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

Great. All right. Well, thanks, everybody, for joining us today. For those of you who don't know me, my name is Vik Kesavabhotla, one of our senior research analyst here at Baird, lead our coverage of the Internet and digital services sector. Very excited to be hosting the conference this week and pleased to welcome DoubleVerify to our conference today. Joining me from the company is Mark Zagorski, the company's CEO; and Nicola Allais, the company's Chief Financial Officer. Just to set the table here, we have about 30 minutes scheduled for this conversation, bunch of topics to get through so we'll try to cover as much as we can. So with that, Mark and Nicola, thanks for joining us today. I really appreciate you being here. Maybe just to start off for the benefit of those who are not as familiar with the company if you could start off just giving us a brief overview of DoubleVerify with that and some topics from there.

So it's nice to be here. Just to let everybody know, the sign outside that said free ice cream was not true, just to bring you all in here, which is a very packed room at lunch time, which is great. DoubleVerify, we exist in the digital ad space. And what we do is we ensure the transaction between an ad buyer and an ad seller is secure, safe, viewable and fraud-free. So think of it, we basically do verification, both on a pre-bid side. So before someone buys an ad and a post-bid side, it's a measurement to ensure that, that transaction did not involve fraud. We ensure that it was viewable by a real person that the ad was delivered in a brand-safe or suitable environment for that advertiser. And that it's aligned with the geography where that advertiser wants to spend. So it's something we call the authentic ad or the authentic ad measurement that we do majority for advertisers who are our customers, say some of the biggest advertisers in the world, folks like Mondelez, Unilever, Colgate and all our advertisers who use our solutions in global markets around the world.

Awesome. All right. So I wanted to start off kind of with some higher-level topics as it relates to the industry and to your company. Maybe first, just talking about the state of the macro environment for digital advertising. How would you characterize the health of the backdrop right now and what you've been observing so far this year?

Yes. I think the digital ad space is fairly healthy right now. I wouldn't call it a boomer year, but I call it a good solid year. We're seeing double-digit digital growth for the first time in a long time. So I think overall advertising spend is healthy, albeit it's changed in its kind of dynamic. It's much more a quarter-to-quarter environment that we're existing in today. And I think that's the new norm when it comes to ad spend. But overall, pretty good.

And one of the things that you talked about -- have been talking about for a while, but certainly on the most recent call is kind of one of the trends you're observing is this shift towards social and CTV within the business. Curious, if you can talk about what you think or is driving that trend to become kind of more prominent within the industry, but within your company as well.

Yes. I don't think there is much new with the knowledge that a lot of dollars are going to social. I mean that's been happening for years. I think we've seen a slight acceleration of that when it's come to the growth of short-form video. So things like TikTok, YouTube shorts, Facebook Reels, I mean when you look at some of the data that the social companies have released something upwards of 50% of the time spent on Instagram now is with short-form video. So the movement towards social is largely one that is around engagement with video, the short-form video that's driving that growth. When you look at CTV on the other side, it's a story of entirely new inventory coming to market that's ad-supportive, right? You saw the launch of the streamers over the last few years. Now it's the launch of the streamers that are ad supported, right? So you saw HBO Max coming in with an ad-supported tier. You saw Paramount and Peacock with ad supporting. You now see Netflix with ad-supported. And the recent 800-pound grill that's launched into the CTV space around ad-supported tier is Amazon with over 100 million users from day 1 Prime users and Prime video coming to market. So I think whereas social has seen a shift to kind of new product. CTV is introducing entirely new inventory into the ad market that's changing both user engagement and the advertising opportunities across the board.

And so when you think about that broader trend towards those channels, what does that mean for DoubleVerify in terms of the impact to your company?

Yes. So I think it's -- to put it short -- briefly, it's all opportunity for us, right? So our drive is to verify every ad impression across any type of media or platform anywhere on the planet, right? When a lot of that spend was in open web, that's where we focused. When that spend increasingly grows across platforms like CTV or social, that's where we focus them. We're really about ensuring that wherever our advertiser spend, we are there. And if you look at, for example, last quarter's growth, our social business grew over 50% -- grew 51% last year. So we're seeing increases in social volumes and social revenue. Our CTV business also grew over 40% last quarter. So CTV impressions are up. And when it comes to the opportunity, though, that's where we get really excited because although those growth numbers are great, right now, we estimate we're only attached to less than 5% of all the social impressions in the U.S., right? So that's a very low attach rate and less than 20% of all the CTV ad impressions in the U.S. And that's just U.S. That's not global, right? So I think there's a significant opportunity in both of those areas for us to grow. And it's great that we continue to lean into those areas with new products and new coverage.

Yes. So you touched on the kind of the opportunity in front of you from a volume perspective. I guess maybe if we can talk about monetization as well. So how does your monetization on social and CTV compared to other channels today? And then how are you expecting that to evolve going forward?

Yes. I think on -- you've got kind of 2 different stories between those areas versus kind of where we are in the open web. In the open web, we are focused very heavily on what we call pre-bid and post-bid, where we could help filter impressions that are programmatically bought and then measure the efficacy of that filtering either our filtering or any buying on the measurement side of our business. And that's been a growth driver of our business to date. When we look at social, for example, our monetization is very heavily focused on measurement today, right? So the measurement, the post-bid side of that business. But I think there's opportunities for us to grow our activation business across social down the road. We have a prescreen solution in market now for YouTube, which continues to grow and allows us to, again, make money on both the prescreen and the measurement parts of YouTube. We've got activation solutions now via our Scibids implementation across social networks that are just being launched. So we've got activation opportunities there, too. So I think right now, when we look at social it's very heavily measurement focused with significant activation opportunities down the road as we build more tools and as we penetrate more platforms. When we look at CTV, it's a matter of we do both pre-bid and post-bid for CTV. I think there, the monetization really has to do more with pricing versus penetration and product. Pricing for CTV for us still is, I think we're taking a less -- a lesser opportunity of pricing increase versus the cost of those impressions. So if you look at, for example, general video CPMs are $3 to $5, if they're on mobile maybe give or take. Connected Television CPMs are $30, $40. We are still now charging the same on pre-bid and post-bid for CTV as we do for all video. So I think that, that is a pricing opportunity for us when we look at monetization of those 2 areas. So I think of social monetization being one of some increased product penetration and product development. CTV monetization opportunities really have to do with pricing opportunities down the road.

Okay. Maybe shifting gears to another topic and Nicola, this one, [ might be ] good one for you. So if we go back to the most recent print, your company lowered its guidance for the year. One of the big factors you called out was some change in spending patterns among certain of your large customers particularly within the CPG and retail verticals. Now that some more time has passed, it would be great to hear your perspective on what's happening with that group of customers? And what's kind of driven that volatility this year?

Right. So against all the positive opportunity that we just discussed, we have this specific issues around these 6 advertisers that are among the top 100, 3 of them are in our top 10. And what we've disclosed is that our top 100 spends about $3.7 million with us last year, and that was a 40% growth year-on-year. Within that cohort, this -- within the top 100, this is a large part of that 100, 3 of them are in the top 10. And they have underperformed based on the expectation that we had for them to continue to grow. And the issues are very specific to the companies. We've mentioned that one of our customers is closing retail locations. One had a legal consideration around one of their divisions. And so their ad spend is just lowered, which has an impact on our revenue. We've assumed for the rest of the year that, that underperformance continues versus our expectations. And if you kind of read the print from both the February and the May periods, the total amount of the impact of this cohort is about $28 million versus our initial consensus number. So if you were to back that into the numbers that we're now guiding to, that would give you a 22% growth for the whole year, which is a very healthy growth rate. It is very specific to this cohort. We haven't seen this spread to other clients. Other clients are actually performing even above our expectations. So this is not -- we're not calling it a vertical issue. As Mark said, the macro is fairly positive. Just as a cohort, these are having an outsized impact on our numbers this year.

Yes. And just to clarify a couple of things that you brought up there. I guess, as far as the guidance as it stands today, what does it now assume for that kind of [ specific-proven ] customers that you talk...

Basically, we've assumed that they continue to underperform the way we had seen it in the first 3 or 4 months of the year. It's a very uneven pattern and we basically just lowered the rest of the year based on what we had seen in the first 4 months.

Okay. And I think you addressed this before, but maybe just to double click on it. Are you seeing any signs of that maybe emerging in other customers? So far, has it still been specific to that?

Yes. We haven't changed the cohort. It is that cohort, other companies within even those verticals are doing very well for us.

Yes. Okay. Great. Maybe kind of shifting gears a little bit as well. So ABS has been a big product for your company, one of the fastest growing ones for a while. I want to talk a little bit about the trends that you're seeing there. So maybe the kind of frame this question -- so first quarter, you saw some deceleration in that product. Maybe if you can talk about kind of what drove the deceleration, but also kind of how you expect growth to trend from here?

Yes. I think a big chunk of that decel came from, as Nicola noted, the core -- those core 6 customers were very heavy ABS users. So their pullback in overall media spend actually hurt ABS in that quarter. We expect ABS growth to get back on a positive trajectory for the remainder of the year. But driven by some different factors than what we've seen in the past, a lot of ABS and activation growth from core client growth or same-store sales. We're seeing a larger percentage of that outcome from new customers, both new customers who are current DV customers who are turning ABS on and new 2 DV customers. So we still have a significant amount of growth with ABS. If you look at our top 500 customers, over 40% still are not using ABS. So we've got greenfield opportunities internally plus new partners that we're bringing on board. So we closed some big brands like Helion and Pepsi earlier this year. So we look at those as being activation drivers for the remainder of the year as well.

Yes. Maybe your point about kind of the strength that you're seeing with new customers, that might be a good segue into one of the other higher-level questions I want to talk about, which is if a customer is not using measurement solutions on the measurement side or on the activation side, what are they typically using right now? And what are the biggest factors that get them to sign on with DoubleVerify?

Yes. I mean we talk about this every quarter and for every quarter since we IPO-ed with the exception of one, a majority of our wins or our new wins have been greenfield wins, which an advertiser is not using our product or any product, even a competitive product in that sector, right? So we still have a significant out of greenfield. So in many cases, particularly outside the U.S., there's still a lot of education being done. There are advertisers. It's like people driving around without insurance on their car, right? And there's no law that it mandates verification, but there's common sense that mandates it, right? So we have to go out and educate folks, particularly out the U.S., outside the U.S. on verification. I think that's piece one. The second aspect of when we grow with verification is the upsell motion of kind of getting in with measurement first and then selling, for example, activation solutions afterwards, that continues to create a drag between people that use one of our solutions versus using 7 of our key solutions. And I think the third piece is what are they doing if they're not working with us, they may be doing nothing. There are like pieces, parts that they try to assemble, right? There may be an embedded free solution on one platform for filtering and maybe a localized version of a tool set some place in one market. But as with all software, we see as enterprises become more global as they look to centralize on single solutions they start rolling up into a single consistent product, right? And they want a single, consistent independent solution that's unbiased, that has the ability to verify across all different types of media, and it's no different than traditional software [indiscernible] where a large enterprise company may use one CRM tool in one part of the world, another CRM tool in another part of the world. But at some point, they decide, you know what, it doesn't make sense for us. We all need to be on platform x, so that we can trade data. Same thing happens with verification. And we see that with large customers like Unilever and Mondelez and Colgate who look to create a consistent verification standard in all their markets all around the world, and that gives us an opportunity to upsell, gives us opportunity to create global enterprise deals. And I think that's where the opportunities continue to create themselves.

Yes. So I want to continue on that path with some other things from product perspective and some of the more recent changes. So maybe first on Meta, right, earlier this year, you launched brand safety and suitability solutions there on feeds and reels. Curious if you can talk about just what the initial feedback has been to that product being available and how it's been performing so far?

Yes. I mean it was a long time coming. We've been working with Meta for years, but really the kind of crown jewel of Meta, which is the News Feed, where vast majority of their traffic comes from, vast majority of revenue, and the vast majority of ad dollars go to has always been out of [ touch ]. So the ability for us to launch that in January was really a milestone moment. Since then, we've been testing the solution with around 40 of our top customers, many of those in our top 100 cohort group of customers. So large customers testing it. Feedback has been great. I think that they've been looking to have the same type of measurement on the News Feed that they've had everywhere else. And let's put it directly, this is the same measurement they get in the open web. It's the same measurement they've been able to do on YouTube, it's same measurement that they can do on TikTok. Now that they can do it in the place we probably spend a vast majority of their social dollars, I think, has been seen as a big opportunity. I think it also unlocks an opportunity for us, whereas prior to having News Feed coverage, we only had about 50% of our top 100 advertisers using us on Meta. If you compare that, for example, YouTube, where over 90% of our top 100 customers use us, you see that there's a pretty big opportunity or a delta in our ability to upsell and get cover our top 100 customers. Last year, something like $40 million of revenue came from Meta. And if you think about if we can create the same type of penetration on Meta that we see on YouTube, there's an opportunity to double that revenue there. So feedback has been good. We've got great top customers testing it, and we're excited to continue to grow that opportunity.

Okay. And then maybe if we could also talk about Scibids, which you acquired last year. Maybe if you can just talk about the key capabilities that, that now brings DoubleVerify and what's been resonating the most and the early feedback from customers?

Yes. Scibids is a really unique solution for us. We're the only platform in the market that has the capability to do dynamic bid optimization with multiple variables and do so across platforms like Trade Desk and DV 360. We're testing it now across some social platforms as well. And what that does is -- it allows us to take any data point or any KPI that an advertiser may want. And we launched this with, for example, DV's attention and optimize reach and cost against attention. So multivariable, how do I ensure that I'm getting the best optimal bid to drive attention levels up, drive reach up and drive costs down. It does -- it basically builds custom algorithms to solve for those solutions. The uptake has been great. We've closed 18 DV customers since we acquired them, 18 of our own customers, 9 of those are our top 100 customers. So we're getting big DV advertisers to employ this bid optimizer into their systems. It also enhances the value of DV data, right? So we can pull things like attention signals in there. We can optimize against viewability in there. So not in the past, think of all those pre-bid activations were very binary, viewable, not viewable, high attention, not high attention. You had to make a choice, right, between using a filter to optimize against that or not. Now you can say, let me see that against cost. Let me see that against reach. Let me see viewability across a whole other bunch of KPIs. So it means our data or really anyone's data can be employed in a much broader fashion rather than a binary filter, which says, filter yes, filter no. And I think it's been exciting. We've closed deals with it. We have now folks that use competitive measurement tools that use competitor measurement tools using Scibids, which is awesome. That gives us a foot in the door with advertisers who may have said, "you know what, we're not ready to change our enterprise employment of verification and measurement. It's not. But we love this thing. We want to use this that gives us a wedge in the door and that allows us to now further have discussions with advertisers who maybe weren't interested in making any changes."

Okay. Maybe to shift gears a little bit, Nicola, a couple of questions for you in terms of the numbers and what's been going on this year. So maybe first, just looking -- going back to the guidance for fiscal '24, the range implies some revenue acceleration in the back half of this year. Could you talk us through kind of the main drivers that are going to support that acceleration in the back half of '24?

So just to anchor the first half, second half, right? So the first half, we were guiding to about a 15% growth and an 18% in the second half. The mix -- there's always more revenue in the second half, right? So the mix of revenue between the first and second half in '24 is not so far off where it was in '23. But the accelerators that we are -- that we're putting into the guidance are there's 3 main ones. One is the large advertisers that we signed like Pepsi, Helion, Uber, those ramping, which they're doing. New client wins, I mean we're actively out there looking at large enterprise clients and continue momentum on social, which Mark spoke about a lot. Against that, you have obviously the [ continued underperformance ] of the cohort of 6. And then we've been pretty measured around how many of the tests will turn into a pay customer for the brand safety in the second half of '24. That hasn't changed. We've always been fairly measured and know they will take some time to contract that out. Scibids is a big opportunity. It is performing to our expectation, but it could also do better sooner. Those are kind of the 2 large ones that we could see some upside against what we've guided to.

Yes. And then in terms of -- and you addressed some of this before when we talked about large customers. But in terms of kind of the visibility into the year at this point and how do you feel like you've accounted for some of the drivers of volatility so far this year? Like what kind of gives you confidence in the range as we look at the balance of the year?

Yes. So I think, again, the big driver this year is this cohort of 6, and we feel like we've derisked the year based on the underperformance that we saw in the first 4 months. I think the -- this is a visibility question a little bit, which is 56% of our business is now on the programmatic side of the equation, which is a fluid channel, right? Advertisers can turn it on and off as they need. And in general, advertisers don't really have to commit to more than a 3-month period, right? They have so many options to be able to put money and play later in the year and kind of adjust their ad spend that it is an environment where visibility is just a little bit shorter. We feel good about what we see on the measurement side because we need to see their campaigns. And that kind of instructs us a little bit as to what we're going to the programmatic side. So we feel good about the visibility that we have. And again, all the drivers that I just mentioned is really what's going to drive the second half over performance with the first half.

Yes. Okay. And maybe if we can touch on pricing a little bit as well. It's been a topic for investors so far this year. Curious what you're seeing in the pricing environment. I think on the most recent conference call, you said it's been stable on a per product basis. Is that still the case today? And what have been your observations there?

Yes, I think -- I mean, look, we've been in the market for 10-plus years with the same competitive set, right? So it's not that the environment has changed. I mean, I would say it's kind of business as usual in terms of price for everyone which is price is part of the equation, when you have an RFP, when you're -- when a customer is in consideration around which vendor to use, but it's hardly ever the deciding factor, right, especially when you have a product suite that's superior, and we have more products to offer to the client. Price is always part of the conversation, but it's generally not the deciding factor. You're correct that the overall mix shifting more towards measurement, towards social, which is more international is going to have an overall impact of lowering the average MTF that we charge per impression, that's okay because it's a broader expansion for large clients globally. So yes, what we said is per product, the fee hasn't changed. It's just that the mix of the business is changing, which is okay. We're not driving that. It's just where the advertisers want to be spending.

Yes. As you look at the portfolio, and Mark, you touched on this a little bit in the CTV kind of description, but where are the places where you think there's the most pricing power that still kind of remains an opportunity for pricing to be a tailwind for your company?

I mean CTV is the obvious one, right? If you take the benchmark of CPMs with the advertisers actually spending per ad slot, the gap between what we charge and what they're paying is much larger on CTV than it is for a display ad. And so that -- we're going to remain very focused on just verifying everywhere, get the impressions first. And then at some point, we'll talk about pricing, but it's very important for us to be able to verify we're going to make it very seamless for the advertisers to just turn on our service and not have conversation around why is this price different here than there.

Okay. So we talked about some of the factors influencing this year, kind of the first half, second half dynamic. Just as we look beyond '24, kind of how do you help investors frame the long-term kind of growth profile for DoubleVerify? And then also if you could talk about the margins as well. How should we think about the framework for this business?

Yes. So the 2 numbers I'll give is NRR has been over 120% for the past 5 years. Obviously, this year, it's going to be impacted by this cohort of 6. And then our margin has been at around 30% for that full period as well. Those are not bad numbers to think about in terms of what's going to drive the future of the business, right? Like once you take out this cohort of 6, you kind of have that the power of the 120 kind of powering on top of new sales, on top of new products. The 30% margin is a number that we see as a healthy margin that allows us continue to invest into our business. So we're very focused on top line growth, not just for us, but also for a proof point that we're becoming kind of the currency in the market, right? We're gaining market share. It's clear from the financials that we report. And so if we're able to continue to invest into that number, right, and continue to show superior top line growth, I think a 30% margin is something that we can invest within those ranges, and that works very well for us.

And what are some of the kind of key areas of investment for the company?

It's going to be R&D. It's going to be marketing and sales, it's going to be opportunistic if we see markets where we're not, and we can kind of have a beachhead into a new market we'll do that. That will be opportunistic as opposed to R&D, which is really where the innovation comes to have the product -- the next product available in the market even before the advertiser knows they need that product.

Yes. Okay. Maybe just kind of staying along the thread of profitability. Just can you talk about capital allocation for this business? How do you think about your priorities there? I know you just recently announced the share repurchase authorization, where does that rank between your uses of cash today?

Yes. So the last -- in the quarter, we had $300 million of cash, which is a nice amount of cash. The -- to speak about the buyback, there was an opportunity there, right? We changed guidance by less than 5%, and the price -- the share price went down by more than [ 40 ]. It's an opportunity. We authorized $150 million share buyback. We think that that's going to be -- something that's going to be at a pretty regular cadence, right? So a nice use of cash. Obviously, M&A remains a big priority for us. It has allowed us to kind of take our distance versus other players in the market. And that M&A, the threshold for M&A is going to be geographic expansion, additional capabilities or adjacent products that can just expand our own product road map faster than if we were -- to build it ourselves. So that hasn't changed either. And it remains pretty high priority.

Okay. We're coming up shortly on time here. I wanted to leave a little bit at the end just to give you all a chance to address. Is there an aspect of the DoubleVerify story do you think is underappreciated by the investment community? Or maybe said differently, is there something in particular you want to highlight here just as we kind of think about final messages for the audience?

Yes, I'd say 2 things. The first is the core value proposition that we offer to advertisers has not changed since the day the company started, since the day that we IPO-ed or since yesterday, which is we ensure that their ad spend is safe, is viewable and secure. That is incredibly important to advertisers in every different media, whether it's social, CTV, mobile, open web. So the value prop hasn't changed, and it's seen in our [ GRR ], which has been over 95% for the last 5 years. customers stick with us, we are incredibly important to them, and we grow with them over time. I think that's the first piece. The second piece is we are much bigger than just one line item of growth, right? I mean there's a lot of focus on our activation, on ABS tools but when you look at the levers of growth for us moving ahead, going back to that core value proposition, it's social. As social continues to eat everything and looking at 50% growth last quarter in our social business. It's international, where for the first time ever in the company's history, over 30% of our revenue came from -- a measurement revenue came from outside the U.S., whereas over 50% of the ad spend comes from outside the U.S. So we've got a huge gap there to make up. And it's new products, right? It's new products. We've -- a majority of our customers use a minority of our products right now, which means that we have an opportunity to upsell over time. So when you look at the growth levers of the international of continued expansion across new media and across an upselling of different products. It's like we've got a lot of different ways to grow. And I think there's a lot of focus on specific things when there's a broader portfolio of opportunities that go back to that core value prop, which hasn't changed at all, which is advertisers need us. They want us. We're independent. We drive safety and trust in their spend and that will never change.

All right. Well, it's probably a good place for us to wrap up. Mark and Nicola, thank you both for joining us today. Thanks for those of you in the room. If you have any follow-up questions, feel free to reach out, and it's a good place for us to end it there. Thank you.

Perfect.

Thank you.