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

Good morning. I'm Justin Patterson. I lead the Internet research team at KeyBanc. I'm excited to have the whole DoubleVerify team up on stage with me today with Mark Zagorski, CEO; and Nicola Allais, CFO. Gentlemen, welcome.

Great. Good to be here, Justin.

Of course. So to kick things off, let's just talk about the resilience of the business. Last year was a very challenging macro environment. This year has started off the same. Yet DoubleVerify has been very different from a lot of the other ad tech businesses that you're often characterized with. Kind of talk through just what is really causing DoubleVerify to be very different than some of these other companies?

Yes, it's a great question. And I think I kind of like to look at it in 2 main buckets, basically, the nature of our product and the utility of it and the kind of the nature of our business model. When we look at our product set and what we do, just taking a step back, is we provide ad transaction verification platform for advertisers. So we ensure that their ads are brand safe, are delivered in a transaction that's fraud free, the ads are viewable and delivered in the aligned geography. So basically, what we do is ensure that transaction is verified, it's a safe transaction for an advertiser. Our product is -- is seen as a utility, advertisers, whether their ad spend is $10 million this year or $100 million next year. They want to ensure that every one of those impressions is not delivered in a fraudulent environment. Every one of those impressions is viewable by a real person. So in good times, no one wants to waste money. In bad times, no one really wants to waste money. So I think the nature of what we provide the service we provide is incredibly resilient. The business model around that as well is one in which -- since we charge a fixed fee every time someone pings our database to send them that information or to verify that transaction, we're not subject to the changes in CPMs, right, that a lot of the media tech market is. So whether that impression was bought for $8 today and was bought for $10 yesterday, we charge the same amount to verify that transaction. So you'll see we don't suffer the wild swings in supply and demand that drives up or drives down percentage-based media companies or CPM companies. And I'll say like the third kind of leg of that stool, which is really interesting, is a combination of both the utility of our product and our business model is the nature of the fact that we are still driving growth through customer acquisition, right? It's a relatively new marketplace. It's a relatively new product. And we are still gaining new customers. So we're not reliant on taking share from another customer to grow. 67%, for example, of our deals in Q4 were greenfield deals. These are people that weren't using any solution at all. So we've got a huge number of growth drivers for us that drive behind us. We've got the utility of our product, but we also got the fact that our business model just isn't subject to the whims of supply and demand that others in the media market are.

Great. So let's kind of unpack a little bit more from the product side. You mentioned verification. The ABS product has been quite the workhorse for DoubleVerify the past few years. Can I talk through just how you characterize the opportunity for ABS today? And then as you move away from even just brand safety, has some of these more performance-centric products start to change the art of the business?

Yes. ABS has been a gift that keeps giving a DV. I mean the product did about $123 million last year. Q4 ABS volumes were up 50% year-over-year. So in a quarter that challenged a lot of media companies that, that product continues to grow. And I think the real value prop there is the efficacy of the solution. And what it is, it's a filtering solution in the programmatic platform. So we work with folks like Trade Desk, [indiscernible] to Jeff and Amazon and Google and just about every major DSP -- we plug into those systems and allow our advertisers to filter out impressions that are not brand suitable for them, right? So it's, again, a utility. Advertisers want to protect their brand. But what they're also finding and this kind of dovetails in the second part of your question is by taking the junk out of the system, stuff that's not brand suitable for them, what's left actually performs better. So although, ABS, we would consider as a part of our protection prospects, so we're helping protect brands, what it actually does is it helps those campaigns actually perform better. So we've seen really significant uptake of that product penetration with our core clients, that our top 500 customers is still in around 65%. So we've got a great number of customers to still add on. And when you look at our ABS growth last year, 40% of it was volume driven, so just customers spending more, but 60% was what we consider kind of greenfield opportunities, either totally new customers turning it on or current customers who hadn't turned it on yet, turning it on. So like that product still has a ton of legs. There's still lots to grow there. And it actually has evolved from a protection product to a performance product, and I think that's why it continues to grow. It's just found another life as driving performance as well as protecting the brand.

Got it. So when you kind of consider that product -- existing products taking on new life, new products coming in and then just this whole arc of new inventory coming into the channel, whether it's Netflix, other connected TV players, this whole retail media opportunity. Has that really changed your perception of the TAM versus when you went public a few years ago?

Yes. It's obviously made it bigger. So when you think about kind of totally new sectors emerging like retail media, which weren't considered part of the TAM. When we look at the addition of new coverage in places where, arguably, we never thought when we IPO-ed that Facebook would ever open up to third parties, right? And they did. And TikTok, even as recently as 2 to 3 years ago, wasn't like an advertising factor. So all of those things have made the market that we're addressing that much bigger, right? Retail Media is now expected to be over $40 billion in revenue and bigger than linear television by '25. That, for us, grew 115% last year, right? Almost -- and continues to grow via our relationships with Amazon and Walmart and Macy's and Target. Our social business continues to grow at over 30% a year. And that's driving -- that's being driven by expansion on platforms like TikTok, where we just launched our brand safety solution. And we still haven't even tapped into the Meta News Feed, right, which is arguably -- well, not arguably is the largest social network on the planet and the news feed makes up the vast majority of impressions across that. So we look at unlocking this TAM down the road is something that we haven't built into our guide this year. We think there's huge opportunities for it down the road. And again, when we IPO-ed in '21, these weren't even on the radar screen for us.

Right. And to put kind of a finer point on retail media. Traditionally, DoubleVerify has worked with a lot of large advertisers, how does retail media really start to change that opportunity set and start to move down mid-market or even SMB?

Yes. It's really opened up, as you noted, we work with the biggest brands in the planet. So of the top 830 or so advertisers, we work with a little bit over 300 of them. And we focus on enterprises. So folks like Unilever and Mondelez and AT&T and Colgate, these are big, big brands. And that's always been our focus. So when you go back to even -- if you look at our filings when we went public, it talked about, we focus on enterprise clients. Never really contemplated the SMBs. We just did -- they were not ready to screen -- to employ our products seems like a stretch for them. But what we found is there's a growing number of channel partners that are providing opportunities for us to touch some of these businesses. So the first one was programmatic platforms. So when we implement tools like ABS into those platforms and other brand safety solutions that are not as sophisticated as ABS. What we're finding is, every quarter, anywhere from 10% to 15% of the revenue that we get from our programmatic platform comes from advertisers we have no relationship with. They did literally go into the Trade Desk UI or they go into Amazon's UI and check a box and say, use DV fraud protection, use DV brand safety production, which is awesome, right? We'll take it all day long. We don't have to build a relationship there. But as you noted, with retail media, we've seen the same phenomenon happen. So small OEMs and small retailers who are buying through Amazon or buying through Target's network or buying through Kroger Precision Marketing are employing our data in those applications without us ever having to talk to them. So it's opened up an entirely new channel for us of reaching smaller businesses and entirely new revenue source, again, which makes that TAM so much bigger.

Got it. So you had mentioned not factoring in any really meaningful benefits in there from social, from the Meta Feed opening up. But this would be one for Nicola when you step back, you look at something like that coming on, you look at CTV ramping up, how do you think about just the right level of investment needed today to really succeed in those categories?

Sure. So we're obviously investing precisely for those kinds of opportunities that keep coming to us. The good news is that our R&D stack and what we're learning from working with existing platforms helps us for the investments on the new ones. So the perfect example is the work that we'll have to do on Meta will have been informed by all the work that we've already done with TikTok, with Twitter and similar on CTV. As I've already worked with some of the platforms as Netflix comes online, we'll be able to kind of accelerate the development of our product road map into these new integrations. Overall, our investments are around R&D, especially in '23 and '24, it's going to be around machine learning, AI, which will allow us to accelerate the time to market of our new products, and we still continue to invest a lot in people. We're one of the few companies that is continuing to add people because we feel like the opportunity is there for us to grab.

And it certainly it fits with the business. If I just look back at the past 3 years, I think net revenue retention has actually gone up each and every year. So could you elaborate a little bit more on just what's driving that kind of very healthy NRR?

Yes, it's a powerful metric to describe how much the recurring nature of our business just continues to grow. The main drivers of that are, what Mark already mentioned a little bit, which is expanding with existing customers into new sectors where we were not verifying before. We have very, very little churn, especially on the large clients. So that allows you to kind of stay with the client and continue to grow with them. And of our top 100 customers, about 66% of them only use 3 of our products or fewer. So even within our top 100, we still have opportunity to sell new products. So all of that kind of just gives you this ball effect of just more and more and more revenue for our existing clients.

Got it. And that's actually a great setup for Mark question right there. As these products come to market, how does that conversation really change with advertisers, especially as they're also dealing with just the uncertainties of the macro environment and all of the platform and regulation change out there.

Yes, look, the nice thing about where we sit is the solutions that we're delivering are both protection and performance solutions. And depending on the environment, our sales motion can change over time. We like to say we -- the CFO likes us because we save him money and the CMO likes us because we save his job, right? And depending on what the market environment is, is kind of who is more important in that dialogue. If you asked us this 18 months ago, it was all about brand safety and suitability. We had social upheaval. We had lots going on around the world that we're creating a lot of the angst with advertisers of where their ads would show up. And that was a very big selling point for us, like leaning heavily into the concerns of I do not want my ad next to that type of content. Today, it's all about saving money. And in this case, it's -- I don't want to waste a single dollar on an impression that can't be seen. I don't want to waste a single dollar on fraud, right? And whether that is in the CTV environment where we've seen fraud increase. And recently, we launched an accredited fully on-screen solution that showed that 1 in 4 apps was running ads while the TV was off. If you're a CFO and you see that, the first thing you do is call up your CMO and go, are we paying for that? When I'm paying those $60 CPMs to Platform x, are we paying for that? So we see that the tools that we're building and that we continue to adopt from our data set evolve over time, but play different roles for different people. And I think the ROI drivers of filtering out content that's not brand safe, but also ensuring that impressions are seen and delivered and can convert is becoming really important. And look, when we look at, even in Q4, which was a tough quarter for a lot of ad tech companies, we grew at 27%. We closed more new deals in Q4 '22 than we did in Q4 '21. Higher number of deals, higher amount of ACV. That means even in that challenging quarter for a lot of companies, advertisers are like we need this because the year coming up, our budget is going to be smaller and I need to save money.

So you alluded to it a little bit there with viewability, but attention is also a very interesting metric to monitor right now. And you've done some really interesting work just around those types of products. As you look at just where attention is today versus, say, viewability several years ago, kind of where are we on that transition? And what do you think really needs to change, whether it's just an advertiser mindset, industry structure, so on and so forth, to turn this into the next big product?

Yes. No, I think we're super early innings for attention. But I think we've said this publicly, we think attention can be as big, if not bigger than the entire viewability industry because: a, it can act as a proxy things like reach and frequency; but b, it is much closer to driving -- understanding how someone's attention is, is much closer to driving a transaction than a simple measure like viewability, right? And for that to catch on, we always say there's 3 kind of steps to that process. The first is socialization; the second is standardization; and the third is commercialization. I think we're focusing very heavily on the first 2 aspects of that. On the socialization side, last year, we launched a freemium version of attention metrics for all of our customers called the attention snapshot. In Q4, we had over 3,000 individual advertiser engagement, so people log in and engage with their attention snapshot. So we're getting people to understand it as a currency. We're getting people to understand it across the board. The standardization side took a big step forward in January where we became the only MRC-accredited attention metric that exists on the planet today. I don't know about other planets. But on this planet, it's the only attention metric that's accredited. So I think -- and also, we've been engaged now with the IAB on the panel that's putting together the standards for attention. So I think once we start standardizing something, once we start getting people using it, the next step will be the commercialization. Year-over-year, we had over 100% growth in our attention business. So we are getting there. It's early days. We are, by far, the leader there. We're creating the category. We're defining it, and we're seeing more and more advertisers pick it up.

Great. I'll try 1 or 2 more before I open it up to the audience. But Nicola, I would love to hear about just how you think about value-based pricing for the business since if I look at a display ad versus a video ad, very different CPMs, there's clearly a lot of value you're delivering. What do you think is just kind of the right balance there?

Yes. So we believe the ROI on when the advertisers spending with us is very large, right? So multiples, we think our cost is probably 1% to 2% of what the media buy is. There's clear headroom there. Our approach right now is really to become the currency and to verify as much as we can, as fast as we can. And so we're trying to remove the friction of any sort of pricing changes that would impact the decision that the advertiser is making. But the opportunity is obviously there. And we saw it even when we bifurcated the price of Display and Video last year, the reaction from the advertisers was -- there was none, basically. So there's opportunity, there's headroom, but we're first looking to become a currency in the market.

Got it. And then just thinking forward financially for the course of this year, solid start for Q1, solid end to Q4. 2023 guidance, also think better than feared, given just the macro dynamic out there. Kind of talk about just the assumptions underlying the growth and the margin profile?

Yes. So on the top line, we think the guidance is a realistic guidance. It assumes an 8% growth in the market. That's one of the functions of that guidance number. But it essentially assumes growth of current customers with current products. It has very modest assumptions in terms of accelerated Netflix revenue, TikTok revenue, [ new Meta ] revenue. So it's what we think is a realistic guidance on the revenue line. On the EBITDA side, we keep our eyes on a 30% margin, which we feel is healthy and gives us the ability to continue to invest in the business. We could certainly do better on the margin, but we're not going to just because we're looking in the top line growth opportunity.

Got it. And perhaps thinking a bit longer term around that. You mentioned earlier, product is the biggest investment area. AI is likely going to have a lot of efficiencies as that ramps up. How should we be thinking about just the return on R&D spend the next several years given just where the gross margin profile of the business is?

Yes. I mean, naturally, it should expand as you look at implementing AI and machine learning tools into the business. What it's really going to do -- the way we think about it is that it's just going to accelerate the revenue growth, right? It's just going to get us more and more penetrated into the market and gain market share, that's even midterm. That's really what we're focused on. So I think the 30% margin is probably something that we'll continue to invest in.

Great. All right. I think we have time for 1 or 2 from the audience, if there are any takers. All right. We do have one.

So the big social platform, how do you expect those to [indiscernible]?

Yes. So it's a great question. And I'll give a recent example. So we launched TikTok with our IVT and fraud solution a little bit over a year ago, and we saw a nice scaling of that business month-over-month to the point where it became our third largest social network that we measure after YouTube and Facebook. Where we saw the accelerant really hit is when we launch brand safety in December this year and between December and January. So 1 month, month-over-month, we saw a 31% increase in the number of advertisers who turned it on, not campaigns, not impressions -- advertisers. So we know that once brand safety hits platform revenue, particularly on social platforms is really when it starts to accelerate. So with the asterisk of going, platforms like Twitter and TikTok which we've launched brand safety across both of them in the last 2 to 3 months, have not throttled advertiser launches across that. We do expect Meta will probably be a bit more tempered in how they let advertisers use the solution, so we will scale a little more slowly. But we're looking at a solid 2024 impact from that as it starts to roll in.

All right. Well, we'll wrap it up then. Let's talk about capital allocation, the standard one on every investor's mind right now. I would love to hear about just how you're thinking about build versus buy philosophy. You've done some M&A in the past. Are you now at just a point where you kind of look at the pipeline and think we're comfortable with current R&D? Or are you looking to get a little more aggressive given market conditions?

I think -- so our view on M&A hasn't changed, right, which is it shouldn't distract from the strong organic growth, right? So we're looking at acquisitions that would accelerate the road map or put us in new geographies where we're not. Right now, we are -- frankly, right now, we're just being patient on valuations around small tuck-ins that would be around the technology of what we do. But it is definitely one of the prongs for our strategy. But we'll be patient.

Speed, speed, speed. If it gets us faster to where we want.

Yes, if it accelerates the road map, yes speed to buy. No, we will wait until it is the right time.

No, no, we can wait on that. But speed to grow for sure.

And we will sort out that race, Mark. It's a pleasure today. Thanks so much for attending.

Thanks, Justin. Thank you.