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

There we go. All right. Welcome, everyone. We are super happy to be joined here by DoubleVerify. Here in the room, we've got CFO, Nicola Allais. And then we also have Mark Zagorski, Chief Executive Officer, who's joining us over Zoom. Can you hear us, Mark?

Absolutely. Sorry, I can't be there in person, but I think you're all better off to me not spreading some stuff around the room. So...

You know what, Mark, 2 years into a pandemic, we are all remote work experts. And just showing off the tech here.

Awesome.

Let's start right there then. So Mark, definitely been battle-tested first couple of years as a public company, from a pandemic straight into a recession, and you really haven't been public during what anyone would consider a normal environment. Could you just talk a little bit about DoubleVerify's growth and performance in the last 2 years and then maybe what you've learned about resiliency of both the company but also the industry.

And again, thanks all for having us here. It's been an interesting journey for sure. So I joined in July of 2020 right at the heart of the pandemic. We IPO-ed last year in a very kind of tumultuous year. And now fast forward to today where we're now heading into potentially a recession, and we got war in the Ukraine still raging, and political upheavals, et cetera. So it's been challenging for sure. But if you look at our revenue growth, 2020, 2021 and what we're expecting to do this year, it's almost been identical, right? 34% in '20, 36% in '21. We're guiding to 35%, 36% this year. So the one thing I can say is that we've been incredibly consistent, and that is kind of been our mantra, which is when you have a solid product in a market that demands a utility like brand safety that is incredibly concerned about the growing incidence of fraud and challenges around viewability, you can build a good business. We've built a good business based on the fact that we provide value, and we have a value proposition in good times and in bad and sometimes even more in bad times when ad dollars are tight. And that -- if we continue to hammer home, build good products, build products that compete against our peers in the marketplace and beat them and that provide real ROI for our customers, then we'll be okay. And I think our vision, if you look at how we've grown versus the industry, we've always paced the digital ad growth over the last several years. And we think that's going to be our emo for the next few as well.

Yes. That's fantastic, Mark. For those of you that are just joining us here in the room, we've got CEO, Mark Zagorski, home feeling a little under the weather. Lucky enough to have him coming through on audio by the miracle, Zoom. But moving on again, you mentioned coming out of the IPO last year. And at that time, we talked about your TAM being 75% greenfield. Can you just kind of give us an update on, one, how you think about that TAM in light of the growing formats and CTV and social, but then also the product portfolio build out into performance?

Yes. So we definitely believe that the TAM for us continues to grow. Back when we went public, we were looking at a 2020 TAM of something like $13 billion and a 2025 TAM of $20 billion, but that didn't even take into account what's happened in CTV since then. So the growing amount of ad-supported CTV cost premium channels, you've got Netflix, Disney+, HBO Max all starting to roll out ad-supported tiers, it didn't contemplate the incredibly fast rise of social channels like TikTok, which didn't even exist a few years ago and now are expected to be $10 billion to $12 billion of ad revenue a year. And so I think when we look at the TAM and the opportunity for us to continue, it's not just the underpenetrated TAM that we noted a few years ago that was greenfield, but it's all these new sectors that have opened up. So whether it's new social channels, new CTV inventory that's grown. And what that's done is it's really provided an opportunity for coverage but to build new products in those places. So you mentioned kind of performance solutions. As we look at challenges across formats like CTV, where measurement is still spotty, right, where companies like Nielsen are having challenges in delivering reach and frequency, we see that as an opportunity not just for our core verification business to grow but for growth with solutions like attention, where we think attention can be a much stronger proxy for an outcome than a -- than just telling me that 5 million, 18 and 24 years old males saw my show. So we think that emerging channels create new reach around performance solutions like attention, which would be launched recently.

That's super helpful, Mark. And we'll give you a break here for a second. So Nicola, we kind of zoomed out at the beginning with the macro. So zooming back in to DoubleVerify, we're looking at the variables for growth. It's MTM, which is volume and then MTF for price. And which of these do you think is the larger driver in 2023 or maybe over the next 5 years? And what's the biggest catalyst do you see for each of those categories? And maybe prefacing this question by saying which is bigger, like do you care between the 2?

Right. So our model, as you described it as media transaction that we measured, times of fee that we charge a fixed fee per transaction. The largest grower for us has been the measured transactions. That's the part where the volume in the industry that still needs to be verified is a very large number. The TAM for our business is very large, and we saw our -- we have a ton of greenfield opportunities. And if you look at the past 3 years, the growth that we've seen on the MTM side of the equation has been double digit, very healthy double digits. The MTF is a part that we feel has an opportunity to grow. It grows -- this year, in particular, will have grown partially because we have been able to bifurcate our pricing between display and video but also because the mix of our products is now shifting more towards our premium priced products. That shift is really where you first see it this year, where MTF is growing just because the premium pricing product is having such an impact on the overall MTF. Overall, I will say, in the next 2 to 3 years, the growth in MTM is still what we believe is going to drive the majority of our growth just because there's so much inventory that still needs to be verified.

And I guess just on my last second add-on, like do you get between the 2? Like is that -- do you run your business focused on one or the other?

I think we have a strategy to continue to drive adoption, which means that we are much more focused on the MTM side of the equation than the MTF.

Land to expand. That makes a lot of sense.

Correct, correct.

Yes. And then Mark, if we can double-click on that. So on the MTF side,as Nicola said, there's 2 main drivers. And so maybe first, touching on the new products. Obviously, authentic brand safety has been a huge success for the company. But what are you seeing of uptake when we think of custom contextual or authentic contextual performance solutions? And what might be like a catalyst for broader adoption? Is it just recognition and getting it out in the market? Or do you see some maybe macro external triggers?

Yes. So on those 2 products, in particular, custom contextual still is growing really nicely, 140% last quarter, year-over-year on a small base, right? So it's growing well. I think the trigger for that product, as you noted, is a change in the macroeconomic environment as it becomes more privacy focused as browsers and operating systems start to block identifiers and cookies, which makes targeting users that much harder. So we think context has an opportunity to continue to grow as the walls start to squeeze in on individual level targeting. So I think that's one play. On the attention side, again, that is a bit different. We're trying to build an entire categorization of measurement, right, which doesn't -- hasn't existed, right? We're creating a category, right? It's not like reach and frequency or even viewability, which has industry standards, industry accreditations around it. Attention, in itself, has a couple of things that need to be done before it really gets massive update. The first is it needs to be -- it has an industry acceptance, right? And that involves standardized definitions of what attention is. It involves standardized accreditations of if we're saying something is high or low attention or giving a score that there's a third party that's vouching for what we're saying the same thing -- the same way to do for viewability, the same way they do for invalid traffic and fraud. So I think, a, we have industry recognition and uptake that needs to happen. But then we need to have client uptake. And I think that's where part of that -- the former that I mentioned the industry uptake is just time and effort and investment and working with partnerships and partnerships with groups like MRC and the IAB. On the client uptake, that's really up to us. And -- or before a vision snapshot earlier this quarter, which was a freemium version -- I'm sorry, last quarter in Q3, which was a freemium version of attention that we now have over 600 clients using the snapshot data. We've generated 200 customer leads or sales opportunities from that. So I think we are well on our way with getting attention out there. It's a longer road than for something like contextual on the performance side or even ABS on the client side. But when these products catch fire, I mean ABS is now over half of our activation business, it's a $100 million-plus product for us that didn't exist a few years ago. And I think the combination of our performance products like attention and contextual have the potential to be that big as well. It's just going to take time, industry acceptance and some client marketing to make it happen.

Yes. No, that makes a ton of sense. And what I'm hearing you talk about Attention as essentially a currency, right? That's something we've talked about for a long time with DoubleVerify. Do you see this kind of the same build-out as when you first brought out the authentic ad, right, that you need to -- you made this thing, you know it works, but the industry kind of accreditation needs to be the next thing to come.

Yes, first -- I mean, look, it is getting a standard definition out there and then getting the accreditation agents behind us to say, yes, what you're saying is valid. The way you've done it is valid, and people should trust what you're saying, and I think that's a big part of it. Because we know once that happens, it brings -- it takes a lot of the questions off the table that folks have, which is how do I trust this data set, how do I know what it really means. And I think that's a big part of the socialization of attention as a currency metric.

And then Nicola, we'll stay on MTF here, and this has always seemed like such a big opportunity to me, the dynamic pricing. I feel like I've asked you about this on callbacks for longer than you've been public somehow. Like it feels, I guess, it's been forever. And you're starting to separate pricing between display and video. And can you just talk about how you see the balancing of that pricing structure with how big this greenfield opportunity still is? And also kind of like the long-term future of maybe how you eventually could separate video from CTV as a quick caveat for the people at ISD and ad tech in the room right now, display prices might be as low as $1, CTV might be as high as $65 and DoubleVerify has traditionally charged a flat fee per impression regardless of the format. And so if you think about their pricing as a percentage of the spend, I feel like there's a lot of pricing power.

Not leading me to an answer, but I'm leading you to my answer. So look, you've laid it out correctly, right, which is the way we think about pricing is opportunities there. The opportunity for us to drive further adoption across all types of media and not having the advertiser think twice about allowing us to verify their inventory because we are tweaking pricing at this stage. It doesn't feel like it's worth it, right? We'd rather get adoption. We'd rather get more volume, we'd rather get closer to being a currency in the industry before we start bifurcating price across different types of media. The opportunity is obvious, as you just said. I think Netflix coming online with $65 and makes it even more obvious. But to remain frictionless for us is more important right now. And again, the growth rates on the revenue side are very strong, and they are led by volume. So we'd rather continue that adoption first.

Yes. That's super helpful. I guess flipping to the other side of the equation, the MTM, so back to thinking about the volume side of it. And this is for Mark. How are you thinking about new logo adoption? And again, for an industry that's so greenfield, you still have a lot of competitive wins. So when adding a new customer, what is the most common reason for them coming to DV either from a competitor or the most common pain point that leads them to adopting a solution if they're greenfield?

Yes. It's an interesting take. So let me start with the competitor aspect of this. The good news, bad news as when we're doing competitive takeaway or a competitive conquest is they already bought into this space. They bought into the notion of verification. They're usually large enterprise brands who have concerns about brand safety or suitability. So a lot of that education is taken off of place. And for us, it gets down to let's test it out. Let's get the systems running head-to-head against each other. Let's see who filters out the most fraud. Let's see who provides the greatest level of granularity when it comes to brand suitability. And as we've seen in competitive RFPs for the last trailing 12 months, we won 80% of those. So we like getting our systems in front of folks. We think that's the best opportunity for a sale. And it's a good showcase for our solutions. When it comes to like pure greenfields and even pure greenfield opportunities taking a step back, usually involves some type of competitive showdown. Most companies just don't like look at one company and then just pick it if they've never been in the space before. In those cases, what drives customers to awareness is a combination of market conditions where as -- fraud is growing in a sector that they're spending in, where there's greater chaos around the news that makes them feel like their brands can be challenged. So they get attracted to the space there. But then it is there -- in that case, it always ends up in the same place, which is a an RFP-type situation. So the pain points are no different for an old client, a client who's using a solution or a new greenfield type client. They all are grappling with fraud. They're grappling with the lack of transparency that drives concerns around brand safety and suitability. It's where they end up in the process. Some already have dealt with it for years. Some are newly approved, which is different. And then they all, in many cases, end up with an RFP, a competitive RFP process that goes head-to-head competition. So look, we think there's great opportunities both places, particularly outside the U.S., many -- a growing number of our deals that we're closing are greenfield because they are getting aware of the issues, and those issues are now global issues, not just U.S. issues. And as reflected by over 70% of our Q3 deals were what we consider greenfields, right, clients that were not using in an embedded system, which means that we're doing a good job creating awareness. We're doing a good job getting into market. And we're just still doing a great job closing those clients when we get in front of them.

Yes. If I could actually just double-click on that piece. You mentioned a record greenfield quarter. Just in this macro environment, if we're coming into greenfield to create new budgets that don't exist, like how do you -- what do you attribute that success to?

Yes. I think the reality is we don't create the value, if we're not driving ROI, then no one's going to work with us, period, good market or bad market, right? And I think in particular, when markets get rough, when -- I'm a CMO and my budget gets cut by 10%, I'm going to think twice about taking any risk on impressions that could be fraud or may not be viewable and don't deliver. I mean look, my budget may be down 10%, but I still have to sell 10 million bottles of shampoo. Like I don't have a break. No one says, "Well, you'd sell 10% less shampoo." It's now your budget is 10% less, you better sell that same amount of shampoo. So that means the concerns over fraud of our ads that aren't viewable by a human but ads that show up in an environment, which maybe is a geography where I came and sell my product or a brand environment where, for sure, no one is going to buy a bottle of shampoo because it shows up next to hate speech, that becomes a big concern. So the market environment, whether it's good or bad, still provides an opportunity for us, and in many cases, a worse financial environment may reduce ad spend, but it doesn't reduce the utility of our product and, in many cases, makes it even more valuable for advertisers whose budgets are squeezed.

All right. I'm going to ask one more quick one on the volume side and then get to some more macro. How do you guys think about ramping volume with customers? Is that a natural process? Or is that something that you can drive?

I think -- there's parts of that we can drive for sure. And the volume that we drive there is by selling new products. We're covering new sectors, right? That's the new social network, so adding products across TikTok or covering Netflix, for example. Those are ways in which we are actively working to grow volume for advertisers, right? By getting more coverage or having new products across coverage that we currently have. So TikTok, for example, we have invalid traffic and viewability tools. We're going to be launching brand safety and suitability tools, right? And Netflix is adding an entirely new platform. So it's adding more coverage. So in that case, we're actually -- we're taking an active role in growing volume. Now the tailwind there is advertisers just increasing their budgets period, which is always nice. We've had that tailwind in the past, which is just ad spend goes up. But we play an active role in driving MTM and upselling clients. And I think the success metric that I would like to say is when you look at the number of advertisers who spend $200,000 or more with us per year rose by 41% year-over-year in Q3, right? That's a big jump in the number of advertisers that we work with. And that just shows the fact that, yes, volume grew for sure. But that volume was in large part driven by upsells of products and new coverage of new sectors. So that's here which could bee quite challenging, right? Ad budgets are not, going to be growing the way they have in the past. So for us, we've got to lean into covering new sectors, trust that are in our control.

Yes, that's super helpful. I think I want to double-click on a few areas you covered there. So thinking about the high-growth format, social and CTV, maybe we'll start with social. So it's been a really challenging year for social stocks and your social business has grown really well. And so can you just talk about that dynamic? What's the biggest drivers? And like maybe where is that disconnect where...

Yes. So it goes back to what we've been discussing all along, which is MTM times MTF. Since we don't -- we're not as impacted by a change in CPM, we're not a take rate model, we're really focused on the impressions that we can measure for our advertisers on the social platforms. What you've seen this year across the social media platforms is a depression of CPMs but not necessarily a reduction in impressions, right? So if you even look at what's been published by YouTube or Facebook, CPM is down quite a bit, but the impression is actually holding. And since we are paid a fixed fee per impression, our business follows that part of the equation a lot more closely than it does the variations on the CPM. So in a business, in a time when CPMs grow really fast, we may not see that kind of growth. But when it goes down, we don't see that kind of decline as well. We're very steady because we're much more focused just on the impression side of the business. I think, overall, the -- to go back to a little bit to what you were asking Mark, in terms of general MTM opportunities volume, ultimately, since we want to measure everywhere advertisers are putting their dollars at play, we should -- our revenue mix should closely mirror where they're spending their money. And I'll just give 2 stats to show the opportunities that we still have. Social is about 17% of our revenue. It is a whole lot more than 17% of the ad spend for every advertiser, right? It's well in the 60s. International for us is 25% of measurement. It is about half of all spend. So those give you an idea of the opportunities we have to kind of just close the gap and just mirror where everybody -- where the ad dollars are going, which is ultimately where we'll be once adoption is higher.

Yes. That's fantastic. I'm fighting myself to not ask follow-ups because I know we're trying to get through in these last 4 minutes. The one point that I've always loved, and maybe it's not even a question, is just we talk about like Facebook and YouTube. But when you think about the disruptors, TikTok, Reddit, LinkedIn, Twitch, you're all those places, too.

That's correct.

And that must make you more defensible. Like you said, you follow ad dollars and those follow eyeballs. And one thing about Facebook is they can only monetize Facebook.

That's correct.

You can monetize all their competition.

Yes, we're sort of agnostic across the platform. It really depends on where the average wants to put their dollars. I would say one thing I will mention on the social platform is TikTok came to us to have us help them create a product, a verification product for their platform, which kind of shows how the whole...

Evolution of all.

Exactly, exactly.

No. I mean -- and that's fantastic. I think I'd be remiss -- I would love to turn this to you guys. I will in one second. But if we don't talk to Netflix, I feel like we wasted an opportunity here. So I mean, essentially, Netflix is a second partner, right, after Microsoft. Now it's TV. And there's obviously going to be a dramatic increase of inventory heading to AVOD and CTV. Like how do you think that Netflix plus the broader environment affects your business maybe 2023 or maybe overall? And then do you have like a rough percentage of how many of your customers are using you for CTV right now and how big of an opportunity that is in your installed base?

Yes. So I'll start, and then I'll turn it over to Mark. By the way, this is how I feel all the time. Like Mark is just talking in my head, just giving me insights as I am speaking. Crazy, let me know how I feel.

That's the thing about ad tech. You have new home speakers.

That's right. It's everywhere. That's right.

So I'll just set the stage and then I'll let Mark speak to CTV. So Netflix selected us NIS to kind of be the verification partners in their space. It's going to launch in the -- probably in the first half of 2023, will have some impact in '23. But I think more importantly, it creates an ad-based product within CTV, which is really going to change the industry for the better, we think, but I'll turn it over to Mark to talk more about the opportunity.

Yes. I think when we look at CTVs, we're starting with Netflix, looking at invalid traffic and viewability, which I think are core aspects of creating a trust equation between a buyer and a seller, right? So ensuring that the ad gets delivered in that viewable environment. And I think that is -- it's a great lead-in from Netflix to actually recognize some of the challenges that buyers are going to start to have around CTV. And I guess, what -- you can't really look at Netflix in a vacuum right now without taking a look at what's happening with AVOD and what's happening with other players like HBO Max, like Disney+, which are going to be entering the space as well. And how that dynamics of all this inventory coming into the market is going to change the power that buyers have? I mean this has been a seller's market in CTV for the last 5 years. So it's about all the power, have all the control. And I think there hasn't been a ton of premium inventory that's out there. Now that's going to change, and the interesting view is does that increase in supply give advertisers a bit more leverage and ask for greater transparency in those transactions than they've had in the past. I think it provides an opportunity for smart sell-side publishers to lean into providing more transparency. It provides an opportunity for companies like DV to help create broader solutions for advertisers around brand suitability, brand safety, et cetera, that provide into programmatic platforms. So I think you're going to see the dynamic of CTV start to become much more like the dynamic of traditional digital video and digital display impressions, which is one in which a lot more of it's transacted programmatically. There's a demand for advertisers for greater transparency because there's much more competitive supply scenario than there has been in the past.

Well, thank you so much, Mark, for powering through this, while you're sick. Nicola, thank you so much for being here with us in person, and we really appreciate having you here. And I apologize to anyone out here that had questions. I obviously ran to the end by myself. We're all figuring out this in-person thing.

Thank you guys. Appreciate it.

Thank you.