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

We'll go ahead and get started. For those of you who don't know me, my name is Arjun Bhatia. I co-head our tech research group here, and I cover DoubleVerify. So it's my pleasure to introduce Mark Zagorski and Nicola Allais from DoubleVerify. Mark is the CEO and Nicola is the CFO. And we also have Tejal here, somewhere in the room, who heads up IR -- in the back there, who heads up IR for DoubleVerify. Thank you both for joining us. I think we have a couple -- Mark and Nicola are going to run through a couple of slides to begin, and then we're going to jump into Q&A after that.

Awesome. All right. I'm going to stand up because, yes, I have to stand up. I don't know, it's weird sitting down. Good morning, everybody. Want to give you a quick snapshot, 5 to 7 minutes here, on DoubleVerify to tell you who we are, what we're all about. Nicola is going to go into a little bit of financials. Then we'll do Q&A. Tejal, don't you have to read all of this? All right. Good. As you know, I'm Mark Zagorski. I'm the CEO. I've had a long history in tech in both public and private companies. Nicola Allais, our CFO, has been with the company as well for several years and also in the media and technology space. When you look at our value proposition, what DV does is we built a software platform that ultimately helps advertisers protect their digital ad spend. We do that by ensuring that the ads they buy are safe, that they're viewable, that they're delivered in the correct geography and they're not subject to any type of fraud or bad behavior. We do this through 2 different types of solutions, what we call our media safety and quality solutions that help them reduce media waste and protect brand equity. So ensuring, for example, that their ads don't show up next to hate speech or pornography or bad content that's not aligned with who they are. And then we also help drive their performance by ensuring that their media is effective, that it's viewed by a real human being and not by a bot, that it's not being siphoned off by fraudulent behavior or fraudulent activity. Together, we help drive better outcomes for advertisers through our software, and do so across multiple different types of media, whether it's audio, video, display, mobile, connected television. Our software solution is ubiquitous across multiple different types of platforms and multiple markets all around the world. The ultimate driver here is that we drive better outcomes for advertisers by ensuring that their media quality and what they deliver is safe and secure. It's obviously a huge and growing market opportunity when you look at the digital ad marketplace. It's almost a misnomer to call it digital advertising. Just about all advertising today is digital. Try to think of one that's not. Probably only print is the last bastion left of non-digital advertising. It continues to grow. Advertising and digital advertising grows at a 15% CAGR. And what's unique for the place where we sit as a company is that it's pretty highly underpenetrated when you look at the global marketplace, less than a 50% penetration of the market, which we estimate to be about -- a TAM of about $20 billion worldwide. The pain points that we try to solve -- the pain points that we solve are some which may be new to most of you. I'm sure you all know about digital advertising. You all have phones. You all watch connected television. You have kids that surf TikTok or you're on Facebook looking at grandkids or kids' pictures. But there's lots of underlying issues. And those 4 issues, what I talked about early, brand safety, fraud, viewability and geography are all significant for advertisers who are looking to push an efficient spend profile. Brand safety. 78% of brands have been hurt by associations with objectionable content. And when we talk about the impact of that to brands, consider this. We work with companies like Unilever. We work with companies like AT&T. We work with companies like Bank of America. These are brands that have been around for dozens, if not hundreds of years, and their brands -- the equity they built behind those brands can be crushed by an ad showing up next to White supremacist content or an ad showing up next to pornography. Within literally minutes, those ads can be tweeted out, screenshots sent all over, and a brand that's been -- a soap brand that's been trusted by mothers for 50 years can be destroyed. So the cost of an ad showing up next to content that's not appropriate is massive. 78% of the brands have said that they've had incidents like that in the past. Fraud continues to increase. Ad fraud is the act of bad players, mostly heavily funded criminal enterprises actually stealing dollars from advertisers in the digital space. Sending ads to fake websites, building fake applications that run on a phone or run on a CTV system. We saw a 70% increase in ad frauds between 2020 and 2021. Most of this focused on connected television, where CPMs are now 5 to 10x higher than on other digital media. Why do people go after CTV? Because that's where the money is. Viewability. This is the fact whether or not an ad is actually viewed by a human being and not by a bot. 30% of display and video ads are never seen. This can include something that runs on a connected television, runs on your Roku that gets turned off or the channel has changed before it runs through its first full quartile. Viewability is a real issue. And then in geo. Having an ad delivered where a person can actually buy that product is essential. It doesn't matter -- if you're delivering an ad to someone who -- your product is not legal, it can't be sold in that market, can't be sold in that geography, it's a wasted ad. 65% of spending on media is wasted because ads are not delivered to the right location. We protect our clients from these issues. We're a software. We don't sell advertising. We ensure that advertising is delivered in a safe and secure way. We do that by building a system that starts with safety and brand safety and building a basis of keeping ads out of places where they shouldn't be. We grow that with solutions that focus on quality, which moves from brand safety to brand suitability, not just what's safe for me, but what makes sense for me, as well as what's viewable. And then we top that off by taking that same data set and helping ensure we keep them away from bad things and direct them to good areas for their advertising. And again, that can be across social, it could be across web, display, mobile, et cetera. Performance -- all of these together help drive better outcomes for advertisers. And ultimately, that's what we're here to do. We want to protect their spend. But if their ads go to places or someone can't buy their product or that diminishes their brand, they're not going to sell a solution or sell a product. We talk about our company as a differentiator. There's 3 key things to think about. Scale. We do this at scale and a pretty massive scale. 215 billion daily impressions, daily data transactions that we review. 4.5 trillion transactions a year. We're looking at data at a massive scale. Why that's so important is the fact that as we see more behavior, as we see more transactions, as we see more ads being delivered, it makes our systems smarter. That's how we discover fraud. That's how we determine brand suitability violations. Doing this at scale is incredibly important and a huge differentiator. It means that small point solution companies can't do this. Because if you don't measure and if you don't produce a solution at scale, you're not covering every place where an advertiser needs to be. Innovation. We're constantly innovating, whether it's coming up with new solutions from our same data set that drive better performance or ensuring that the latest media is covered by our verification solution. We have this drive to verify everywhere. It's a key differentiator. Innovation is a key part of what we do. TikTok didn't really exist 3 or 4 years ago as a main source of advertising. Today, it's multiple -- it's in the teens of billions of dollars being spent on advertising. Didn't exist. Now it's a huge focus. Our ability to work with folks like TikTok, our ability to evolve into platforms like connected television is a critical part of who we are as a company and how we innovate. Then finally, trust. Our advertiser partners, of which there's over a thousand of them, have to believe and trust in us as a company. We are independent, which means we're not part of the media transaction. We're independently accredited. So we are the judges. But who judges us? Another independent firm. And because of that, our advertisers rely on us to ensure that their spend is secure, to ensure that they're getting the right information from us. And because of that, they stick with us. Some key stats here. These are best in industry standards. 126% net revenue retention. Over 95% gross revenue retention over the last several years. These are top-tier statistics because our advertisers stay with us. Our top 25 advertisers have been with us for almost 7 years; top 50, almost 6 years. Once advertisers work with us, they use us. Their system becomes part of their daily routine. It becomes part of every transaction that they buy across as many digital media partners as possible. So with that, I will also talk about how these -- or I'll turn it to Nicola to talk about how these incredible statistics are backed up by strong financial performance.

Thank you. So quickly through the financials before we get to Q&A. We have strong top line and bottom line growth and a very good cash generation. We are, what you'd deem, a company that's in the rule of 60, top line growth of 30-plus and an EBITDA margin of 30-plus as well. If you look at how digital advertising is growing, it's in the mid-teens. We are far outpacing that growth because of the large TAM that Mark mentioned and because of our ability to penetrate further into new verticals that our advertisers are looking to verify. The margin is at over 30%. If you think about our cost structure, once we verify 4.5 trillion transactions a year, the cost of verifying the next one is very small. We are achieving these margins even with a significant amount of investments in the company. We were less than 200 employees a few years ago. We're over 800 today. So despite all these investments, we have a very, very attractive top line and bottom line growth, and we have a lot of cash generated from our operations, along with a lot of cash on the balance sheet today with no debt right now. The key to DV's sustained business performance. This is sort of a summary. We have a fixed business -- fixed fee business model. So the way our model works is we have media transactions that we measure and we charge a fee per transaction that we measure. We are not a take rate model. We don't -- we're not subject to the variations of the CPMs, the media costs. We just charge a fixed fee per transaction. And so our model is to verify everywhere. As more transactions are measured, we're going to increase our revenue. There is an essential nature to our products: once you are verifying, the decision for an advertiser to stop verifying is a tough one. It would be very difficult to see why all of a sudden you would stop using our services. The ROI -- and I'm sure we'll get into it during the Q&A portion -- is tremendous. We are a very small cost compared to how much money we're allowing an advertiser to reduce waste on. We verify everywhere. That's our strategy. We want to go everywhere the advertiser is and make our model as seamless as possible. It's a fixed fee model, right? So whether you're measuring on a display ad, a mobile ad, a video ad, a CTV ad, we want you to just say, yes, we're going to verify our inventory. And then the underpenetrated TAM is really the huge potential here. There are entire sectors of digital ads that are still to be verified. TikTok is an example. It just came online, right? All of that inventory needs to be verified. The TAM is huge. And the organic growth that we get from our current customers is really what's driving the top line growth that I've shown. Here's a GAAP to non-GAAP, which we won't go through. It's there if you want to see it. But basically, we have a very high flow through, very little CapEx requirements for the business. This is all people and technology that we've built over 10-plus years and that we keep on improving. With that, I think we're going to go into Q&A.

Yes, that sounds great. Thank you both. That was very helpful. Maybe we'll actually start off on the ROI point, right? I think it would be really helpful if you can help both contextualize how much is it that you charge on a per transaction basis? What do CPMs look like across various channels? And what is the benefit that customers get, whether it's reduction in fraud, whether it's avoiding adverse outcomes from adverse ad placement. Yes. Maybe just walk through some of those dynamics.

Yes, I'll start. So on average, it's about $0.06 to $0.07 per transaction that we measure. Very small, right? The average CPM for a display ad maybe $2, $3. The average CPM for a CTV ad is $20, $30, $40. So even on a display ad, the ROI is extremely high just on the cost side. The benefit of our service, obviously, is avoidance of media waste. So it starts with avoidance. And then goes into where we're now focused more, which is positive targeting, in places where the ROI is even going to be higher, right? So historically, it was avoid bad stuff. Now we're moving into products that are actually going to allow the advertisers to be right next to the next content that is going to improve their ROI. But on the math basis, literally, it's $0.07 versus $5 to $40 CPM. It's very high.

Yes. And one of the beauties of the system, again, that goes back to that net revenue retention and the longevity we have with our customers is they have a UI that they look at every day. And it shows how much they've spent, how much we blocked and protected them from. So for example, if they're running a $10 million campaign and we blocked 5% of those ads because we felt they were fraudulent, we felt that they were not in the right geography or it was a bot versus a human being, they know that we've saved them $500,000 on that campaign. So it's an easy ROI calculation that they see in real time. So it's very hard, as we said, for someone to say, "Well, let's turn this off because, hey, we're okay losing that $500,000." And they know how much it cost them, which was -- in that case, if it was a couple of cents per 1,000, maybe it will only cost them $50,000 to save $500,000.

And so as long as they're running digital ads, they're going to keep DV turned on?

Yes. I mean we use this analogy all the time. It's kind of like -- you don't wake up in the morning and go, "Oh, traffic is a little bit late. I'm not going to wear my seat belt today. It looks pretty safe. Let's just not put it on." In many ways, our protection part of our business is the utility. It's a seatbelt that advertisers don't turn on and off. And very different than other digital advertising-based businesses. We don't fight for wallet share. We are not -- we don't go to an AT&T and say, "Hey, we want some piece of your advertising spend." They either go with us or don't go with us. It's a software implementation that goes through an RFP process and they pick one provider for the most part, right? And they go with that. And they more or less put all of their spend through the system. So it is a different proposition than most -- what you'd hear about in the advertising technology space.

And so one of the -- I think one of the interesting parts about where you play in the ad-tech ecosystem is that you are channel agnostic, right? It doesn't matter. As long as it's digital -- whether it's on social media, whether it's on CTV, as long as it's digital, you can verify that. But we're in the digital ad ecosystem are you seeing the most growth? Which channels are resonating most with customers right now based on the data that you're seeing through your platform?

Yes. Our business follows consumer volume, right? And where we're seeing the greatest amount of consumer volume right now is across areas like CTV, which are still relatively small, but growing pretty rapidly. So we see growth there. We continue to see it on what we call programmatic advertising. So we have 2 parts of our business to be clear. We have what we call measurement, which is done traditionally across non-programmatic platforms, so social, direct media buys, et cetera, which are not bought through machines. And our activation business, which is prefiltering, that's done through programmatic. Programmatic continues to grow as it eats the entire ecosystem. And so that is a huge growth driver for us. And social continues to be a huge focus for advertisers, areas like TikTok, which I know we've mentioned multiple times, have really emerged as massive monsters taking ad dollars. I mean, again, $12 billion plus in ad spend just doesn't drop from the sky. It comes from other places. And I think that's a key part of our verify everywhere strategy, which is as long as we cover everything and every place where money goes and our product goes there, we are somewhat indifferent whether or not an advertiser decides to spend on TikTok versus Facebook versus Roku versus Apple 11 -- their mobile app, right? As long as we're there, we're indifferent. And that's what -- when Nicola talked about the resiliency of our business, as dollars shift, we're still measuring or filtering out those impressions as well.

One of the successful parts or the very successful parts of the business, I think, has been the premium solutions. And I think authentic brand suitability or ABS has been a great example of that. Talk about some of the success that you've had launching that product now that it's been in market for a couple of years? And what is next in your portfolio that gives you that level of excitement that can be -- that can see the similar levels of success as ABS?

Yes. So we've had this kind of development cycle, which starts with what we call measurement, right, which is the idea of let's -- we can block an impression or measure what happened to an impression after it's been purchased. And then we spin those solutions, whether something is viewable, whether it's brand safe, whether there is fraud involved, we spin those into what we call activation solutions, right? And those activation solutions are: let's not just measure and block after it's been bought, so we can block delivery in an ad. Let's try to keep you from buying that to begin with. We do that through programmatic applications. We do that through prefiltering solutions. So don't even buy bad stuff anymore, not just block it from being delivered, but don't even buy it. ABS was the culmination of taking some of our brand safety and suitability solutions that were measurement and pushing them back into the activation or filtering tool set. And what we found, obviously, is that an advertiser would much rather not buy something, right, than have it blocked afterwards. Blocking is great because it makes sure it doesn't get it, but I still have to go get a make good on it or try to get a refund from the platform or try to get my money back. So ABS is the culmination of taking a bunch of different data sets that we have in measurement, pushing them into the prefiltering through programmatic platforms like Trade Desk, DV 360, other programmatic platforms, allowing advertisers to come up with not just brand safety, but we call brand suitability criteria as well. And just as a quick definition. Think of brand safety as things I absolutely do not want to be around. These are bad things, right? This is pornography. This is hate speech. These are things -- brand suitability is much more nuanced. And ABS is a brand suitability tool that allows for filtering. For example, if I am Unilever, baby food and baby products have a very different level of brand sensitivity than kids fruit juice boxes, right, or that are targeted towards teenagers, so energy drinks, very different level of brand suitability. Same thing for large companies like Disney. Disney has -- they're launching the latest cartoon by Pixar, it's one type of brand sensitivity. But they're launching Deadpool, which has a very different audience, right? Same company, different levels of brand sensitivity. So the content that they want to be around is very different. Brand sensitivity in ABS allows for over 7 categories with 3 different levels of sensitivity for advertisers to target and filter impression delivery across that. ABS has taken advantage of the increasing level of brand sensitivity that advertisers have. It used to be the New York Times was a brand-safe environment. Of course, it's brand safe. It's a legitimate publication. But some articles around specific topics may not be appropriate for certain advertisers, and every advertiser has been forced to take a stand on just about every political position out there. So that has been a great driver of our business. And as things become more sensitive, as companies have had to take stance on specific issues, it has actually driven growth in ABS because they're more and more concerned that their ads will not just show up against something that's bad, but something that doesn't align with who their brand stands for.

And so following on that innovation point, right, you do charge a premium for something like ABS, where you are delivering more value to customers. But there's other products in the pipeline as well. There's authentic attention. There's perhaps some contextual -- where are we in the adoption of those products? And maybe just walk us through some of the recent trends that you're seeing there?

Yes. So you mentioned 2. So authentic attention is us taking kind of concepts like viewability, can an ad be seen, and engagement to a whole new level. So if you think about -- as we talk about the progression of what our solution does, we try to take the garbage out of the system first. Then find what's relevant second, which is contextual targeting. And then finally, we got what's out which is bad. We know what's good. But of the good stuff, what really performs, what's really -- and that's where attention comes in. Because attention is a new metric -- so we start with metrics and then we move them to activation -- is a new metric that focuses on whether something is not just getting exposure. So an ad is a good environment, it's being exposed and someone can actually see it. It's on a page for a certain period of time. But does a consumer actually engage with it? Is there a rollover? Did they change the channel while they were watching this, et cetera? So exposure plus engagement together means attention. And we know that we can link attention to actually performance. Because if you're not paying attention to an ad, there's no engagement, you're not going to sell a bottle of shampoo because no one really cares, right? So I think attention is very early. We're trying to establish that as a metric first and get people to buy into it second. And I think that's a first inning product. Contextual targeting, which is another performance solution, a premium performance solution is also pretty early for us as a company. But the sector is gaining speed. Contextual targeting is really -- think of it as the old days of: "Why did I buy Monday Night Football? To sell beer, because that's what men watch, right? And I sell beer to men, right, for the most part. Fast forward to the digital age: "I don't need to buy football anymore. I can buy any place where men go off to sell my product." Well, privacy is now rearing its ugly head in the digital world. The ability to target individuals based on a cookie or based on an identifier is going away. So contextual, where something is, where an ad shows up is becoming much more important to advertisers than who that person is because of the inability to target a specific user. And you see platforms like Apple starting to squeeze individual identifiers to the detriment of certain platforms like Snap and Facebook and others, which means the context of where an ad shows up is becoming that much more important. So contextual is another area where as a performance-based solution, we think there's a huge opportunity there. It's still very early days as privacy starts to squeeze in. But we know in talking to our agency partners and our advertiser partners that is going to be a huge focus over the next few years as they look for ways to drive performance without individual level data.

Awesome. And I know -- I think something that's on top of mind for everybody in this room is the macro environment, right? We are -- obviously, the markets are reflecting it. There's inflation, rising interest rates, et cetera. What are you seeing from your customers in terms of their ad spend? Is there anything in your pipeline or what your customers are telling you that is suggesting that there may be a slowdown in ad spend coming? Just maybe walk us through where sentiment is based on your conversations.

I'll take it. The -- so we -- the way our technology works is basically a tag that follows the ad through the ecosystem. And so because of how it works, we actually have insight in where the campaigns are going to run. And so we have that view into where the ad spend is going to be. It's 3, 4 months out. It's not much within than that. But it does give you the ability to see exactly what's happening in the near term. And we're not right now seeing a reduction in spend from our customers. And I think it's important to think about how our product is used and why you would want to -- why you want to see that or not. And one example may be what happened in Q2 of 2020, right, at the height of the COVID pandemic disruption. We grew 20% in that quarter. Q2 2020, we grew 20%. And the growth was on volume, right? Because what happened is customers that already were using DoubleVerify service were in a situation where our services were needed even more so, right? The more disruption there is in the market, the more you need those services to verify that your ads are in the right place, reaching the right audience. So that's kind of the must-have nature of our product that allowed us to continue to see growth even in that quarter. Our peers didn't see the similar growth. Ad-based companies didn't see that because they are much more subject to variation on the CPM side of the equation, right? So we measure a transaction and we charge a fixed fee per transaction. So we're not subject to huge swings on the CPM side of the advertising environment. So as the environment went down, CPMs went down, but people still advertised, right? Even in a recession, it's not as though usage of TikTok is going to go down. It's not as though people are not going to watch CTV less. They're going to be watching it at the same level. And since we measure per volume, right, which is really the driver, we grew 20% in that quarter. None of our customers turned us off. We're very diversified across the industry. So whether some industries were going down -- so travel obviously went down. But we have -- no single industry is more than 20% of our mix. So we're sufficiently diversified. And I think that for us is a proof point of how we should be able to react to a deep recession.

Is there a scenario where CPMs may actually come down for maybe some of the higher priced channels like CTV, and that may actually cause the industry to mature faster, where volumes might go up faster? Like how do you think about that dynamic?

Yes. No, for sure. I mean there are certain sectors -- and we speak to advertisers. They're like, "We can't wait for demand to go down because we're going to dump even more money into more impressions at a lower rate." Particularly around folks who are quasi DR advertisers -- so think of someone like a T-Mobile or an AT&T. They're trying to sell plans, they're trying to sell phones. Or someone like Marriott, right, who's also a customer, who's trying to sell hotel rooms, right? Those have a DR concept to them, that -- yes, they're building brand. But they're trying to get people to click to buy a hotel room, click to buy a service plan for their phone. If those impressions become cheaper, they're going to jam volumes way up, right, because they can drive more for less. That again helps us. And I think it's critical to note that during recessions, people don't watch less television, people don't watch -- go on their phones less. What happens is the demand for those impressions go down. So revenue goes up for those impressions. However, the number of impressions stays the same, which means our importance in that scenario becomes -- it doesn't change and actually almost increases in importance, because advertisers who are used to being a bit sloppy and just kind of spending here or there and not worrying about it, are now like: "Every dollar counts. Every dollar I spend counts. And I need to make sure that it's not a bot, that it's not going to fraud, that it's in a brand-safe environment." So again, not -- we aren't totally immune to all headwinds, but we are in a good position, whether the economy goes up or down because of the fact that we have an essential tool that protects spend.

One of the things that I want to touch on, I think, Nicola, before we wrap up here. You did mention the rule of 60 model, right? You have a 30% plus revenue growth, 30% plus EBITDA margin. As you see some of these newer growth opportunities, whether it's TikTok, whether it's Meta, whether it's CTV, how do you think that balance between growth and profitability might change in the coming quarters and the coming years? Is there one that you prioritize more over the other to look at?

Yes. I mean we're going to keep an eye on the rule of 60. The business is inherently profitable. We are -- I know it's a strange macro environment, but we are continuing to invest as we see new vectors coming on play, right? Like so, TikTok, we have to invest in, right? It's going to be a huge priority for us. We are well over the digital growth spend, right -- the digital ad spend growth. So we're 10, 20 points over what the average is. So we are going to allow revenue to lead what we do on the EBITDA side. But the quickness by which we can increase or decrease investments is pretty nimble. We're pretty nimble that way. So I think we're going to keep an eye on both, and I think we can easily manage the bottom if the top really slows down. It's hard for us to see -- as we just said, the demand for digital is so high that I think our top line is still pretty strong.

The nice part is we've got flexibility. We're going to take advantage of when the market is soft to get people, to continue to invest in product and continue to -- we've got a huge greenfield opportunity right now. 67% of our new deals in Q1 were new customers, new greenfield opportunities. So we're going to take advantage of any softness to hire people and continue to invest, because we have the opportunity. We're already cash -- we're throwing off cash, right? We're growing revenue and growing EBITDA. So if the market is soft, awesome. We're going to invest in people and play. If we think things are turning, we can move that lever very quickly. But for us, I think it's time for companies that are in the right space to be bold to take advantage of that and not to kind of cower in a corner.

Wonderful. Well, thank you both for joining us. Thank you, everyone, for attending. The breakout session is in 10 minutes in Richardson, which is just upstairs.