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

Welcome to day 1 of the RBC Tech Conference. I'm Matt Swanson, an analyst here at RBC. Super excited to be joined by DoubleVerify. We have CEO, Mark Zagorski; and CFO, Nicola Allais. I just asked how [indiscernible] the last time.

It works now. It works.

[indiscernible] on this chair [indiscernible] with who I was talking to.

I guess kicking it off right away. You delivered a really strong third quarter result. There is a solid fourth quarter guide. It's been a really uneven macro. And you guys -- and we talk about this all the time. You get a lot of credit, which you should for being defensive, but it's not the same as kind of being a new. So maybe if you could talk more about what makes you so resilient, but then also how macro still affects your business and how that's impacting you today.

Yes. I think we've talked a lot about resiliency, and it's been a year in the advertising space in which I think that's been increasingly important, right? The macro has not been kind. We certainly haven't had tailwinds pushing us along. That being said, I think the real differentiator in DV in this space is that we've got a big series of growth drivers, right? So it's not just one thing. We're not -- we don't rely on one sector or one media type or one product to drive us. We've got multiple products that we continue to introduce into the marketplace. We're covering multiple different sectors. So if you think about whether it's short-form video or social or CTV or the open web, I mean, we're there in all those different places. And then also, we look at different markets. We are pretty underpenetrated globally still. Only around 29% of our revenue comes from outside of North America. So when we think about like the global advertising pie, we're still just taking slices of that. And I think that's allowed us to grow in a marketplace, which if you're a one-product company that does one thing and you rely on one sector to drive revenue, you're going to be challenged. I think we've had, again, the ability to kind of lean into social when open market is down. We've got to lean into U.S. market when global markets are down. It's given us a nice, what we call, matrix of growth drivers, and that's helped us to be resilient in times when the market isn't so great.

And then, Mark, if we can key in on one of those verticals from the message on some growth drivers. Social has definitely been both an area of strong performance for you, but then a lot of real secular drivers in terms of like the individual companies and verticals. You delivered 56% year-over-year growth in Q3, up from 32% in Q2. Can you just talk to us about what those key drivers have been in 2023 and then how we should think about this opportunity in 2024?

Yes. So social -- the story on social recently has really been all about short-form video, right? And that's a combination of folks like TikTok in which we launched a couple of years ago, but we've expanded our product suite to include brand safety and suitability, which has grown really nicely. We did almost twice as much revenue last quarter on TikTok than we did a year ago. So it's been TikTok, but also our expansion into Meta Reels and YouTube Shorts. Those are -- obviously, the competitive products that Google and Meta have launched, those have driven social engagement. Our coverage of those have driven revenue in that sector. And they've been a really bright spot in our growth trajectory over the last year. Those will continue to grow. So the usage of those 3 platforms is not slowing down in any way. And our coverage, for example, on TikTok, language-wise, continues to grow. I think we noted in our earnings call by the end of the year, we'll cover 85% -- will be in languages and markets that cover about 85% of global ad spend ex China and India. So short-form will continue to be a catalyst for us moving ahead. And then when we look at '24, the new story there is the news feed, right? So currently, on Meta, on Facebook, we do what's called invalid traffic analysis and viewability analysis on the news feed, where arguably almost all the traffic goes. We are testing right now brand safety and suitability measurement on the news feed, and we expect to launch that sometime in early 2024. That will provide significant growth opportunities for us moving ahead as we expand that to an entirely new customer base and expand with our current customers across that. And when we launch on the news feed, we'll also be launching brand safety and suitability across Instagram and across the reel -- around Facebook Reels as well. So we've got lots of different catalysts pushing social ahead. And I think the last thing I'll note there is you also have macro environment changes with regard to cookie deprecation and more advertisers looking to be able to close the loop, which lends them to walled gardens and social.

Yes. No, that's fantastic. If we want to really simplify that story that Mark told down to 2 metrics, Nicola, and we're looking at this company, it really comes down to MTM or volume, right, MTM or price. Can you talk about each of those metrics and how they performed [ as fast ] this year? And then how do you think about those variables contributed to growth in '24? And then also just kind of the long run [ that are there ].

Yes. So the 2 metrics for the model are MTM, as you said, which is the media transactions that we measure, and then MTF, which is the fixed fee that we charge for every impression that we verify for the advertiser. The key to that model is that the MTF is a fixed fee per impression. And so in the ecosystem of advertising dollars, that means that we're not necessarily tied to the CPM that an advertiser might spend for an ad. And if you look at what you've seen in the market, especially this year as you were talking about the impact of macro in the market for companies that do report impression volume change and price CPM change, the CPMs have been coming down. But every time that happens, it doesn't necessarily mean the impressions are going down. And so since we are paid per impression that we verify, we're a little immune to what's happening on the CPM side in the ecosystem. So our model is MTM times MTF, and it's very much driven by MTM. We're in a growing market. More and more ads are coming into the digital ecosystem. And so as more impressions come to the market, we're able to verify more and more volume. The MTF part of our equation has remained fairly steady. It grew this year and last year because we bifurcated the price between display and video, where video calls for a premium in terms of verification services. But overall, we are very much focused on MTM. So MTMs grew 27% in the quarter. MTF was just 2%. That model and that drivers of the growth, we think, will remain the same next year and in the future, which is we want to verify everywhere, which means that MTM is still the number that's going to drive the growth for the company.

And then, Mark, what part of [ expanding ] that volume base is landing new customers? Obviously -- and we've talked about throughout the last 1.5 years, how impressed I personally think it is of your greenfield wins in this macro, right, you going in places that don't have budget and you create budget in a time when people don't want to spend money. So we're talking about your go-to-market. Can you just talk about what that motion looks like both for companies that have an existing solution versus when you're going after a greenfield opportunity?

Yes. So we look at greenfield opportunities as any place where we're selling it to an advertiser that's not using that solution in that market, right? So as you note, it's a slightly heavier lift because we're trying to convince them that this is something they should buy, right? It's a new solution. Go-to-market for us is really focused on kind of classic software land and expand. We get our foot in with one solution. And then we show the value of the efficacy of that solution and continue to expand over time as that advertiser moves into new markets, as they move into new sectors or spend on different types of platforms. And we've seen that be incredibly successful. And our win rates, as we've noted over the last trailing 12 months, has been about 80% of RFPs we're involved with. And that continues to be steady. And I think it's not just based on the efficacy of our product, but that go-to-market is based on a broad basket of goods, right? And that basket of goods gives us multiple entry points into clients. I think that's a key thing for us. If you're in the AdTech space and your DSP, for example, or an SSP or anything, you basically have one product. We do one thing. We sell an ad, and we help them sell the ad better through programmatic. We approach with measurement solutions, with activation solutions. They span from things like measuring attention and engagement to contextual targeting to the ability to optimize, on a pre-bid fashion, a bid on a programmatic platform. Having that broad basket of goods that are all based on the same thesis of verifying and ensuring an ad transaction is protected and then it performs is really essential. So I think that basket of goods allows us multiple entry points. We land and expand over time. If you look at how that has changed the trajectory of our client growth, once a year, we give out average revenue per top 100 clients. That's grown from 3 years ago at $1.8 million to $2.1 million to last year at $2.6 million, right? So we grow with each client over the years by landing, expanding, selling more products to them. And on the greenfield side, we do it via a basket of goods that gives us multiple entry points into that first engagement with the client.

And I guess talk about those multiple entry points but also the [ difference between ] one thing and many things. A lot of times on software, we're talking about that as like products versus platforms. And when we're thinking about your platform, ABS, authentic brand suitability, has been an incredibly successful expansion. A lot of investor questions I get is, what's the next ABS? What's the next leg of cross-sell growth? If we're thinking about social measurement, authentic attention, [ custom and factual ] and then Scibids kind of the newest addition, what's kind of the path to significant contribution? Or how do you think about that?

Yes. Part of this matrix of products that we focus on is ensuring that we don't rely on one blockbuster drug to save us over time, right? It's a combination of the group of solutions that we have. And we get that question a lot, like what's the next ABS, what's the next ABS because that is a boomer of a product, right? It grew 40% last quarter, and it's 5 years old, and it continues to drive growth for us in our activation line. I think the shorter answer is we've got lots of little ABSs, and one of them will likely pop over time. We're very excited about Scibids and pre-bid optimization. I think algorithmically based decisioning, which is basic -- and this gets super complicated, but basically looking at multivariate decisioning in a DSP. So before I make that bid, I'm not going to decide just based on the price of that impression or whether it's viewable. I want to base it on 100 different factors at once that could potentially drive a KPI on the other end. I think that's super exciting. I think we've basically said in the next 5 years, we think that's a $100 million product. So I think if you look at that versus something like an ABS, that could be considered ABS. But if you look at kind of bottom line growth catalysts, what we started this conversation off was short-form video. And I think that is a large driver of future growth for us when you look at the level of engagement, the number of impressions, the penetration level. And this is -- we've got an entire generation of people growing up with this is how they consume media. That is going to be a key driver for us moving in.

And maybe, Mark, focusing solely on Scibids from that previous question. You talked about its ability to drive towards KPIs. And there's been a lot of talk this year about kind of the stages of ad spend optimization. And it's all about being well approved [indiscernible], so it's not that budgets are dropping so much as they are being refocused on areas that you can quantify better. There's a lot of new areas of TAM Scibids can [indiscernible] you into. But I think direct response is one of the ones that can get most interesting to a lot of people, especially [ when you work in social ]. So can you talk about what kind of a stable opportunity for the product? And then also, what kind of catalyst this could be for other products and maybe for kind of like other KPIs that are harder to quantify, authentic attention, but just really gaining steam as kind of a next metric?

Yes. So we look at Scibids, there are multiple levers where, I think, that can help drive growth as a stand-alone product. It's super interesting because whether it uses our data or someone else's data, the whole idea behind it is it's going to optimize a bid for an advertiser in the open web towards the KPI, right? And that's ultimately what every advertiser wants is like, "I just want to sell more x." And we gave an example of Icelandair, which was able to reduce the cost of a ticket sale by 70%. Like, that's huge, right, based on the ad spend that they had to go against it. I think that is, as a stand-alone, it's a core driver. It makes sense to advertisers as so much of the open web. So 85% of mobile and probably about the same amount of display ads in the open web are bought and sold programmatically. To do that more efficiently through a tool like Scibids is, I think, powerful. As a stand-alone, it also is really unique because we started talking about that basket of goods we have. It is specific to DV. Our competitors don't have it. And we've already seen it as a tool that helps us tip the scale in those RFPs. So when we go after enterprise RFP with a client, they're looking at the solutions we have versus what some of our competitors may have, and they say, "Wow, we like the Scibids thing. We can integrate it into our solution. This is something no one else has. We're going to get with you guys," right? So again, that basket of goods concept that we talk about gives us not just more stuff to sell, but it helps tip the scales on these big RFPs that we go out and win. So I think Scibids has been a key part of that, so that provides value. Finally, the aspect of, hey, how does this help your other data sets. What it does is it allows us to directly integrate our data sets into that decision-making process even for advertisers who may not be big users of attention measurement or context measurement for us today. They may put it into this algo and say, "Wow, attention really is a great proxy for an outcome. It works. I need to start measuring against this." So it's almost like an instantaneous trial of the value of our data in an open market or created situation that allows us to insert it right in there. So it helps as a stand-alone. It helps as a part of the basket of goods, and it helps us sell more of our core data sets over time. And that's why we bought it. That's why we're excited about it. That's why we think it's going to be an important part of our future.

Yes. No, that's fantastic. Nicola, we spent a lot of time so far talking about investments, and all of them are driving growth and driving future growth. But one important metric we hear a lot about in software is [ reported ]. And you're coming off -- you're [indiscernible] here, not that [indiscernible] the rest of the year, you're going to be very close this year. When thinking about the balance of revenue and adjusted EBITDA margins, how do you think about that balance? And what are the key areas of growth in terms of investments?

Sure. So we do exactly what you just described, which is we balance growth and profitability, but we have a very keen eye on growth because we -- as we've been delivering, we delivered 28% growth in Q3, sort of guided to 29% in Q4. Those are industry-leading growth rates that are achieved by the level of investments that we're putting back into the business. So the way we think about investments is if it is delivering industry-leading revenue growth, that is a worthy investment. We do need to invest into the margins that we've been achieving because the business model is inherently very profitable. But the level of investments that we think we need to make to continue to show the revenue growth that we're showing are the investments that we're making. So currently, what we're focused on is, obviously, R&D. We're not at a scale where G&A is no longer in our investment. Sales and marketing investments are more opportunistic as we see opportunities in specific countries to go into because we know advertisers will use us, will go into those countries. But really, the core of our investments are around R&D. And what it is, is specific to Scibids, which we just acquired, obviously, integration of the product, integration of the company into our company. And so that will have a little bit of an impact at the beginning of 2024. But more importantly, AI, as an area of investments, and machine learning is one where we think it's actually going to unlock opportunities for us to further reinvest into the business, right? It's going to make our business more efficient. It's going to allow us to do things faster, apply AI learning into, let's say, new language applications of products that we currently have in English. And with that, we'll be able to reinvest into the business. So we anticipate to remain at a 30% to 32% margin level. Those are the levels that, we think, allow us to achieve industry-leading revenue growth.

Yes. That's fantastic. Talking about another remark of investment that we've seen, and it's really the international opportunity. And it seems like at the time of the IPO, we talked quite a bit about international. But then the macro kind of turned harder internationally in the last couple of years. Maybe it pulled back a little bit. But obviously, some really healthy growth rates reemerging so far this year. So can you talk about the opportunity, the investment, how many of that is the macro getting better versus DoubleVerify executing better internationally?

Yes. And I would say, even when the macro -- we call the macro -- isn't that weird? We make up the sort of the macro and just explain everything with the macro. The macro is killing me. It's nothing to do with my business. It's the macro. Don't look over here. It's the macro. I think when we look at international growth, we actually never took our foot off the pedal. We have been underinvested outside the U.S. for years. We know that there's significant global opportunities for us. And those investments we make when we talk about investing, it's really sales and marketing outside the U.S. We're a cloud-based company. Our -- we have 7 tech hubs around the world, but the reality of those are just -- those are engineers, right? We don't need to have tech people on the ground in any market or infrastructure on the ground in any market. So we're looking at sales and marketing. And what we've seen is of the 867 largest global advertisers, we only work with about 322 of them. And in those cases, it may -- we only may work with them in one market or across one product so that we're highly underpenetrated, particularly on a local basis. We've started leaning more into specific regions, particularly APAC, where we think there's significant growth for us. APAC is interesting because a significant amount of growth, particularly in APAC, has -- is connected to social. So as we see things like social or short-form video and social growth, they go hand in hand with investment in APAC because that's where the growth opportunity is. I think before we had the kind of social coverage we did, the kind of tools that we have to cover short-form video, I think those investments probably were a bit ahead of where spend was. We're now there with them. I think it's -- I think we've got great growth opportunities outside the U.S. And just a little bit more on when we look at global investments. We don't just throw bodies into a market and say, "Hey, good luck, go out and try to sell brand safety." What we look -- what we try to do is follow our large enterprise brands into market. So we launched in India. It was based on the fact that we had an enterprise deal with Mondelez. And Mondelez is one of the largest advertisers to India. So they wanted local support, but once those folks get there, then they can now go sell local brands. Did the same thing in Japan. So we follow our enterprise deals into market and then use those folks to sell local brands as we've seen in Tokyo, when we sold Fujifilm Japan and sold Sony. Those are local entities in that country that we first went in with Yahoo! Japan as an enterprise client and rolled from there. So we still think international is a great growth driver for us. I mean this quarter, I think it was 67%, 62%. We've got help in the audience. 62% international or outside of U.S. growth on the measurement front year-over-year. And again, it's one of these things. Last year, EMEA was a wreck, right? We had almost flat to declining sales in EMEA based on the economics there. We've got now better economies worldwide. But again, diversification globally, diversification against products and platforms allows us to kind of ride the wave when one market or one sector is going to go down or up.

No, that's fantastic. Now we're going to touch another hot topic right now. It is CTV. And you've obviously got some of it, definitely one of the most impressive partnerships in CTV. DoubleVerify is one of Netflix's only partners for verification. And -- but you've also made it very clear to investors about some of the challenges of CTV to your business in terms of being not quite the growth driver. Maybe social is. Can you talk about how that market evolves over time and your opportunity? And maybe just in regards to MTM versus MTF, kind of what will make CTV a more attractive market for you in the long run?

Yes. It's -- we love CTV because it's a growth driver for digital, right? It's just taking dollars from linear that we just don't have access to. So it's all new money. It's great money for us. But the thing that you noted, that is something that Nicola alluded to earlier, which is we're an MTM business, right? We look at volume. And right now, MTF is not the core focus of what we do. Charging more is not -- our ability to measure another impression is -- cost us almost nothing, right? So it's all volume, volume, volume. CTV is great because it's new volume, but it's not a lot of volume. So you mentioned Netflix. Netflix does 4 breaks per hour with 4 spots. That's 16 spots in an hour to -- for us to verify and monetize. And our long session on TikTok has hundreds of ads impressions, if not more, right? So if you're a volume-based business, there's much more to analyze in a short-form video session than there is in a CTV session. So I think there's -- it's about -- when you look at volume versus price, there's less kind of upside for us there. However, we think there is pricing opportunity down the road when we look at what we charge for, for example, verifying a CTV impression versus verifying just a short-form video impression. We're not taking advantage of that just yet because I think there's still not a ton of volume yet. There's lots of dollars going to CTV. But the big, high-quality partners, like Netflix, are still sub-10 million [ ads for ] subscribers. Disney+ added 5 million, but they're still sub-10 million subscribers. When you look at that footprint versus the billion users of Facebook, right, or the hundreds of millions of users of TikTok, it's -- they're just not equal in scale. So CTV, great driver, new dollars, we're going to participate in that space. We think there's an unlock in the future as they provide more transparency, and we do brand safety analysis on those platforms. Right now, for the most part, we're doing app-level brand safety, which is not super interesting to advertisers. They want program-level brand safety. The content providers are not opening that up yet. They just -- they're selling CTV very differently. They sell based on the channel, not based on the program. I think once that opens up, there's another value prop for us to be able to upcharge and to drive that MTF up a bit.

And if we were to kind of continue to break down the secular lines, the next logical step would be retail media. And there was a few companies that actually calls out growth rates. It shows a [ memory ] transcript because there's not a lot of quantification going on about it. Can you just talk about your opportunity there and kind of how you see that opportunity growing over time?

Yes. I mean we look at retail media as being a driver of all 3 of our revenue lines. So we report on what's called activation, which is pre-bid revenue; measurement, which is post bid or after the ad has been purchased; and then platform revenue, which is we kind of take our products and sell them, base versions of them to platforms to filter their inventory. Retail media has helped drive all of those. So think of it as we designate certain types of transactions in each of those 3 line items as retail media transactions. Last quarter, we saw 75% growth across those lines. And we work with folks like Amazon, Walmart, Macy's, Target, Best Buy. Everyone has a retail media network these days. Dollar General has one now in case you're in the dollar store business. So I think it's an interesting opportunity for us for growth because, as we noted earlier, as cookies start to get deprecated in the open market, these retail media networks provide an interesting opportunity for advertisers to look to close the loop by taking first-party data from retailers, using that if you're an OEM to target new -- to target advertisers outside of that website. So it creates an opportunity there. What it does for us, which is interesting, is it opens us up to smaller and midsized OEMs or advertisers who we wouldn't really touch. We work with enterprise clients, so the Unilevers, the Mondelez, the Colgates, the GMs, the Rolexes of the world. These are big companies that we work with. But there's lots of small headphone manufacturers. Skullcandy makes headphones for snowboarders, right? They would advertise on Best Buy's retail media network. We're not going to sell them directly. But because we have the integration into that retail media network where they can leverage our data through Best Buy's retail media network or through Kroger Precision Marketing, that packaged seaweed company. And I think that my kids eat that stuff all the time, and it costs like $1 million. It's the most expensive lunch. I can react on that forever. But like we're not going to sell one of these companies our solution, but they're advertising across Kroger Precision Marketing, right? They're going across these retail media networks. So it opens up a new avenue for us to reach some of these smaller advertisers through, more or less, a distribution channel, right, through our data.

And if we're going to touch on one secular driver of that, what it lacks in AdTech [indiscernible] that makes up for scale, generative AI. And like what do you think about when you think about the AdTech ecosystem or DoubleVerify specifically?

It took us this long to get to AI. We have a minute left.

It's going to be a record at this conference.

I think generative AI is really -- is interesting on multiple fronts. And I'll go into one that's probably most relevant to us is that our job is to help advertisers navigate the Internet, right, navigate the content that's created out there that could be challenging for them, that could be challenging for their brand. Generative AI creates so much more of it, right? You're looking at websites. We've all seen these websites like, what are the Brady Bunch kids doing today, like how do you lose your belly fat in 7 easy steps, like these kind of websites, there have always been thousands of them. Now think of those being multiplied by tens of thousands. Some of these generative AI tools can create 1,000 articles a day on 10,000 websites and perpetuate that over time. Like you're looking at tens of thousands. So it's filling the Internet with content. We've created an MFA tool. It's called made-for-advertising content. We created an MFA tool based on AI. So we use AI to fight AI to allow our advertisers to navigate through some of that stuff and avoid that content. So for us specifically, that's one aspect. There's lots of others using generative AI, for example, in our UI are -- called Pinnacle to help advertisers who are looking through our data, find it more easily. There's all kinds of applications. But for us, I think specifically in AdTech, it's creating more content, harder to navigate demand for our products. We created a product.

Right out of time. We get lost. Thank you guys so much for spending time with us. Yes, I'm sorry. I didn't have enough questions. This is my first one today. [indiscernible] have a great company, great story, like [ we just ] scratched the surface a lot. So I would want to talk about -- so I'm sure you guys have great questions as well. But thank you guys so much.

Thank you. Thanks a lot.