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

Welcome to day 2 of our conference. I'm really happy to have the team from DoubleVerify here.

Maybe just start with -- I will start with slightly broader questions and then kind of narrow it down. But Mark, can you talk a little bit like given the uncertain times we're in at the moment, how would you see your offering in that context in terms of like people are cost-aware, but they still have to do a lot of stuff? Like how do you fit in here?

Yes. It's a great question, Raimo. Maybe just taking a quick step back to let everybody know what DoubleVerify does. So we've created a software platform that enables advertisers to optimize digital ad spend by avoiding fraud impressions that are not viewable by human, impressions that are delivered in a geography where is in align where their product can be sold, and avoids brand safety or brand suitability violation. So think of it as kind of ad delivery security software, right? It ensures that ads are delivered, they're delivered in a safe environment, that can be viewed, and that spend is optimized because those impressions are valued by the end user. In an environment like this, we look at our tool set and our clients look at our tool set really as an ROI driver, right? Because if you're a CMO and your budget was $100 million and just got cut to $80 million, every dollar counts, right? You have 20% less money to spend on impressions. So ensuring that those impressions are delivered to a real human, that they are not delivered in a fraudulent environment, those things become incredibly valuable, right? I have to make sure I get that garbage out of the system. So in this environment, we've seen our advertisers even -- leaning in even more heavily in some cases into our system because they're concerned that they just can't risk fraud, they can't risk impressions that end up in a geography where their product is not sold because they have only 80% of the budget they had last year, but they still have to sell 100% of the product.

Yes. And then like on that note, like what's interesting, a lot of the time then is to kind of think about like how -- what percentage of that kind of spend that kind of are you commanding and then like the value that you're kind of providing for that spend? Can you just kind of put it into relationship maybe a little bit?

Yes. The way our business model works is we charge a fee, basically a CPM or what we call transactional SaaS fee every time someone pings us to better understand what's happening in that transaction. Is it fraud? Is it brand-safe or brand-suitable, et cetera. That fee varies based on the product, based on the platform that we're analyzing. But if you kind of aggregate it, you think of it about maybe 1% to 2% of the transaction, right? So a very, very low fee, much less than what credit card companies charge, for example, or even what others in the ad tech space charge like DSPs, which charge 15% to 20% to manage transaction. It's a very low-cost insurance, if you want to put it that way, to ensure that the impressions are being delivered in a valid environment. So it's very small. We like it that way because we want to create as little friction as possible between us and the people who use our product because it's a volume game. You look at driving transactions. We want them to turn us on, on everything they buy and not have a concern about what the cost is or what the impression friction would be on the overhead.

Yes. Okay. And then the -- like, in theory, that sounds like a no-brainer. Like I mean, like what's the -- if you get pushbacks, like where would that come from? Like -- and how do you overcome it? Or is it just more a kind of lack of knowledge?

Yes. I think for the most part, when we look at our total addressable market and our opportunity to penetrate, we never kind of think of, well, there's areas we're just not going to be able to sell into. I mean we believe this is a value prop for every advertiser. And we know when we get in front of advertisers, they get it, right? They understand like this is incredibly valuable to us. They have a UI that they can look at every day and see the number of impressions that we blocked because we thought they were fraud, the number of impressions we blocked because they weren't viewable. That's incredibly valuable because they can just run the math on that and say, if I ran a campaign in 3% of those ads we considered non-authentic, we call it the authentic ad, that's 3% of a $10 million campaign. So they saved $300,000 on one campaign by using us by not delivering it to a fraudulent end point. So at the end of the day, we don't get a ton of pushback. And we always use this analogy: once we close a client, we have an incredibly sticky proposition. Our average -- our top 25 clients have been with us for over 7 years on average. Our top 50, slightly under 7 years; and top 75, something like 6.5 years. So I mean people get us, they use us. And I've used this analogy before, it's kind of like when you put your seatbelts on, right? You don't look out and say -- look at the traffic and say, looks pretty safe out there today. I'm just going to -- I'm not wearing a seatbelt today. I'm just going to go for it, right? Our advertisers are the same way. Once they start using us, they don't go, I think there's a lot less fraud out there today. I'm going to feel good about it. There's no brand safety violations because the world is really safe these days. There's no hate speech. There's nothing like that. So we've got a really embedded role, and I think that helps us close new clients, but it also helps the people as well.

The -- I mean that's the one thing I had when I -- since I've kind of -- we've kind of been covering you since the IPO, whereas that -- I listened to you and you think like, well, this makes like total sense, like it's total no-brainer. Like where are we in terms of customer penetration? I mean, does everyone have it now? Like in theory, they should, but like where are we on that?

Yes. I guess our customer penetration is really a tale of 2, right? We've got -- our business has been predominantly U.S.-focused. So I think if we look at our revenue, less than 25% comes from outside the U.S., which is obviously very lopsided when it comes to digital ad spend. And so in the U.S., I think our penetration is pretty high with top advertisers. However, when we look outside the U.S., our penetration is very low. And that has to do with your question earlier, which is, it's just getting in front of advertisers in many cases that we haven't had a chance to do. We've invested pretty heavily over the last few years in getting sales force around the world, and that started to pay off. But I think we are still in early days as well and not just because in customer penetration, but also platform penetration. So when we talk about our product, it's about analyzing impressions on the open web, but also across mobile, across CTV, across social. And in many of those places, we are still just building products, just getting coverage in those places. So in addition to client acquisition opportunities, we've got sector growth opportunities as we add platforms in the future, like Meta maybe more for them and do more for platforms like TikTok and others.

Yes. I'm getting to that in a second. The -- if you think it like -- and into the last question on like new customers. Like if you -- it's more for Nicola now, like what's the situation for in the given quarter? So if you kind of plan your quarter and look out like how important are new customers?

Yes. So as Mark said, we -- once we have a customer they kind of stay with us, so the core of our revenue is really just a reoccurring revenue from our existing customers. And that's probably about 80% to 85% of our revenue in any quarter. The new revenue that comes in every quarter makes up the difference by 15% or so. So it is a very reoccurring kind of model. The interesting thing for us obviously is like new customers, once we get them, then they kind of grow and they get into the base. And that's what continues to give us some growth.

Yes. Yes, yes. And then if you think about like the as you go international, is it like -- how do you have to think about it like in that expansion? Is that a greenfield opportunity? Is it like there were inferior kind of local solutions? Like talk to that a little bit.

Yes. I think the -- so first of all, the way we need to go international is not a technical question, meaning we could verify from the U.S. anywhere around the world, right? So going internationally is being on the ground to find, first of all, expand existing customers that have operations outside of the U.S., where being on the ground really helps us provide superior customer service. And then once you're on the ground, then you find local advertisers that you're able to get as new customers. So we've made these investments. We've made them over the last 2 years. We feel like we have the right kind of investment levels for outside of the U.S., and now it's a matter of going after the greenfield opportunities that are on the ground.

Yes. And then the -- I mean it's uncertain times at the moment. And then maybe last question on that one. Like Europe at the moment is a little bit of a mess. Like how do you think about that investment then there?

I think the good news for us is we made the investments last year. So we're kind of going to -- you're right, this is where we're feeling the biggest pain in terms of macro impact, especially in EMEA right now. We're just going to wait it out. I mean we have what we want on the ground, and we're just going to wait for the market to turn.

But the interesting thing is we're still closing lots of new deals there, right? And I think the biggest headwind that we'd face in a market like EMEA, which is probably slowly slipping into recession, is current client spend goes down. But our growth there is really driven by new clients, right? And if you think about our growth levers, there's really 4. There's kind of like current client spend, which is like just momentum of them expanding budgets. There's new client acquisition. There's new sector coverage as we move into social and into other areas. And then there's new product growth, right? So in an area like EMEA, you're really leaning on the latter 3, right, versus recurring revenue. Because those companies, yes, they may not spend as much. However, with so little penetration in EMEA, APAC, MENA, all these different regions, that we're still just adding new customers. And as a matter of fact, the last quarter, we added more customers -- new customers in Q3 than we had in the entire first half of the year. So we're still adding a lot of new nameplates all around the world.

And then the -- I wanted to shift gear a little bit in terms of the new platform, and you mentioned them already. Like I kind of want to apologize, a lot of people in the room might be like software guys. Like can you talk about the relative importance of these new platforms like Meta, like TikTok, CTV will be one of the next questions then.

Yes. So maybe taking a quick step back. If you think the way our platform works, it really -- it's about analyzing advertising transactions, right? And each one of those transactions is different, whether someone is buying an impression on the open web, so I'm buying an impression on the New York Times; I'm buying impression on Roku, I'm buying an app impression. Those are all places where we need to analyze that transaction. There's what's considered the open web, and then there's the walled guards, right? So the open web is New York Times, buying a banner out there, stuff like that. Walled gardens are the people you all know, so Meta, TikTok, Twitter, et cetera. The walled gardens, we have specific business development relationships with them that they send us data about the transaction, right? They actually -- we have a relationship with them. We have to have that relationship because they're giving us proprietary data to analyze what's going on in their environment. Why that matters to us is as we -- as our customer spend continues to expand, so it goes from Twitter to Meta to emerging platforms like TikTok and others, our relationships have to grow with those platforms as well. But that also means that the amount of coverage that we can get with a customer grows, and the amount of pings to us grows as well. So think of -- we can grow with their spend on a single platform, but we're also growing as we add more relationships. As Meta, for example, opens up their News Feed to third parties like DoubleVerify to analyze what's going on from a brand safety perspective; as TikTok allows third parties like DoubleVerify to come in and analyze for viewability and brand safety, so those all provide bigger and bigger opportunities for us to drive volume into our platform, analysis volume. And that's how we make money.

And then the -- if you think about the relative importance of something, like what's the one that gives you a -- is most exciting at the moment? And where do you think like in the future years like you would think like, oh, wow, this could...

Look, the 8,000-pound gorilla out there is Meta. It just -- it owns social. And so we're excited about that opportunity. But I mean, look, TikTok has come out of nowhere. I mean it literally is expected to be anywhere from $15 billion to $20 billion of ad spend over the next several years from nowhere a few years ago. And that's really exciting because they've been incredibly open in bringing third parties in. We've got major advertisers who are looking to lean into that platform because of, just be very direct, to what's kind of going on, on other social platforms that they're not comfortable with. So dollars are going to move there. They've been really open. So TikTok, super exciting. Meta is obviously a big whale out there that we're really excited to work with as well.

Yes. Yes, yes. Okay. And then CTV is the other like really interesting one. And we all have kind of experienced this with all the different subscriptions that I'm running now like as well. Like talk me through like where -- like why is that market so important? Where are we on that journey?

Yes. It's still early days for CTV. But again, as a sector, I think it provides a really unique growth opportunity for us. We definitely have this thesis that's starting to play out, which is CTV is starting to really resemble traditional digital media in its evolution, right? It started off as kind of closed environment, non-ad-supported. And then it became ad-supported. It was directly bought, then it became programmatically bought. So you're seeing this evolution from subscription base to ad-supported to programmatically sold ads. Why that matters for us is the programmatic world is an exciting one because it allows advertisers to optimize across platforms, right, so they can optimize spend, but it also creates a lack of transparency. So think of how people bought television 20, 30 years ago. You called up a guy, told him what show you wanted to buy. He told you how many viewers that had according to Nielsen, right? And then you paid for that. That was it. That was done, 2 guys and a piece of paper. Today, you've got CTV, you have catalogs of tens of thousands of programs that those CTV platforms are not selling individually because you're buying a user, you're not buying the shows. You have this digital world where you've got multiple different opportunities to buy it. You've got a programmatic platform, which can actually bid against those different platforms and buy against it. So it's much more complex but also a lot less transparent. That's where companies like DV can come into play to verify the transaction was secure because we see tons of fraud around the CTV space. The...

By the way, how would that work? Like -- sorry, I mean it sounds like...

Well, here's the way it works is the -- a lot of fraud is actually inherent in the ad transaction itself because there are what's called spoofing URLs. So you think you're buying a CTV impression because you're buying it through a platform -- a programmatic platform. But what you're actually buying is an impression which may not be -- we just found fraud ending up on people's refrigerators. So connected refrigerators were impersonating connected televisions, and people were buying single pixel ads on those, right? This is stuff that happens. And the reason why, it's that old analogy: why people rob banks? That's where the money is. Why are people targeting CTV for fraud? Because the CPMs or the cost per 1,000 is anywhere from $30 to $60. A banner ad on a mobile phone can be $1. So do I want to try to commit fraud there or commit fraud where I get 60x as much? So there's lots of different schemes out there on the CTV front. And I think for us, it just provides an entirely new venue of ad inventory that's coming into market with -- you've got Netflix, which we've just announced a partnership with Netflix. You've got Disney+ coming out ad-supported, I think, any day now. You've got HBO Max coming out ad-supported. This is all inventory that's coming into the market that people are going to try to spoof, create fraud around that needs viewability, as mentioned people think well CTV is viewable, I am watching it, it is in my living room, but I am sure you change the channel during that commercial. In the first -- and it doesn't run for the first quartile, right? It's going to be said that the ad was delivered, but it wasn't viewed, right? So there's things around that we look at, too. So again, we look at verification across those 4 metrics as being something that's universal across any media. And that's the way our advertisers look at it. They want one standard for viewability, brand suitability and brand safety, geographic alignment and fraud protection, wherever they spend. Whether it's social, CTV, they want one metric. And I think that's our drive and our goal, and that's the value prop that we're offering to those advertisers.

And where like -- I mean it sounds really exciting, but it owns also still very early in the journey. Like people are like how important is it for you from more the number of prospectives?

I think it's more important from a longer-term opportunity than it is near term in the next few quarters. But the good news for us is, as Mark said, Netflix is very eager to work with us. So in terms of us being able to integrate with the platforms, it's going to be a much easier process than it was originally with the social platform.

Yes. Yes, yes. Okay. And then the -- one thing that kind of -- I want to talk about is like on these new platforms, like you have -- still have a fair amount of uncertainty as well like in terms of -- how does that play into your business in terms of when you see like will TikTok be in the U.S.? Or like can they actually do it? We see all the stuff at Twitter. Like how does that play into your business? Then like all of a sudden, Nicola, you wake up and there's like so kind of that revenue is no longer there? Or like how do you guys have to deal with that?

Well, I think the way the -- our model is to be able to follow where the advertiser is spending, right? So we try to be as deployed across every platform as we can. So we basically are able to verify where the advertisers are spending, specifically on a platform like Twitter, this was fairly small for us. And it's probably advertising dollars that will be placed somewhere else in the ecosystem in which we can measure anyway. So we're not so highly dependent on one single platform.

Yes. Yes. Okay. Makes sense. And then talking about uncertainty, like Q4, you kind of -- you mentioned a little bit, like what do you see -- and I'm sure you followed like the off-cycle guys that reported last week and sales was reporting -- kind of talking later, like talked about like October getting a little bit worse. Like what are you seeing out there in the field at the moment?

Yes. So we are -- we've obviously -- we're guiding to a softer Q4 than we saw in the first half and the third quarter. We're obviously not immune to the large macro swings that we're all part of. The good news for us is while we're not immune to it, our model is so much focused on volume of activity in the digital ad space that over time, that should help us continue to grow much faster than the average industry. I mean one example to give is on the social platform performance in Q3, both Facebook and YouTube saw revenue declines, not because volume went down but because their rates went down. And since our model is based on volume, we were actually able to show growth for the social revenue, right? So -- and that -- I think that dynamic will continue for us, right, where we're insulated on the CPM side of the ecosystem. So as long as people believe there is more volume going to digital, CTV, I think, is going to free up a lot of terrestrial advertising coming to digital. As long as the premise is, more volume comes to digital, I think we will continue to benefit.

And then you talked already about volume. Like the one theme that was interesting over the last day, and I'm sure it will come up today as well, is like with all the vendors at the moment is like, well, at times there's high inflation, I'm watching on prices. How do you think about that? It sounds more like -- like is there -- let's leave it open. How do you think about that.

Yes. I think we -- so we are still in the phase of needing to penetrate the market, right? And so our model is to try to keep a flat fee per service that we provide. And the reason for that is to allow the advertisers to not have to even think about whether to turn on verification or not, right? As more volume comes, we wanted to just say, "Okay, we'll verify it." The opportunity to play on prices obviously there as we launch new products that are premium product or as we go on to platforms like Netflix, where the CPM will be so much higher than display. But right now, we feel that we have the opportunity to continue to gain share to get more and more volume and get to a point where we're much more of a currency, at which point pricing will become a big opportunity.

Yes. I think it's a really interesting point because we're still in growth mode, like we're still in market acquisition mode. We're not fighting for wallet share with other folks. We're like fighting to get new clients and get into new markets. So like we're super bullish. Like we revel at the opportunity that's ahead for us. We talked about penetration is still fairly low, particularly outside the U.S. So we're not -- we've always said this, like we're not immune to headwinds, but we think we're pretty resilient. We've got a good model. We've got lots of TAM out there. 70 -- over 70% of our wins last quarter were greenfield wins. That's -- it's a new business that's totally out like force. So like there's lots of opportunity for us there. It doesn't mean things might not slow down. It doesn't mean that global ad spend changes couldn't impact us. But we feel all right.

Yes. And then like on the last question on that note, like the -- obviously, if I look about the market setup, there's like 2.5 players probably that come up when you kind of look into that, which, in theory, is kind of a good set from an industry perspective. And you're kind of executing really well in that kind of environment. What's the -- if you go into certain deals, like is it because of that setup? Is it more price-competitive? Is it like actually who's showing up first? Like how do I think about that?

Yes. It's an interesting take. It is a relatively small market, right? And we do run into the same folks over and over again. And I'd say for the most part, price comes after everything else. Because in most software pitches, it's -- it comes down to -- it starts with an RFP and it comes down to a test, right? And then 2 systems go head-to-head against each other. And whether you're a Salesforce or you're DoubleVerify, it's all about how well your technology works, right? And in those cases, we've had an incredibly strong win rate over the last several quarters, averaging around 80% of the open RFPs that we've been involved in. So does price come into play? It does at some point. But I think our -- we always let the technology speak first. And as Nicola noted, we kind of look at price as being the afterthought here because our marginal cost of verifying each additional impression is pretty low. And our infrastructure costs as a relative to our overall costs are pretty low. And for us, it's about getting more into that box.

Yes. Yes. Okay. Perfect. I only have couple of minutes left, so I need to shift gear. The other big question, a big theme that came up here at the conference so far, and I think it's for the industry, is around profitability margins, cash flow. Nicola, like maybe remind us like where are you on that journey.

Well, we're -- we have a 30% margin. So we're very profitable. We have no debt and we have a lot of cash, so we can start there. And then I think the real question here is why are we so profitable? And can it be sustained? The infrastructure costs, the way we've built our technology really allows us to have a very high cost of -- very high gross margin. And that continues, right? It probably is going to stay at a very high level, well above 80%, just because cost of hosting just keep coming down, right? So there's that part. The rest of our cost base is really people and talent. And we keep investing into maintaining a 30% margin. And that's a strategic choice that we're making, right? Because of all these opportunities that we see to integrate with Netflix, with Meta, et cetera, et cetera, we are going to continue to invest for the future growth. Our top line revenue growth is very strong. We have the ability to do that. So we're certainly not slowing down our investment. We're going to continue to hire. We have plans to continue to hire, especially around R&D, and that manages us to about a 30% margin.

And the way like -- if you think about like -- you were a private company, so you probably had to be disciplined at that time with different ownership. And so that kind of continued now is that kind of the good way to think about it?

Yes. No, I think -- I mean, of course. I mean, I think both levers are important, right? Revenue growth and margin, the high margin is important. Not every company can afford to do that. So a lot of companies in the space are now reducing head count. We're able to continue to invest because I think we've been very disciplined on how we do that and which sectors we go into first. And we're going to continue to do that.

One thing to note is we do believe this is a winner-take-most opportunity for us. And I think it would be silly for us to be focused on a couple of points of EBITDA when we have an opportunity to actually take significant points of market share.

Yes. Yes. Yes. No. And I mean, like it is from -- it is a classic software business. You have like your high gross margins, and then you define your OpEx spending to where you want to get the EBITDA come out. And given the high gross margins, there is good room still to invest and kind of kick around.

For sure.

Yes. Yes. Okay. The last question for me is like how do we think about cash -- usage of cash?

Right. So as I said, we have a lot of cash. I think the opportunities are to either -- it's really all about accelerating our road map, right? So do we get an opportunity to integrate faster with, say, Netflix or Meta? And can we invest towards those opportunities? The one that we haven't talked about is obviously M&A, which is an opportunity for us to look at things that, again, integrate into our product suite and allow us to accelerate into a new vertical, for example, or into a new geography, right? So in the last 24 months, we did one of each, geographic expansion or product integration, and those are the kinds of opportunity that we'll keep looking at. The market is obviously what it is, and it's a little challenged. So I think valuation will keep coming down, and we'll be very focused on finding the right opportunity for us.

Yes. Yes, yes. Good. Okay. And then like M&A for you is more tuck-in, like -- it's like -- it's not like -- there's nothing transformational you can do there?

I just don't think we need to do transformational right now. We've got so much core growth to do right now. It sounds like how do we make it go faster.

And I think that accelerates organic growth and just kind of continues our opportunity for what we are looking for.

Yes. Perfect. I mean it sounds really exciting. So it's great to join you here -- have you here and have you on stage and to meet you in person for the first time. Thank you.

Thanks, Raimo.

Thank you. Thank you.

Thank you.