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

Okay. Welcome, everyone. I'm Mark Murphy, software analyst with JPMorgan. And it is a great pleasure, of course, to be here with Mark Zagorski, who is the CEO of DoubleVerify as well as Nicola Allais, who is the CFO of the business. So first off, gentlemen, can't thank you enough for taking the time to be here, and welcome to the conference.

Great. Thanks for having us.

Maybe you could spend a moment just to give us a very brief introduction of yourselves in DoubleVerify just in case there's anyone in the audience who's not familiar yet.

I'm Mark Zagorski, I'm CEO. Nicola here is our CFO. And DoubleVerify provides verification services and solutions to some of the biggest advertisers in the planet. We ensure that their ad spend across digital media is delivered to a real person, it's viewable and is delivered in a brand-safe or brand-suitable environment.

So thinking back on the time of the IPO, the company has grown very successfully. And the customer feedback that we've collected on DoubleVerify, it's always impressed us. We'll hear these comments that we'll run into brand advertisers, let's say we would never run a campaign without this. It's a must-have. It's the most well rounded. There have been a lot of companies that will tell us that the DoubleVerify measurement is second to none. Can you spend a moment or two helping us understand what is it that is unique about the actual platform that it kind of gets that type of an accolade from the customer. So I think maybe just trying to understand what is differentiated about the platform.

Yes. So we've always thought ourselves is where we wanted to end up is become an essential part of an advertiser's playbook. We want them to think of never wanting to spend a single dollar without working with us, right, to ensure that spend is secure, it performs and reaches who they wanted to reach. And I think the way we've built that up over time and how the platform has differentiated itself is really on 3 main areas. The first being trust, we are a measurement company. We're a verification company. They need to trust us. And the way we lean into that is by having more accreditations or more external accreditations than any other platform out there. So A, who scores the scores, groups like the MRC and others do that. So A, trust. The second differentiator is really around performance and the way our tools perform. When we do things like brand suitability measurement, we do so at a much more granular level than any other platform out there. We have more tiers of suitability and more levels of sensitivity than anybody else, which allows us to measure more granularly. On the fraud side, because we use deterministic fraud techniques and have our own fraud lab, which was the first in the industry. And I think it's pretty much the only one that's really at scale out there, we're able to identify fraud 8.5x more effectively in efficiency than our competitors. So if you think of trust, performance and then just basic features like features of the tool set, tools that we have like prebid optimization tools like Scibids, which we now employ. Pre-screen solutions for social that we do across YouTube and others. And even our broader tool set like Attention, which we now have an Attention Solution, an Attention Measurement Solution, that is both in the prebid aspect or the activation aspect of our business and in the measurement aspect of the business, which no one else has in our space. It's very differentiated. And most recently, Attention was leveraged by Netflix. They ran a test with us last quarter to look at the engagement on CTV impressions. So all of these things, performance, trust, differentiation features have allowed us to grow faster than the market, faster than our competitors and put us in a unique position.

And so if we're trying to take that the uniqueness of the product level and try to apply that back to the business model, Nicola, the trajectory for DoubleVerify, when there have been periods of huge volatility, downward volatility in advertising, you've -- at least in the prior cycle of that, you held on to growth that was above 20% through that course of that year. What do you think it is about the business model that makes it more resilient?

What's unique about our model is that it's tied to the volume growth, right? So we charge a fixed fee per impression that we measure. And so as the volume of advertising that's coming to digital grows, we grow with it. We're less subject to fluctuations on the CPM side of the business just because we're not a take rate business. So if there is higher volatility around CPMs that are charged in the market based on market condition, we don't feel that as strongly. Neither the upside nor the downside, we have a much steadier business model because we are attached to the MTMs, which we call the Media Transactions Measured.

And so one of the other metrics we've noticed that you do tend to provide that we don't see it too commonly across the rest of our software coverage is where you'll actually comment on the win rates. And you've consistently cited these win rates that have been 80% plus. I feel as though we can see that in the numbers, because when we look back on it, I'm not saying that everything is perfect in the industry right now. But on average, you've grown 10 points faster, right, than kind of your #2 competitor. That's over the last 2 years. And you've actually done that on a slightly larger scale. So can you help us understand where -- I mean, where do you think there is a shortcoming from any of your competitors that are out there, either on the product side or just the strategy vision side?

Yes. I think when we look at our overall vision, it's pretty all-encompassing. We want to verify everywhere. We think it's important for us to be any place where our advertiser partners spend. So that means physically being globally in the markets where they are. So last year, we expanded further into APAC with offices in Vietnam and the Philippines and in Thailand and double down and other markets like Singapore and Southeast Asia. So I think it's important for us to verify everywhere and on every platform. And we leaned very heavily into social over the last several quarters, and that coverage differentiates ourselves versus many in this space, particularly the point solutions that don't have the kind of coverage. But I think when it comes to kind of taking on our larger direct competitors, it comes down to performance of the tool set, how well we filter out fraud, how well we provide granular measurement on a brand suitability level, number one. And then more importantly, the features that we're able to provide or the functions we're able to provide. Our competitors don't have prebid social tools, our competitors don't have prebid optimization tools like Scibids, our competitors are late to market on things like attention and MFA filtering. I think our investments in technology, which have been considerably more than our competitors over the last several quarters, have allowed us to advance, allow us to have strong win ratios and keep that 80% plus target that we've been shooting for on the wins.

So let's talk about then the 20%. Where -- the 20% where you lose the business in a competitive selling situation. What -- is there a commonality -- I mean, if you've got -- if you're identifying fraud 8.5x better and you've got the prebid and all this other tooling that some of the competitors maybe haven't moved as quickly. Why do you lose?

Yes. I would love to make this sound very sophisticated and deep, but this is still a world based on relationships. So in some cases, we'll have a CMO or a media leader who has a relationship with a competitor that sometimes trumps us. There's also cases where geographically, maybe that we may not be as strong. We -- to be very direct, we didn't open an office outside the U.S. until 2018. And some of our competitors have been there long before us. So for some global advertisers, if we're maybe weaker in a market, we may lose because of that. We've caught up very quickly, and we've invested in that over the last several years. So I think that's become less of a factor. And then there's always the issue of price. And I think we've been able to maintain price integrity pretty strongly over the last several quarters. We'll continue to do so. There'll be a price at which we just won't go to. And what we find is, in most cases, those customers will come back to us over time over quality.

So Mark, what -- as we try to understand what inning is this opportunity in, right? Where are we in the kind of the technology adoption curve. I think you said on the Q1 earnings call, 62% of the wins are greenfield. And you're defining that as it's a win where the advertiser wasn't using third-party tools for the business at DoubleVerify one. And I think if we took that in a vacuum, it makes it sound like -- it conveys to us a market that is super early stages, right, in the development. But then I think we look at it, then the flip side is, you already have nearly half of the top -- you have nearly half of the top 1,000 advertisers as customers, I believe. And I think it's something similar to the top 100. So how do those two go together? Like if we said, where are we on a spectrum of it's early stages, low penetration versus like -- versus just maturing and we -- and there's some saturation out there for ad verification?

Yes. I think this is where kind of the basket of goods that we sell really comes into play. So when we say we work with half of the top 1,000 advertisers, they could be working with us with one product in one market. And I think as our customers become more global, we see that there's a huge amount of growth potential to penetrate across their global entities. The upsell capabilities that we have across new solutions, I think, has never been greater as we add new solutions like prescreen social and optimization through Scibids AI. So I think a, we may have engagements with a lot of these customers, but we've got massive upsell capabilities across the board. A couple of things to note, too, only about 30% of our measurement revenue last quarter came from outside the U.S. whereas arguably over 50% of digital ad spend happens outside of the U.S. So we're still underpenetrated on a global basis as well. So we've got great relationships I think those relationships now are the launching point for further penetration for upselling of products, further global penetration with additional solutions around the world.

Okay. So within the customers that you have, you're not all that penetrated when we look at the kind of the broader portfolio that you've crafted. Nicola, is there any alternate method to try to estimate where we are penetration-wise. I mean I think the -- for example, is there any way to estimate like if we said -- here's the total volume of digital advertisements in the world. Do we know what percentage of them are undergoing verification today?

We did an analysis at the time we went public to try to estimate the TAM, which is a very large number. And that number at the time we did it was assuming would be $13 billion going to $25 billion. What's important is that the percent served was estimated to go up to 50%. So it's still pretty small percentage of that opportunity being served. I think more practically, to think about what we see as the opportunity for us is to think about just our customer base and our own metrics. We have 120-plus percent NRR over the last 4 or 5 years, which means that we are growing with the customers that we have -- if you think about it, even at the level of a specific product, if we take ABS, for example, which is our premium priced product on the activation side, only 60% of our top 500 clients use it. So that means there's an opportunity even within our base to continue to have more customers using it. And even within the base of customers that use it, this is the part that's hard to evaluate. But even within the piece of the pie that uses our product, there's probably another 40% or 50% of their business that still don't use ABS. So not only do we have customers that don't use it yet, but even the ones that use it don't necessarily use all of their volume.

Because they may have other brands...

They may have other brands, and it might take time to get to certain geographies. So the opportunity to continue to penetrate there is pretty high for us.

And let me throw just another kind of data point a stake in the sand. We did some analysis recently on kind of social penetration and what our attach rate in social. And what we estimate is only about 5% of all the social impressions in the U.S. is what we're covering right now. So you think about that. There's 95% of social impressions in the U.S. that were not verifying. So there's -- I mean, there's a ton of volume out there for us to still tackle.

Okay. And I definitely want to come back to that. I want to talk about social in just a moment. But before we do, can I try to get your assessment on the -- just on the current health of the advertising market. And I don't mean for your kind of the small subset, the small handful, I mean, for the -- I mean, for the bulk of the market. Because I seem to recall, if we think back a little over a year we were coming into 2023, it felt kind of soft. I think you thought coming into 2023 that there could be some softness lurking out there. And when we look at what has happened more recently, there's actually been an improvement. I mean, certainly, if we look at advertising growth rates for Google and Meta, right, both of those picked up in Q1 and so that actually feels like it's been kind of resilient in the face of -- there's been consumer softness. There's been a macroeconomic soon. So what is the sense you're getting just on -- if we said business confidence, right, and willingness to lean in and do some advertising. You have -- I believe you've had customers like Mondelez and Colgate and Pfizer. I mean, you've got a lot of very big brands. What are they telling you?

Yes. I think everyone's pretty feels okay. And I know that's not a very technical term, but everyone feels okay about the space. The challenges right now is that no one is willing to bet further than a quarter out. Most advertisers now have total flexibility in their spend. They can move it, especially in the digital space, where they can move it programmatically from platform to platform. I mean upfronts, you can call them commitments, but I can tell you, anybody who's selling upfronts right now know that the commitments are pretty loose. So the reality of it is, I think advertisers are really in a world where they are playing quarter-to-quarter. They feel okay, general economy is fine. They're not pulling back massively on spend and where they're spending, they're spending where they know they can prove an ROI. And that's a key thing. So when you hear people like Google and Meta having great results, is because they've done a lot of work as a platforms like Amazon and Retail Media Networks, which are booming, on trying to ensure that they can prove an ROI from spend. So tying it to an outcome. And I think that's really important, right? So platforms and media that can prove an outcome that can tie to an outcome or a verification companies that can help optimize that outcome like DV, I think you're going to continue to thrive in a market where there's that kind of imbalance.

What is -- what do you read into that kind of mindset that they're in? Is it -- it could just be very simple. They also don't know where the economy is going right now. Is that it? Because when you describe the technologies, right, and what they can do with prebid and programmatic, the -- I mean would it ever go back to really meaningful kind of upfront long-term commitments would you say, if we're going -- if it becomes clear that we're coming into a booming economy, would it go back to that?

It's all a matter of supply and demand dynamics. And right now, there's lots of supply out there, right? And whatever supply is going to work is where advertisers are going to point their ad spend to. So I would be surprised if there is ever a point in the future where people would have to commit to anything. And again, the platforms are making it easier for people to move money and to prove where that money works or doesn't work.