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

We have DoubleVerify with us to start the day. Mark and Nicola, thanks so much for being here and supporting the conference.

Mark, let's just kick it off. Help us understand the recent softness that led to the 1Q '24 guidance that calls for growth to decelerate by 16 points. What happened in 1Q or what's going on? Just help us understand that.

First of all, thanks for the soft ball. It's always nice to have that coming out of the gate. Look, we came off a great year last year with numbers that were pretty extraordinary if you look at top line growth, in the high 20s, sectors like social growing over 60%, ABS growing over 40%, which is our marquee activation tool. So we came off a really great quarter. We would have loved to have a slightly stronger start to the year, but we still are guiding to a really nice growth trajectory for the year. The soft start, we attribute to a handful of some of our bigger CPG and retail customers that had independent issues separate from us. I can't say it was an endemic sector issue. We had one major advertiser who's shutting down 150 stores who basically just stopped spending. We had a CPG company who had a division get shut down. The average spend of our top 100 customers is $3.7 million. So when there's a slight hiccup, it does impact our business. Now we've seen a pretty strong turnaround in a good number of those. So we think we are looking at a much better second half to the year as well as come back in a lot of those accounts as well.

Nicola, can you flesh that out, right? Talk about the demand coming back, and then the anticipated rebound for the full year and how that reflects in the '24 revenue guide?

Yes. So first, just to follow up on what Mark said, no one turned us off, right? So this was really an advertiser spend impact on our business rather than customers saying, okay, I'm just not going to use the DV product. So based on that and based on the conversations we're having with the customers, we do know that they're anticipating to come back. And so what we've anticipated in our guidance is essentially a more normalized level of growth and of spend in Q2, Q3, Q4. So if you think about the year, it's really Q1 that's very low because of the slow starts, as opposed to the rest of the year where we feel it's going to be more normalized. We have a lot in our portfolio, right? The idea around the numbers that we've put out are we're ramping up new clients. We signed very large enterprise deals, including Haleon and Pepsi. And those, we have experience with other enterprise clients of that size. So we kind of know and expect a certain level of spend based on our conversations with them, and that's impacting the Q2 to Q4 as well. What's not in the guide are anticipated or projected accelerated opportunities such as the Meta opportunity, which I'm sure we'll talk about, accelerated growth in TikTok where all we saw in '23 was the English language markets, anticipated growth of new client wins, right? We've been fairly cautious about how many more we can win below a certain level of probability. So to go back to where the question started, it's really Q1 that's low. The rest of the year feels a lot more normalized.

And again, so it sounds like growth is starting to come back and you guys have visibility into that growth.

That's right, based on the conversations we're having with our customers. That's right.

Okay. Mark, pricing was certainly top of mind coming into the quarter, right? The pricing question came up on the call. But can you just talk about the conversations that you're having with clients and whether you are hearing anything on price as it relates to DV?

Yes. So pricing didn't come up until the night before when our competitors mentioned pricing, to be direct. I mean, we've -- I've tried to be as super clear as possible, is that we've been in a relatively competitive market for almost a decade now with a good group of competitors. And our dynamics haven't changed. I think if there's one thing that has changed, is that the differentiation in our product set now has set us apart into an entirely different type of solution. We're driving high-performance ROI, high-value engagements with our customers, right? With tools like pre-bid social, which our competitors don't have, with tools like pre-bid optimization through Scibids, with aggressive tiering of made-for-advertising content through ABS. And ABS is a programmatic tool our competitors don't have. We've just put together a different bundle of goods which has enabled us, as we mentioned on our call, to have what we call an increased MTF or management transaction fee. Our fees actually went up last year. So what we make on every impression went up for the full year and actually went up in Q4, too. So it wasn't the dynamic of, oh, first half was really great, you guys collapsed second half, no way, came out of the year with a higher MTF year-over-year, full year MTF was greater. So with regards to kind of pricing, we're not seeing different pricing dynamics than we ever have. It's always a bit of a competitive market. We sell a differentiated set of goods. So it's really not an apples-to-apples comparison with us and the rest of the marketplace. And we've got the proof points to show that our fees are actually going up.

Nicola, talk about that going forward, right? So you guys split ABS display and video pricing last year. How do we think about pricing as a growth driver for the business in '24 and beyond?

Yes. So I would say we think about it as secondary to volume, right? Our theory is still we need to verify everywhere, and the more we have impressions to measure, the greater our revenue growth will be. That hasn't changed. And I think in the short term, that remains the go-to-market kind of strategy, which is more and more impressions to verify is how we're going to grow our revenue. On price, I mean, Mark already mentioned it, we have premium-priced products that we are able to upsell clients to. The price bifurcation that we did last year had no impact on clients saying, hey, I no longer want to use DV, right? Because the ROI is so high. So if you put that into the mix, we're not -- we're certainly not anticipating to have to reduce list price of our products. That is certainly not in the cards. This is going to be a situation where we're able to continue to upsell, and that should have an impact on MTF. There are drivers that go the other way. So as we expand internationally, obviously, MTF is lower there. But overall, the strategy is volume, and the bigger the portfolio of products we can sell, the more powerful the MTF will be.

Is there a cadence that you guys review pricing in terms of taking up that list? Or do we think about that in any way?

No, it's fairly opportunistic. It's not at all on a calendar basis. It depends on ROI, it depends on feedback we're getting from the clients. It depends on our ability to now bundle with, say, Scibids or prescreen, right? Those are -- those give us the ability to rethink pricing around the bundles.

Okay. Mark, let's transition to social. Brand Safety is now live on Meta. Talk about how early conversations are going with advertisers? Start there.

Yes. So this is something that, for everybody, we've been working on trying to get launched for years, and not because of challenges on our side but challenges with Meta and their ability to allow third parties in to actually have an independent audit of what happens on the News Feed. So we launched that in January of this year. It's in GA. And the client feedback has been great, I think something they've been waiting for it for a while. We've been doing what we call viewability invalid traffic measurement across the News Feed for years. We're now adding the third leg to that stool, which is what we call our Authentic Ad, which is viewable, fraud-free, in the right geography, and then brand safe, delivered in a brand-safe environment. So I think the uptake has been -- the initial feedback from our customers have been super positive. They've been waiting for it for a while. They've had the same type of experience across TikTok, for example, and across YouTube for years. So the ability for them to get this on the News Feed, I think, is a big deal for them.

Are there any limits in terms of that GA launch? Is it across all placements, across the feed? I know that was a concern going in. Is there any placements or geos that it's not available? Are there any limits? Or is it fully GA?

It's fully GA in its current form. I mean, the product will continue to evolve, and we'll add more features, more granularity over time. Like this is the way it always happens with every platform. We usually go into 1 level of a product, we'll add more granularity over time. We may add more different kind of features on how people can actually ingest the data. So it's GA for the product that it is, but that product will evolve over quarters, creating higher value, creating greater stickiness to the customers. We're in this together with Meta, and that's the great part, is the whole point of this is to drive greater confidence in Meta's News Feed, and for our combined customers. And there's a huge overlap between our current customers and people that are spending on Meta. And we want to deliver a service for them that gives them confidence to continue that spend across Meta.

In terms of gating factors for growth for Meta, right, if you guys had everyone that tried to turn on Meta tomorrow, what would prevent that from happening? Operationally, what do you guys have to do to be able to scale the Brand Safety business?

Yes. So from a technical or infrastructure perspective, no friction whatsoever. We're built to handle massive amounts of data. We analyzed 7 trillion billable impressions last year. So scale-wise, there's no issues. For us, it's a matter of upsell. So when we think of our top 100 customers, only about 50 right now are using our solutions across Meta, wherein you look at someone like YouTube, for example, where we've had Brand Safety solutions live for a while, over 90% of our top 100 are using us there. So we've got some upselling to do that involves contracting. It involves pricing and involves -- go out and actually working with the teams to implement. Implementation is pretty light. It's not a big deal. We implement tags all over different social networks everywhere. So it's really the contracting and upselling right now, that is the friction, if you want to keep it that way. But we know that when there's demand, and we're talking to every one of our top 100 customers, we know that this could be relatively seamless to launch.

You mentioned the top 100 multiple times in that summary. What about more of the long tail? So if I think about the other 900-odd, however many you guys have at this point, what about smaller customers, what's their demand profile look like for Meta?

Yes. I don't have our full penetration at that level with Meta, with the percentages, but we know that there's a significant amount of spend that goes on Meta, particularly social is very big outside the U.S. Social mobile is very different than the U.S. where people -- we talk about CTV, we talk about big brand kind of implementations. So social is quite big outside the U.S. So when we start looking at some of our longer tail customers, a lot of them are smaller, a lot of them are outside the U.S. There's a significant amount of lean into social, and we think there's going to be demand there as well. We talk about the top 100 because they do make up a big chunk of our revenue because we work with pretty large brand customers. That's where our focus is today. We have a $3.7 million average engagement with the top 100 customers. That's pretty large. These are pretty big customers. That's what we're focused on first, to kind of drive that Meta opportunity.

Okay. Let's talk about TikTok within the same kind of framework, right? TikTok feels like it's been a homerun in terms of Brand Safety adoption, that's certainly been a driver for the business. Is it fair to extrapolate that success onto Meta? Why would kind of the TikTok adoption be different? Or is it fair to kind of use that as a runway for Meta Brand Safety?

Yes, I think -- so I don't think it's a bad model to think about how successful it's been on TikTok, to think that the clients were really waiting for Brand Safety and Suitability if you turn on Meta, right? So TikTok, the growth that we had in '23 from TikTok was primarily driven because of the Brand Safety and Brand Suitability product, right? And so that's why people were just on the sidelines waiting on the Meta side. Of our top 100, it's not even 40 clients that are using TikTok right now, right? Because it's early days, right? Only the English language. But it got there pretty quickly. It's still a distant third platform for us. But the growth trajectory on TikTok is very strong in '23. And there's -- it's not a bad model to think that there is no reason why somebody shouldn't use Brand Safety and Brand Suitability on Meta, and we hear that clients are just waiting until the product is available, which is available now.

Okay. Mark, I'm going to try this. We size Meta at $92 million in terms of medium term over a couple of years, right? We try to back into that math via a different way, be able to get there, it feels like it's about $100 million, right? Is there a way that you think about the Meta opportunity, as it starts to mature over maybe the next couple of years and how much incremental revenue that can bring to your platform?

Yes. I mean Meta is certainly a sizable opportunity for us today and into the future. And because there's still multiple levers of growth there. We've got the customers that aren't using us there today. So that first chunk, think of those -- those 50 of the top 100 that we haven't used. We've got new coverage that we launched last year. So we launched across Reels and we launched across Instagram, so there's kind of growth that continues to occur there. We've got another lever of growth with just totally new customer wins, right? So that always feeds our business as well. So not just current customer growth that we go after and not just new coverage, there's new customer wins, too. So when you put all those together, we do look at the Meta opportunity as being multiples larger over time, right? Even if you just do the simplest math and say, all right, we did around $40 million-ish or so with Meta last year, if we penetrate that top 40 customer or top 50 customers that we don't currently work with in the same way we do with YouTube, and that top 100 makes up probably around 80-ish percent or so of our Meta spend, then you're looking at it probably almost a doubling of our business just on the News Feed, right? Just expanding to the News Feed, with our current customers. Take it now to if Meta not launches new solutions, we're not even talking about the Metaverse yet, right? How come no one talks about the Metaverse anymore? That's over? There's Brand Safety violations in the Metaverse every day, right? We need to think about that. So there's new things to cover, and then there's new customers, too. So is $96 million a moonshot? Over time, with those growth levers, there's huge opportunity for that. I mean just like there is with TikTok as it grows as well.

Multiples of the 40 though.

Sure.

I think -- so just to follow up on this. If you think short term in '24, social is a major driver of growth for us, right? Not just Meta, but the fact that we didn't have Reels at the beginning of last year, now we have it for the full year. Shorts on YouTube is also a mid-year growth launch in 2023. So if you want to think about beyond just Meta, right, social, I mean social grew 62% last quarter. The sequential growth was very strong between Q3, Q4, which is not necessarily what everybody saw. So social beyond just Meta is going to be a large growth driver for us in '24.

So let's double-click on that, right? YouTube Shorts went live in December. They've talked about 70 billion views daily, right? Understood there's an ad load component to that, but still it's massive. What does Shorts add for you guys in '24? And how do we think about the further ramp of short-form video one level up?

Yes. I think what it does is it fuels the growth rates that we saw in '23 and it gives us confidence that they're not necessarily going to slow down, right? Is it going to be 62% that we quoted? No, right? But that plus Reels not having been at the beginning of the year, plus the Meta upside, I mean it's a large driver of our growth in '24. It's basically the largest one.

As you guys start to lap these additions though, I mean, how do we think about the additional growth that is coming from short-form video, right?

We don't really split it between Short form and other forms of video within social because basically all of social is now kind of short form. So we don't really think about it as a different driver. It's just the fuel of the growth that we're seeing in social.

Yes. No, I think the number we quoted in the earnings script was something like almost 70% of social is now video, right? So video is the future. And I think one of the things that we're pretty proud of is we made investments back in '22 going to '23 in infrastructure and AI-based analysis to be able to handle massive amounts of short-form video content to analyze for brand safety violations, to use predictive modeling, to not have to look to frame by frame analysis, which is very expensive to do, and do so in a way in which we're maintaining our gross margin still at incredibly high rates. I mean that's important to know, which is we went from a display business to a social-based, massively scaled video business in a matter of 2 years, and that's going to be our growth driver without impacting our gross margin, without huge capital costs because of the fact that we made some investments in people and data science and predictive AI modeling to be able to analyze all of that stuff. That puts us in an amazing position to scale across the number one growth driver in the future, which is going to be social short-form video.

Let's talk about social in terms of international. So here's kind of the question, right? We've talked about the unlock that is social for international markets. Is it becoming an on-ramp for new customers? Is that fair to think about the capabilities of social as they're bringing on new brands to DV?

I think it doesn't hurt. I mean we want as many -- the key for us with brands is as many entry points as possible. As Nicola noted, our drive is to verify every impression across every planet -- across every platform in any media, any country on the planet, right? So the more points of entry, whether that point of entry is social, whether that's mobile, whether it's connected TV in a market, we need to be there. Social is just another place, particularly outside the U.S., where a significant amount of spend happens. Mobile and social are big outside of the U.S., particularly in APAC. The ability for us to cover those markets, and like we did with TikTok this year, move into multiple language analysis is really key for us. So a combination of social, the combination for us to -- the ability to analyze language at scale, which is another big investment we made. So if you think about where we're leveraging AI, it's in video analysis, but it's also language translation, right? So think of all we're doing, we're just a giant classification engine that looks at tons of content and tries to bucket it in certain things, safe, not safe, viewable, not viable, et cetera. Part of that is language. And translating language now is so much easier using AI tools, allow us to classify that in specific ways. It allows us to move into international markets and also support social in those markets, too.

Remind me going back to Meta Brand Safety in terms of just what's unlocked. Is it English only? Or is -- what's the -- what are the other languages that are available for Brand Safety for Meta?

Right now, we're at 7 languages, I don't have the exact number, but we're multiple language, and they'll be expanding over time.

Okay. So it's a similar road map to what TikTok did. Okay. Nicola, switching to ABS. The concern we frequently hear from investors is that ABS is saturated and that growth will slow there. Growth accelerated last quarter. Talk about the drivers of that. And then big picture, what's the -- how do you feel about the runway in the future for ABS?

Yes. So the beauty of ABS is that most of the growth still comes from existing clients using more and more of the impressions, right? So when 2/3 of your growth comes from existing clients saying, I'm going to use this product on more impressions of premium-priced product, that is fuel for continued growth, right? So if 2/3 of the growth comes from additional impression from existing customers. We're only penetrated about just over half in the top 500. When this product launched a few years ago, we thought top 100 is everybody that's going to be interested in this product because it's a premium priced product. The reality is the next layer of clients are actually interested in it. So there's still a lot of growth there just because we get more impressions from existing customers. And within the top 500, people are very interested in using it because the ROI is really obvious, even at a premium price point.

And talk about -- help us understand the operationalization of the additional impressions. Is that international markets? Like what does that typically look like?

It's international markets because it's large enterprise clients are opening it to new geographies, right? So yes, the answer is yes. Because it's a byproduct of large enterprising saying, I'm going to use it in more and more of my geographies.

Okay. Mark, you talked about the investments in AI earlier. Clearly, it's been the massive trend across all of tech recently. What does AI do for DV?

Yes. We look at it kind of in 2 main buckets, how it makes our product better and how it changes the environment we work in and with. So the product better, I think I mentioned a little bit, we're using it for predictive modeling on video, right? So think if you look at a video of a sunset, right? In that video of a sunset, you don't look -- have to look at every frame to determine whether or not it's safe or what's going to happen next. We know that the sunset is going to do certain things. The AI actually helps us predict to say, all right, I know what's happening here, we can move on, we can look at another part of this video to analyze it. So it allows us to do video analysis much faster. Same thing with language, language translation, much faster. And this fuels our Brand Safety and Suitability tools. It also -- we've been leveraging AI to actually better identify fraud schemes. So we haven't talked about fraud here at all today. Fraud is still a massive problem, multi, multi billion dollar issue for advertisers. We just uncovered a fraud scheme that we called CycloneBot, last week. We announced it with Roku, which was a massive CTV fraud scheme. It was taking millions and millions of dollars away, that we use AI to actually identify the patterns that were generating those false impressions. So we use it for core product development. We also use it for advertising products. We're using it more now for looking for things like deepfakes, an AI-generated content and MFA. So we use it to enhance our products, make things more efficient, do it faster. The other part is AI is changing the publisher environment. We're seeing massive amounts of AI-generated content out there that advertisers are becoming wary of. It creates -- it proliferates hate speech at levels that we've never seen before. So AI, not only is something we leverage internally, but it's also created a much more hazardous environment for advertisers to have to navigate. So it's kind of like we're using fire to fight fire, for lack of a better term, right? There's crazy AI-generated content out there. Advertisers need to avoid it. We're using those same AI tools to help them avoid that bad stuff.

Sure. One last question. Mark, you've been very committed to reinvesting back into the business. EBITDA margins have held very close to 30%. Talk about the philosophy there. And what would have to change for you to see margins materially expand from current levels?

Yes. So since I have my CFO next to me here, I will take the strategic discussion, but he knows the ops part of this whole thing. We have a huge opportunity ahead of us and in front of us. Since the day we've IPO-ed, every quarter with the exception of one, almost 2/3 of our revenue growth or our new customer growth has come from greenfield wins. So we have new customers to go out to conquer. We have new media to go out and analyze. We have new markets to move into. These are investments we're going to continue to make because we're driving a growth trajectory that's significantly larger than most of the digital ad market space. So we're going to continue to lean into those investments, both in driving market growth and filling in and getting those new greenfield customers, but also making sure our technology is incredibly efficient and can absorb what's happening out there today. I mentioned the analysis of video, the video analysis that we do. We invested in that, but by hiring R&D people and data scientists in '22 and '23 so that we could be prepared for what's happening. If you look at other competitors in the marketplace, they're talking about lowering their gross margins 2 points this year because they have to handle huge amounts of video data. Our gross margin is 3 points higher than theirs is. And that's because of the investments we made in R&D over the last several years. We're going to continue to lean into that. We think there's tons of green space. We believe this is a winner-take-most marketplace, and this is the time to take it.

Okay. With that, thank you so much, guys. I appreciate you guys supporting the conference.

Absolutely.

Thank you.

Thank you.