little bit about, like, we announced at [ the world ], new variants, et cetera, et cetera. So you've talked to that in the guidance. Can you maybe just talk us through what your thinking was?

Yes. The thinking was that -- the thinking was that as our customers are telling us that they may reduce their spend, obviously, it's going to have an impact on our revenue. What's really important to understand is we're not in a decision with losing customers. It's just that their spend is moderated because of external factors. They're telling us this. We're talking to them day in, day out. And so to the extent that they're telling us, we're obviously going to adjust our own expectations. I mean, it's important to remember our net revenue retention is extremely high and our actual retention of customers is basically perfect for the top 100. So this is just a matter of moderating our own growth based on what the volume is that we're seeing from our customers.

Yes. Okay, yes. So it's basically like -- and is it mostly supply chain issue driven, so there's no point of advertising will be -- comes out of the product?

Yes, this is -- we're very diversified across industries, but specifically on Q4, this was just a supply chain story that we were hearing from our large CPG advertisers.

Yes, yes.

Just [ passed ] that. Yes.

Okay. Makes sense. Okay. So that's all the question I had. I mean, I really enjoyed our session. Great to have you at the conference. And hopefully, next year, we do it in person. I'm looking forward to that. Then -- but hey, thanks for joining. Really exciting story.

Thanks, Raimo. Appreciate it.

Thank you.

Thank you.

Have a great one.

Yes.