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

Hello, everyone, and welcome to the Raymond James TMT and Consumer Conference. I'm Andrew Marok. I cover digital media and advertising technology here at RJ. We're thrilled to kick off the conference on a strong note by welcoming in DoubleVerify. And joining us from the company today are, CEO, Mark Zagorski; and CFO, Nicola Allais. So welcome to the conference, and thank you for joining us.

Awesome. Thanks.

Great. So I have a few questions prepared, but if anybody in the audience has anything that they'd like to pose to the team, we'll have openings for questions later in the chat. So why don't we kick it off? Mark, before we dig in, why don't we start with DV background. So for those who be aren't familiar with the DV story, can you provide us a quick overview of the company and where DoubleVerify fits into the digital ad ecosystems?

So DoubleVerify works with advertisers in the digital media and marketing space to ensure that their ad spend is delivered in a brand-safe, viewable, and fraud-free environment. So I think this is kind of like an ad transactional security software. We ensure that ad spend is delivered in a safe, effective matter to a real person in a real safe digital environment.

Great. And kind of the question connected to that is look, we did a lot of verification providers on the penetration of both TAM. So it seems now that most major brands are aware of the need for efficiency management and brand safety, and are working with the media quality provider in some capacity. So where do you see some of the greenfield opportunities that may you have yet to see?

It's a great question. And I think there's probably a mistaken assumption that everybody understands and every digital company is already doing something about it. The short answer is, it's not. So when you look at, let's say, the top 800 and just to round number 836 largest global advertisers. We work with a little bit over 300, right? So our penetration is certainly not inclusive of everybody. And that can be working on one product in one market across one brand, right? So there's still a lot of greenfield to go after. And mainly due to the fact that this whole area of understanding context in brand safety is still relatively new. I think it's become part of the common understanding that businesses are concerned about just as much about what [indiscernible] says about where it is. But that's a relatively recent phenomenon, right? As you saw you're at COVID, you saw very some social justice movements, ads in what they say and ads in what the place became a bigger part of what companies were worried about. So we're seeing increased focus on brand safety. But things like fraud. For example, is around since the beginning of digital ad world. So I think when you look at penetration [indiscernible], it's not just about brand safety. It's about expanded basket of goods, things like fraud detection, like viewability and enhance viewability, your attention that we saw a significant amount of growth to you. Not just with those 500 or so other brands that we work with, but across the companies a sign the broader asset of goods. So there's a significant greenfield. We give a data point every quarter that shows our win ratio on reviewing. And I'd say probably the vast majority of the orders since we've been IPO, say, all except one, the 2/3 of our new closes or new deals would they work using a product of that type in that market for that brand. So with 66% of your deals are [indiscernible] to every quarter, you're closing a lot of the business, touching a lot of the customers.

And I think you brought up an interesting point from the consciousness of [indiscernible] from the brand side, how much do you think that that's driven by maybe an increased awareness from the consumer side, and sensitivity to where ads are being placing on same controversial content?

It's a 100% consumer. At the end of the day, the ability for our consumer to react or to share an ad that [indiscernible] wrong place is [indiscernible] making posted on social media, they can [indiscernible]. They see an ad of place. They say, do you really believe that Bank of America should be here? Do you really believe that Coke or Nike should be against this type of content. And I think it rattles brands, even if it's a small issue. So I think brand safety has now become on equal footing as actual performance. And as a matter of fact, our thesis has always been that when you take garbage out of the system, so something that is not brand safe, that is not seen by human being, that is fraudulent. What is left actually performs better. So although we talk a lot about brand safety and protection, right? What we're really talking about is performance. Because if my ad shows up in a place that's more appropriate contextually, is viewable and is not fraudulent, it's going to actually perform better, right? And the reason why we exist is because it's no longer an advertising world in which an advertiser calls up NBC and says, "Give me a spot on Friday night at 8:00 and I'll make sure it runs and that's it. The ability for an advertiser to reach a broad base of consumers, means that they have to spend across a hugely fractionalized digital ecosystem, which they may be buying tens of thousands of websites and on social media platforms. This is where people are. So you're buying tens of thousands of websites, which you probably don't know much about because you can't or you're buying across social media, which is a bit of a free for all, right? There's a lot of things going on there. It's no longer buying a program on a Friday night. So that lack of transparency drives the need for solutions like ours, and drives the need for advertisers to not only understand how they're protected, but whether or not if they can take that garbage out, will they be performed better.

Excellent. Thank you for .We're going to poke on some of those social issues, I think, later in the conversation because those are really interesting. For now, we'd love to get your perspective on the state of the macro environment. So DV had a strong 3Q across its businesses. And for the most part in the industry, 3Q commentary was fairly positive with 4Q outlook kind of tending towards the cautiously optimistic or the hopeful. From your position, how do you see advertiser confidence? And how is that flowing through into DV's business?

Yes. As you know, we had a strong Q3. I think we've been at a pretty strong year. I mean I'm not going to say a strong 3Q, because of the way we saw this conversation, we still are going after a good amount of greenfield opportunities. So we're not just slicing a pie that is consistently challenged to grow. When we look at the macro, what we like to say is we've not gotten any help, right? There's not been any tailwinds because advertising is booming right now, and the market is great. We've grown because we've had to do it on our own. We've either gone into new markets, close new clients in greenfield or launch new products. Those 3 things give us these growth drivers that really go against any headwinds that we see out there. So generally speaking, we see the macro is not a positive or negative right now, it's kind of neutral. We're seeing slight bit of better confidence this year than we saw last year in Q4. Only due to the fact that I think last year, the recessionary concerns were much greater across the entire ecosystem. This year, I think people are cautiously optimistic we may be looking at rate cuts early next year or sometime next year and that the macro may be headed towards a soft landing. So I think net-net, we are cautiously optimistic that we're heading into a better year than we saw this year for advertising.

And then kind of the theory that we've heard, and I think has kind of borne out in the results has been that in a time of maybe a bit of macro pressure, ad spend, advertisers being more conscious of their ad budgets that a service like media quality is really highly in the priority list in advertisers' minds. Is that something that you've been hearing from your clients that they need ROI measurement and efficiency in this kind of garbage collection you talked about more than that?

Yes. We like to think about when times are tough, people worry about every dollar they're going to spend and advertisers are incredibly concerned. And when times are good, they worry about making sure that their spend is not going the wrong place. So we kind of play both sides right? And ultimately, advertisers don't want to be next to content that is not safe for them, no matter how much they can spend right? And I think that's the ultimate utility of our solution, which is we like to think of ourselves as a utility, a utility that will drive value in different ways over time, but you have to have it no matter what to protect yourself.

Makes sense. Nicola. So notably, DV strength in 3Q was driven by increased volume, but also an uptick in the media transaction fees or MTFs. Could you please talk about the drivers behind the uptick in pricing in an environment where you've heard kind of mixed commentary on CPM trends?

Yes. So just a moment on the model, right? The model for us is media transactions measured times a measured transaction fee, MTM times MTF. And the overall driver of our business is really MTMs, right? More and more impressions that we can verify, the greater our revenue growth is. And that's very much what we saw in Q3, right? So MTMs were up 27% and MTF was up 2%. Now your question is around the 2%. The 2% is, it's not as though we are raising price as we go. We have premium-priced products, where there's a shift towards those premium-priced products that has allowed the overall fee to continue to grow even in an environment where you might think there's some pricing pressure. The important thing with our model is that if you compare that to a take rate model, we're not as impacted by swings in CPMs. So if you look at companies that actually do report volume times fee, especially on the social media network, you'll see that the fee -- the pressure on fee has been pretty significant. CPMs have been down on Facebook, been down on YouTube. And we don't necessarily feel that as much in our model because we just charge a fixed fee per impression that we measure. And that's what you see sort of what you saw in the Q3 and where you're seeing the overall for our business. It's all about MTMs continuing to grow.

Great. And then social, which was up 56% year-over-year, came up as the fastest contributor to the 3Q growth results, kind of highlighting that rising momentum within the walled garden relationships. So I guess what are some of those key fundamental drivers behind the social success? And what are some of them that will continue to fuel the growth of the social business as we get into '24 and beyond.

Yes. So what's new in '23 is really short-form video content, right? So that's a new type of content that we're able to verify. And when what's happened during the year is for while the advent of TikTok, the scaling uptick dock as a platform has created the ability for advertisers to use our service on this new type of content and new type of format. The interesting thing that's happened over the summer is that now you have alternatives to TikTok, right? You have reels, you have shorts, and that creates the ability for the whole category to grow. And so what you saw in Q3 is this ability for us to essentially have more and more volume to measure in that category. And if you think about what happens to the advertiser, the advertiser decision is we're already using DoubleVerify to verify most of our content in other vectors. Now we're able to essentially open it up to short form. And so that's what you saw in Q3. We anticipate that that's going to continue, right? TikTok is still a distant third platform for us on the social side of things. So that's going to continue to scale. The additional really large opportunity that's going to come online now is going to be the [ Meta News Feed ]. So Facebook so far has allowed for invalid traffic and viewability but not brand safety in suitability. Once that opens up, we're currently testing it, it's bound to go in GA in the first quarter 24, that is going to really be the key component of our tool that advertisers are waiting for, and we anticipate that that's going to unlock a lot of volume for us to verify.

Great. And then for either of you, you kind of led beautifully into my next question. So I guess just helping us understand how meta contributions currently fit within the mix and the potential impact or the potential sizing of that new opportunity for the social business.

I can take it. So as I said, Facebook basically, if you think about what we're able to provide to Facebook is 2 of the 3 parts of our products so far. Once we open the third, which is really what the advertisers are wanting to have on Facebook, brand safety and suitability, is really the key product. We think that that's going to do 2 things. It's going to increase adoption of the product. And then even within customers that are currently using it, it's probably going to encourage them to use it on more and more of their volume. So broadly, the opportunity that we see is Facebook is already our largest provider on the social side. It's our largest platform on the social side. And about 50% of our top 100 clients use the Facebook product. So 50% of our top 100 use it without brand safety and suitability being available. Once we turn that on, our assumption and our expectation is that the other 50% that are kind of waiting on the sideline are going to turn it on. So that will be the most immediate impact. And we have instances where, for example, YouTube, where brand safety and suitability is available, over 90% of our clients use that product of the top 100. So we think that that's going to be replicating on Facebook. So you can think of basic doubling the number of clients in the top 100 that are going to use the product. That's the most obvious one. I think even within the clients that are using currently Facebook, we anticipate them to use it on more and more brands because really what they're waiting for is the brand safety and suitability. So you could think of a doubling of the opportunity there.

Really interesting. And kind of on top of that, it seems like to some respect, the pace of social growth is driven by how the platforms choose to make inventory available to you. So I guess, can you just talk about how that process kind of happens? And what your thoughts are kind of for the pace at which you'll be able to access these new pockets of inventory with expanded solution offerings.

Yes. I think we're having this conversation when most of the conversation around whether the application should be available or not have passed, right? It took us a long time to get where we are now. But I think it is understood that a third-party independent verifier should be available in the wall gardens. TikTok contributed a lot to that because they started saying, yes, we want verification. And once that happened, Facebook had to be able to provide a similar offering on their platform. So I think we're already there. What's the secret sauce for us is knowing the walled garden space, right? Because every time there's an integration, you really need to understand how it works specifically for each wall garden out there. And that's the part where I think years of us having worked with them makes it very easy for us to continue our coverage whenever new volume becomes available. But we're kind of already at the stage where it is understood that verification should be available in the walled gardens.

Yes. I think a great example of that is think about when Netflix launched with an ad-supported tier. They are planning on kind of pushing a launch out very quickly and they told people one day, like, yes, a month, we're going to start selling ads, right? The whole ad community was like, well, all right, that's great, but you need to have a verification measurement. So if you remember, Netflix launched with a verification 2 verification partners and a measurement partner right out of the gate, and they knew it. Now that's very different than when this company started where we had a knock on doors and asked for platforms to let us in and they are like, "We don't think so. Why would we give you our data? Why would we want someone to tell us our baby is ugly basically, right, which is what our job is, is to be an independent arbiter of quality, right? And it turned out that Netflix said, "Well, if we're going to sell ads, our advertisers have told us we need verification to make it happen. That's the different dynamic that we see today. And so as Nicola noted, when TikTok really started gaining steam, the first thing they said was for us to get legitimacy with advertisers. We have to have third-party verification. That's why TikTok was the first short-form video company come. Then when shorts launched and reals launched, they basically said we need the same thing.

That makes a lot of sense. And now kind of turning to some of the potential pitfalls around social. So we've obviously seen a lot of headlines at x recently, formerly Twitter that are really kind of bringing forward the issues that brand safety providers have to grapple with in UGC or user-generated content environment. So DV is one of X's key brand safety partners. I guess how do these headlines and these issues affect advertiser demand for brand safety solutions, maybe on X or on other platforms?

Yes. Look, there's no lack of controversy around social media platforms. And I think what's going on with X is a great example of the potential pitfalls for brands in some of these environments. Whether you're comfortable with total free speech or not, brands have a right to make a decision of whether this is something they want to do or not want to do, right? They always have. They've bought certain types of programs on television because it was content they liked. It's late night content. That was great for edgier brands. If it was family content, good for family brands for CPG. And I think it's no different on social today that advertisers want to feel comfortable. They know they need to be there. That's where people are. I mean, you have billions of Facebook users, right? You have hundreds of millions of X-users. They know they need to be there. And what we provide in many of those cases is the ability for them to feel more comfortable to be around content that could be potentially controversial knowing that that's where their consumers are. Now X is a whole different situation because most of the issues there don't have to do with the content itself, but the content coming from the owner. And that's something you can't filter out, right? So it's an interesting time. It's an interesting place for brands to be. But we know that the utility that we provide of giving them the data, that's a key thing to know about the role we play is we're not a police officer, right? We're not saying you should or shouldn't do anything. All we do is provide information. So you make the call advertisers, and advertisers make the call. For brand suitability, we've got literally dozens and dozens and dozens of categorizations and sensitivity levels that advertisers can turn them online. Some advertisers are more aggressive. So if you look at someone like a Unilever who sells Axe body spray, the teenage boys and they sell Dove soap to moms, right? The different types of content that they're comfortable around in any market. And we do it around the globe for them, varies widely, right? VICE magazine may be totally appropriate for Axe body spray, but it's not going to be for Dove soap. And that's the information that we provide. And I think in this highly fractionalized digital world, it's important for advertisers to have that information.

Well, speaking of not turning, let's shift to activation. So authentic brand suitability or ABS, kind of remained an important revenue contributor to the segment, up 40% year-over-year, kind of building on years of ramp. What's driving the growth for that product specifically and expectations on sustainability of current growth rates for ABS?

Yes. ABS is a wonderful solution for us. It's over 5 years old. And as you noted, it grew 40% last quarter for a 5-year-old product. And not on small numbers, on big numbers. I think ABS is a great example of how our products have progressed from being protection to helping drive performance going back to how we started this conversation. ABS is a pre-filtering solution for programmatic. So it's integrated into places like the Trade Desk and Google's DV360. Those advertisers deter that norm very finely on a campaign-by-campaign basis to filter out impressions, not even bid on impressions that don't make sense for them, right? So rather than try to block something they already bought or report back to me if there is a violation, keep me from buying it in the first place, and that's what ABS does. And when we look at the growth drivers, that 40% growth 85% of it came from current customers, right? I think it's 85%.

Yes.

Just to make sure I get the number right. So its current customer growth. And to me, that is awesome because that shows that people who are using it today know it works and not just because it protects them, but it's helping to drive performance, right? They're taking bad stuff out of the system. And in programmatic, you can see what works really instantly. So if it wasn't working, and it's a premium-priced product, it we charge almost 2.5x more for that solution than we do for some of our measurement solutions. So people are paying more for it. They're using it more. And it's still growing after 5 years means it works. It's driving performance. So we're excited about ABS. It continues to grow. Brands continue to launch it in new markets across new lines of business. And it's a solution that I think is unparalleled in the industry. There's no comparative solution.

Very interesting. Maybe, Nicola, switching over to the financial profile. We've heard quite a bit about some of the big top line drivers and opportunities so far. I guess how should we be thinking about margin trajectories and things like balancing the need for tech and product investment versus margin expansion?

Yes. So the model is a very profitable model, right? We have a tech stack that allows us, once you've measured over [ 5 billion ] transaction turn transactions, all of a sudden, the cost of doing one more is really small for us, right? So the gross margin profile is very high. It's a very profitable model. Our philosophy is to invest into a margin that's a healthy margin, which is 30%, 31% margin. And the reason we want to continue to invest in that is to get to the industry-leading growth rates that we have on the top right? So that comes first. If we continue to grow that strongly on the top line, we're going to continue to invest. And if you think about the lag is we need to invest into what's going to be the next big thing, right? So we're investing currently in products such as authentic attention where we're actually working with the industry to come up with the standard that's going to be the standard for the industry. Those are investments that come before the revenue actually comes into play. We are fortunate enough to be now in a situation where we've scaled G&A. We have investments in sales and marketing there. opportunistic in certain countries where we're not yet present. But really, all of our investments are on R&D. And we intend to continue to do that in the short term just because our revenue growth is industry-leading.

Great. And then kind of somewhat relatedly on capital allocation, you've shown a willingness to be acquisitive to complement your solutions with open slate and more recently, Scibids being some pretty timely examples. How are you thinking about your appetite or capacity for further additions? And are there any capabilities or tech that particularly appeal to you right now?

Yes. So the strategy around M&A is nothing that diverts us from the organic growth, right? The organic growth is so strong. The market is still untapped in many ways. So we want to continue to go there. So the M&A philosophy is, can we find acquisitions that will accelerate our road map or expand our coverage or expand our geographic footprint. Anything that we can do that we could do ourselves, but just accelerates that is what we're going after. And the 2 examples that you mentioned are exactly that. Scibids,in particular, is in the activation side of the business, it creates a tool to do predictive analytics pre-bidding, which is really where we think the next big development is going to be on activation. So don't want to distract from organic growth, but we do have cash. We have a very strong balance sheet. And so to the extent that we can find those M&A transactions will look for them.

That's great. I guess we would have time for one from the audience, if anybody has anything. Go ahead.

You talk about cash conversion a little bit. I'm looking at EBITDA and cash flow little bit there..

The question was on cash conversion.

Yes. Yes. So we do not have a strong CapEx needs, right? CapEx is basically just capitalized software costs and a little bit of hardware software. So what you're seeing in the last 9 months and is kind of where we think it's going to be on a normalized basis?

[indiscernible].

Yes.

Great. And I guess in the couple of minutes we have left, I always like to ask our companies before we turn them loose. I know you guys have a lot on your plate. If there's one thing that each of you would highlight that investors should focus on or pay particular attention to as we get into 2024, what would that be?

I'll start so you can [indiscernible]. I think I would go back to where we were discussing our model being really driven by impressions as opposed to the CPM, the take rates in the industry. I think we're finally getting to a point where people are understanding the power of our model. I think it's still -- it's a kind of stable market macro environment, but I think a lot of the variability that you'll hear from other companies is something that we're not so exposed to. And I think that that's going to again show the power of our model next year.

I would say we've only just begun. I like we've only just begun penetrating global markets. We've got an incredibly broad basket of goods that not only include things like brand safety, and suitability, and viewability, but expanding into areas like attention measurement and performance optimization. These things are going to drive growth for us for many, many years to come. And I think we're a relatively new IPO. But one of the few that continues to perform since the first day is launched. So I think we've got a long road ahead of us of success.

Great. Well, that's really interesting. I'd like to thank the DoubleVerify team, Mark and Nicola for joining us today. And hopefully, we've set the tone for a great Raymond James TMT and Consumer Conference. So thanks for attending.

Thanks.

Thank you.