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

Well, I'll take -- I'll start with the obvious, which is our balance sheet is strong. We have a lot of cash, we don't have any debt. So as money becomes more expensive, we're not exposed to that risk right now. So that's step 1. Step 2 is we are a very profitable business model. And we are continuing to invest in it, right? A lot of the questions we get is, why don't you just let your margins grow at a faster clip. And that comes to, it's a very large market. We want to become a currency. We want to be where all the ad dollars are going regardless of the platform, which is why our pricing strategy right now is fairly...

I hate your pricing strategy.

The pricing strategy allows us -- allows our advertisers to use us indiscriminately wherever they put their ads. And that allows us to become more of a currency in the market. I think if -- that's a message that we're really going to stick to for a while until we become a larger share of the whole market.

Yes. I mean just -- I would say, and Nicola hit the big ones there. The other thing I would think about is we are still -- we are not a wallet share company number one, which means I don't fight other companies for a piece of an advertiser's business. We win the business, they use, for the most part, 1 platform to do verification, right? Unlike even the biggest companies in the world. Facebook does not get 100% of someone's ad spend. Google does not get 100% of its ad spend. We get 100% of the verification business for vast majority of our enterprise clients. So it is a pretty binary equation. And so we don't fight over wallet share, which positions us a very bit different in the market. And the other part is it's still pretty early days for us as a company. And because of that, we're still gaining customers. 70% of our closes in Q3 were greenfield customers. They don't work with anybody. They're totally new, right? So we're not fighting folks for wallet share. We're not trying to conquest competitors' business to grow. We're actually going into new markets, we're gaining new customers, and that gives us a really interesting growth trajectory over time. And it is a long game. We're playing a long game. And I think I would love to be here -- well, I'm not going to be here 10 years from now. But maybe 5 years from now I'm saying, yes, look, now it's a matter of us worrying about launching new products and raising prices. We don't need to do that. We have so many more customers to go out there and just close like that in itself is a huge growth driver for us.

Love this answer. I want to ask you to buy IAS. So the incumbent here was really your only competitor, IAS. You say on your calls that you're winning 70% of business. Tell me in the marketplace, not to Wall Street. But in the marketplace, why are you winning 70% of the RFPs, request for proposals...

It comes down to technology. This is an RFP process that usually ends up -- starts with 100 questions and ends up with a head-to-head competition. They launch both systems against each other. And what they look at is who filters out more fraud, who gives me a greater level of granularity when it comes to brand suitability and brand safety, and allows me to turn the knob to finest. And ultimately, who delivers the highest ROI. So there's lots of things around it. There's relationships, there's service, but it really comes down to what works better. And when it comes down to that, I think we do really, really well. And the reason why I think we've been gaining share is because for years, we just weren't getting in front of customers. We had underinvested in sales and marketing. The year of the IPO, we IPO-ed in 2021, we talked about it. We're going to -- we're investing heavily in sales and marketing. We've built a very large sales force. I think we looked the other day, I think we grew our sales force by how many people was it...

We were -- we grew 48%.

48% our sales force that year. So like that -- what we're seeing now is the benefits of that is like, okay, if we're in the game, we're in front of the customer, we know we can win.

Okay. I'm going to take it is now 15 minutes left. So I'm going to take questions from the audience, theoretically, the rest of time. Yes, sir.

Simple question on so 70% of greenfield [indiscernible] net success in terms of what's [indiscernible], how does one kind of project [indiscernible] usage?

I'll give 2 stats. One is the net retention rate is over 120%. So once we have a customer, that customer grows because we go into new sectors and we have new products, and the percent, the growth in customers have spent more than $200,000 with us on an LTM basis grew 40%. So this just gives you the power of the scale. Once you have the customer, you really can just grow with them with new products and new sectors.

The average -- and the interesting thing is the average tenure of our top 25 clients is over 7 years. Top 75 is something like 6.5 years, and that continues to grow. So people, it's a pretty sticky engagement, unlike ad dollars, which again can flow from platform to platform. I'm going to spend on TikTok this year. I'm going to spend on -- not spend on Twitter this year. Dollars move pretty fluidly. Platforms don't.

What percent of your MTM is on rate card versus...

I mean most are negotiated based on volume tiers, right, as we grow into larger, larger global kind of customers. We'll be able to give a discount if we get more and more impressions. That's how we grow. That's how we get the 120%-plus net retention rate. So there are very few people that are on the rate card, like any media business, right, the rate card just was published.

Do you think that will stay the same as you guys grow?

I think there's a long road...

I'm going to keep flying with them [indiscernible]

No, there is -- my answer in the short term, I think there's plenty of opportunity to continue what we're doing, which is always get more volume for more territories or more sectors against the rate.

Yes. Our marginal cost -- 1 thing that's important, like our marginal cost of measurement is incredibly low. So again, or doesn't like it. But we're about volume like we want to continue to drive volume, reduce friction. I think we'll get to a point someday for sure, where -- we have price leverage now. We increased price last year on our programmatic prebid products by splitting the price between video and display, basically doubled the price. We get 0 pushback, 0. We didn't lose a single customer. We didn't lose a single impression. So we know we have some leverage. But for us now, I think it's a matter of driving volume, going into new markets. And I think we'll have -- that leverage will only increase over time as we become scaled, as we are able to marginalize other solutions and other competitors.

How important is TikTok to kind of Facebook, if you will, or just talk about what kind of Facebook needs to get there? And second question, just on seasonality. Like can you talk about how [indiscernible]

I'll take the first one. You can take the seasonality one.

I'll take the easy one.

So I think, look, Facebook announced almost a year ago that they were going to open up the news feed to third-party brand safety and suitability companies. They still haven't launched any yet. However, a big part of that pressure, we believe, was the fact that companies like TikTok had been very vocal and very public about opening up their feed to third-party verification. So I think it definitely played a pretty significant factor. I mean, TikTok is no joke. It's a $10 billion plus ad business that came from nowhere that's growing at triple digits each year. And that's got to be hurting Meta in some way. So I think there is definitely some pressure on them to start to do the same when their biggest advertisers were looking at TikTok as a viable option with brand safety and suitability controls versus Facebook. So as we talked about, Social has incredibly high engagement. The other aspect of it too, is the fact that TikTok has a much younger audience than what Facebook's core is, right? So you're drawing dollars away because of the demographics, which is hard to compete against, you're not going to change Facebook's news feed overnight to make it younger, but what you can do is actually make it more competitive from a brand safety and suitability perspective. So I think that did drive a lot of the change that happened there.

What's the hesitation there? Why they're not trying to do it faster than TikTok?

They've always kind of walked to the beat of their own drum or which is we do think the Facebook way, right. They're investing in Metaverse. They are -- they have always been reluctant to allow third parties and to do anything on their platform, which is totally understandable. But they're getting there. I mean, look, they've been very open. They've been great partners with us. We're excited about working with them, and I think it will be -- continue to be a great relationship.

The seasonality question is, in theory, Q1 should be the smallest, Q4 should be the largest and Q2 and Q3 are kind of the same. That hasn't happened in the last 3 years. But I do think that Q1 '23 should be as small as just considering what we're hearing in the market.

Could you expand on that trade-off between investing in your sales force and marketing and then Fleximarket? And at what point do you feel comfortable with letting like the SG&A and [indiscernible] drive, if you will, on taking those margin.

We certainly don't feel we're there right now. And the reason why I say that is because of the impression growth that we're seeing even in the market, the way it was last year was very strong, right? It was plus 20% in markets where the CPMs were going down a lot. And that meant that we were still growing revenue quite fast. That's going to be the main driver for us, right? Because revenue is still growing so fast that there is no reason for us to really look at the margin play. We feel like we have a long way to go there. It doesn't mean that we're always going to be at that 30% margin that we've seen in the past few years, right? We could easily go to 27%, 28%. We see a tremendous opportunity, right? If Meta all of a sudden opens, we'll take the investments to take that opportunity. But I would say it's not in the short term that we're going to play the margin game.

Cookies. So I would like you guys to address the issue. The primary reason I run into that investors will not touch any of ad tech, including infrastructure of ad tech, is that cookies deprecation, given the signal loss we had when iOS kicked off Facebook, who said their revenue fell by $10 billion just because of that cookies is much more broadly used. Does -- can ad tech survive cookie deprecation, unless the same way it happens in 2024 when Google says it's going to. Because if the ad tech industry can't survive really, that's good for nobody even -- like pitch to me why ad tech can survive post-cookie deprecation whenever that happens?

So just to kind of level set, DV is not, DV's technology does not rely on cookies. We don't use cookies. It's not part of our infrastructure of how we collect data. And as walled gardens become either more or less powerful, we're getting direct feeds from them. So even furthermore, like even if the open Internet starts to crumble a bit, the walled gardens we have direct feeds from them. So the dollars going there will continue to grow. But needless to say, almost half of our business is activation and almost all of that activation is on the open Internet, right. So we certainly want a robust open Internet. There is a demand for non-walled garden content, as you said. That the ability to reach specific users has always been enhanced by identifiers or cookies or things like that. But remember, the ad business started without cookies, started selling like TV was sold based on context. And context is cookie-free, doesn't need cookies to be targeted against. And television had built a $70 billion business on selling ads based on Monday night football, reaches men, right? So I think ad tech has a future with or without cookies, because advertisers do want to reach audiences in different places besides walled gardens. And whether that's aligning content based on context or on first-party IDs, right? Or through lots of other different types of channels, it will still be there.

Okay. Retail Media Networks. One of the things we're writing, which is unpopular with you guys is that retail networks do away with intermediaries. They [indiscernible] the need for intermediaries. And so retail media network just real quick is basically what Amazon does. It is the convergence of you have an ad and then actually you have a sale that feeds back that feeds the next ad. So it's the overlap of advertising, which round numbers is $800 billion a year globally. And e-commerce which is $4 trillion. So it's a really big business. And so Trade Desk has just done, let me call it, partnership with Walmart, where you buy the ad on Trade Desk, which is the ad piece. And then Walmart gives the advertiser the data to close the loop to know how effective your advertising was. And Amazon, of course, is the best answer of the advertising you sell. So what I'm arguing, which is not popular with you guys, is that intermediaries like is it valid, doesn't matter in that context because you know what the sale was and so you could actually calculate with a return on the ad spending. So please disagree with me.

I'm going to disagree with you in a huge way. So actually -- it actually ties into your last question. When you talk about the open Internet, retail media networks are another reason why the open Internet will thrive. Because what you just described there is 1 key point, which is most retail media networks are made up of core advertisers, so whether it's Best Buy or Target, who take their data and things that happen in their environment and extend that out to the open Internet, right? So they go out and buy inventory in the open Internet. That has to be controlled, right? There is still brand safety issues they have to deal with. They're buying inventory on properties that could have incredible brand safety issues. Even if you are a small OEM or a large OEM who is buying through Best Buy's network, you do not want your ad showing up next to hate speech or incendiary content. And so that's piece number one. Piece number 2 is, yes, if I can measure the transaction, it's awesome. Maybe I could care less if it's next to hate speech or something. None of them will, but maybe they will. But at the end of the day, if you're getting fraudulent impressions on the other side of that retail media network, your denominator is wrong. I know how many transactions...

I'm selling something.

Because shouldn't it be better? Should I be taking -- why? I'm paying a CPM, right? I'm not paying a CPA through retail media networks, for the most part, I'm paying a CPM so...

You need to say those out loud...

A CPA is a cost per acquisition, CPM is cost per thousand. So I'm paying a cost per thousand. I'm getting a good transaction rate, but what if that good transaction rate is based on the fact that I'm paying for impressions that are fraud, get those out of the system, right? So it can be even better. So we absolutely need that. And the third thing I'd say on retail media networks is, yes, there are a ton of advertisers and a vast majority of advertisers on retail media networks are looking -- brands trying to sell products, right? They sold some on Best Buy, but now I want to sell -- if someone doesn't buy on Best Buy someplace else I'm going to keep it on. But there's a lot of brand advertising that goes on there, too. And brand advertisers, yes, they're concerned about transaction, but they're just using that data to reach more people interested in their product. So I could see retail media networks extending to even things like automotive at some point, which they want to do branding based on people going to 1 automotive site, looking at the car and extending that other places, dealerships, things like that. So those are brand-building exercises that don't specifically rely only on a transaction at the end to determine whether the value of their impression are and that transaction is important.

And 1 of that raises a point, and we just have 2 minutes left. That raises a point that has been most surprising to me about that we'll verify. The competitive advantage of digital media is its bottom of funnel. It's really close to conversion or to the decision surge social. And DoubleVerify really does call on brands. Most of your clients are brands more top of the funnel cost per thousand, as you say, it's not really. So you've actually built -- DoubleVerify has built this really large digital business, and a piece of the Internet that is not a competitive advantage of digital advertising because it's a higher funnel. So what that really argues is that digital media is going to be full funnel, you are servicing the top and a lot of these more traditional large walled gardens...

Yes. It's a 100%, like the digital dream has always been yes, we want to sell a product, but we want to do it with a very valuable engagement interaction. Most people are focused on the bottom. But as you see connected television continue to grow, sight, sound and motion is about building a brand, right? So the dream of CTV is the power of bottom of the funnel with the exposure and engagement at the top of the funnel. And I think that's what makes CTV exciting for us because it continues to tell that story, but for a lot of advertisers as well.

Okay. Any last question? We have 1 more minute. Any last question? Okay. I'm going to call it there.

Awesome. Thank you, Laura.

Thank you.

Thank you very much.