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

All right. Thank you, everyone, for joining us. My name is Matt Farrell. I'm the Internet and media analyst here at Piper Sandler. We're very lucky to have Nicola, the CFO of DoubleVerify with us for a fireside chat. So Nicola, why don't we just start with a brief overview of DV?

Yes. So DoubleVerify provides services to advertisers. We help advertisers protect the quality of the ads that they put online, right? And that is with the intention to maximize the ROI that they get on their ad spend. And what we do for advertisers is that we protect them against fraud. We make sure that the ads are viewed. And more and more now, we help put ads next to content that's brand safe and brand suitable. We've been doing this for 10-plus years. We're integrated with most of the platforms that are both on the open web, but also on the walled garden of the industry. Our main advertisers are brand, large brand advertisers that are very focused on return for their investment but also on protecting their own brand. And as I said, we've been around about 10-plus years, double-digit top line and bottom line.

Great. And DoubleVerify exhibited a solid Q2 and a strong full year guide on the last call. Would love to hear a bit more about what's driving some of the near-term trends, both activation and measurement. And anything specific you'd call out from a vertical perspective of strength that we can see on.

Yes. So the way we help advertise it is both on the measurement side of the business, which is an ad runs, and then we tell the advertiser how it did based on the criterias that we have. but we also help the advertiser now more and more on the activation side of the business, which is even before you bid on an ad, can you use our data to inform whether you're about to bid on a good placement or a bad placement. And so we have measurement and activation, that's 90% of our revenue. The drivers of the growth on activation, which is the larger part of our revenue, it was a double-digit growth in Q2. What's happened recently is we've been able to open up activation for social. So this is a new trend where we've been able to do activation for the open web for a long time, but now we're starting to do it on the social side. And that's been one of the drivers of the growth on the activation side with a long-term growth drivers where we'll be able to replicate the success we've had with the open web with the social platform. And that business grew 12% in the quarter. Measurement grew 22%, where, again, this is an ad runs, and then we measure how it did. That driver of the growth is also a social side theme here, which is, historically, the company has done its services first on the open web and now we're moving to social. The big driver of this measurement is the fact that brand safety and suitability, which is a very interesting product for our clients is now available on Meta only been available on Meta since the beginning of this year. That's one of the drivers of the growth. So the -- Q2 was a good quarter for us because we grew double digits in all of our revenue drivers, above and beyond what we used to do, which was just open web.

And maybe just taking us back to your bigger picture. Based on your conversations with advertisers, how is the broader digital advertising landscape here, I guess in Q3 and heading into year-end? And what are some of the puts and takes that we should be considering from maybe a macro or even a micro perspective?

Yes. So we -- what we say -- what we're feeling is that the mood is cautiously optimistic. Maybe leaning a little bit more towards cautious just because there are a few unknowns that are happening in the third and fourth quarter, right? There's still an unknown around interest rates and the timing of that, there is the political season, which doesn't directly impact our revenue, but does have an impact on overall media inventory and CPMs that are paid for the inventory. So it creates this sort of cautious outlook through the third and the fourth quarter. I think it's too soon to say how advertisers will enter '25 because we need to go through this period. I think in general, it's important to know that the market has moved away from long commitments from advertisers, where at the beginning of the year would come and you'd have 6, 9 months' worth of commitments from the advertisers. Even the upfront today are pretty segmented, right? There's an overall commitment but even within that, there is the ability for the advertiser to change their view. So the visibility is 3 months, 6 months very -- 6 months will be deemed long, right? So 3 months is when the advertisers are able now to choose where they're going to put their dollars. So I think it's cautious optimism, we have to see what happens through the next few months.

And DoubleVerify has been one of the few companies within digital advertising that's actually driving accelerated revenue growth in the back half of the year. You kind of hit on it before, but I wanted to kind of double-click on what's driving that strong momentum and allowing you to kind of accelerate revenues while the rest of the industry is kind of stabilizing at this front growth?

Yes. So we have several drivers, which is sort of what powers the whole story of DV. And specifically for the second half of this year, we see strong momentum on a company called Scibids, which we acquired last August, which is an even more sophisticated way of doing activation and allows people to use analytics and AI to predict what they would like to spend on a specific impression. It's algorithmically-based. It's the only product out there in the market that does this. So we acquired it in the middle of last year. We're trending on the higher end of the expectation that we put out there for this product. And that will -- that we anticipate and we'll have an impact in the second half. Social momentum continues. So as I said, we just launched a product on Facebook and we see continued momentum from social on the measurement side. We're seeing early signs of momentum for the activation product for social -- as I said, that's more recent, but it is also having some impact on how we see the second half of the year. On the puts and takes list, the moat, which I think we'll speak to you in a bit. We've put in a modest assumption for the impact that it will have in the second half, and we'll talk about that later. And then we did have this year, a discrete set of advertisers that had some uneven spend, which didn't help or hurt in the second quarter. It is still very uneven as we get into the second half, so that could be a put and take for the second half.

And maybe let's dive into social a little bit more. You hit on Meta. Obviously, we're still early around their adoption of brand safety and suitability. But what are some of the early takeaways that you have and I think, call it, I think we're about 9 months in it at this point?

Yes. So the adoption of the Meta, so this was a big moment in the social challenge, just Meta is such a large player. The fact that we now have brand safety and suitability does create a large opportunity. And just to size the opportunity, right? So 50% of our top 100 clients we're using the Meta product even before brand safety and suitability was available, right? So they kind of used it knowing that it would come. 50% of the top line were not using it at all, kind of waiting with this product. The example that we have, the benchmark that we have is YouTube, we've had that product since 2020 or 2019, that penetration is 90-plus percent. So with that product, 90% of our top 100 are using it, on Facebook it was only 50%. So the natural opportunity there is for the remaining 50% to use it. Now we've been very consistent and think it's going to take some time because the advertiser needs to understand the data that they're now getting from people. Understand it, read it, benchmarking is what they're getting from us on other platforms before they can really act upon the data. So there is a testing period. It's a lot of volume for advertisers. So they really want to test it. They're testing it on a specific brand, for a specific period of time. So the testing period is as long as we expected. And then there will be a contracting period, which is also, you know it can take its own time. But the opportunity is really with the extra 50% of the top 100 to use the product which is what we have on YouTube.

Yes. And maybe just taking a step back, as you pointed out, social as a category has been a huge driver. You've talked about TikTok in the past. What inning are we in kind of around the social adoption curve for your products? And at some point in the future, how much of your revenue could be coming from social?

Yes. So I don't know, baseball, so I don't know what any worry. What I will say is we are, as I said, we don't have -- let's start from what we don't have. We don't have the activation suite product on social. So it's really currently just measurement. Let me just clarify, we have a social activation solution on YouTube alone a but it's early, and we don't have it, and it's a prescreen solution. It's not really a pre-bid equivalent to what we have on the open web. So that is still nascent, even within measurement, we just have brand safety and brand suitability on Meta. So it's going to take time to even grow that. The way we think about the opportunity is you can think about it in terms of the revenue percentage that we get from social. It's not even 20% of our total revenue, a 60%, 70% of all digital ad spend today. That gap once you have the full suite of products, could close, right? Because the point if we verify everywhere, we're going to look -- our revenue mix should look like our advertising mix. So you can keep that in mind, which is 20% is a revenue mix versus 67%. The much larger opportunity within our own revenue set is if you look at what activation is as a percentage of measurement for the Open Web, it's a 3x ratio. For every dollar, we got to measure it with 3 more dollars on the activation side. On social, it is essentially very, very small and we only have it on YouTube, which is not even the largest player on social. So there's all those gaps that we can close. It's going to take time. Part of the distinction between open web and the social platform is that you need to integration with every single social platform as opposed to the open web, which becomes available as soon as the other products. So that will also take some time, but that's the midterm opportunity, right, replicating them 1, 2, 3 on the social side of the business.

Yes. And maybe pivoting to CTV, it's been a hot topic this year. You have some early partnerships within this space. Just help us understand the value that you're providing to advertisers within CTV, especially as a lot more inventory has kind of come on.

Yes. So. We've been talking about social. CTV is even behind in terms of adoption of the product, right? So the short-term opportunities, social. CTV is behind. We talk a lot about CTV, and it's talked a lot about just because the opportunity is so large, but it's still about 10% of all inventory on digital CTV. So it's still small. We have the suite of products available. The dynamic that's happening in CTV that's still existing today is a supply and demand issue, right? So there is a supply, but for a long time, it was so limited, the advertisers were just saying, "I just need to buy whatever is available, right? Because I need to be in it. " Now the supply side of CTV is opening up quite aggressively and quite quickly. Netflix now has ad supported service, Amazon Prime is a very large component of what's going to open up the supply side of CTV. Once that opens up, advertisers will want more choice, and we'll want to be able to use a product like ours, differentiate between the quality of the inventory, right? So once it opens up, then our product becomes very relevant. In order to unpack the last piece of this, we will need show level data, which is not yet provided for a product to be used. So we can tell you if there's brand safety, suitability around app, apps there within the CTV because is not yet at the show level data. We are starting to talk to all the different partners to get that information. And once we have that, then the power of the tool will really be available because it will differentiate the type of supplies that you have. As you can tell this is a longer-term opportunity, right? Social is much larger for us [indiscernible] term than CTV, but we're on the right path, and we're making sure that advertisers understand the benefit of getting that show level [indiscernible].

And pivoting a little bit again. You hit on them earlier, but the company has been working through a unique situation with a few large retail CPG customers this year. What's the latest and greatest on this customer cohort as you head into year-end?

Yes. So I mean, we've been consistent with our message. It is 6. We said the -- what we've seen this year is lower level of ad spend from these six right? They didn't turn off our services, right? But because they are lowering their ad spend, it obviously has an impact on our revenue and the issues are discrete to every single one of these six. As we said in the Q2 call, we didn't see anything worse or better to change our outlook for the six. So the spend pattern is uneven, and we said that since the beginning. So we're not seeing the patterns that we generally would have seen from the group. And so and it's definitely too early to tell what's happened '25 with us. Within the group, there are companies that are clearly not going to spend the way they were in the past because discrete issues that they have internally. But it's definitely too early to talk, it's going to play out to '25.

Got you. Okay. And maybe as a result of this cohort, one of the more debated topics over the last few quarters has just been activation revenue. How should we be thinking about the growth drivers of activation kind of over the shorter term, but also over the longer term, just given kind of the backdrop that we've seen because of this customer [indiscernible].

Yes. So activation, activation growth has been driven in the past few years from ABS, which is our premium priced product that really had an unbelievable success. If you roll back a few years, we expected this to be a premium product for our top 100. We're now well penetrating into the top 500, even though it was a premium priced product, the power [indiscernible] made, made it such that even the customers below the top 100 were using it, we still have a long way to go there. There's still -- we're 170 of our top 500 that are not using the product. But the growth has naturally slowed into the 5-plus year product, right. And it was impacted a lot by the core of the six. What we've seen, and clearly, Q2 showed this, which is activation grew faster than India. And I think we've moved away from having a single product driver of growth to more drivers of growth. And so if we think about activation and what helped the growth there is Scibids, which we acquired last year, and that is essentially the next evolution of the ABS product, that allows people to do predictive analytics that are not just, yes use this -- yes, bid on this, no don't bid on this. So it allows advertisers to evolve from just a yes/no answer is something that's a little bit more sophisticated based on resulting KPIs that they're looking for. And so in our model, which is we're getting paid for every impression that we helped verify, that means more impressions are bid on right? So it's the next evolution in the ABS product, and that is one of the drivers of the growth. The second driver of the growth is what we were discussing earlier, which is we do have a pre-screen product for social and for YouTube, that product grew 30% in the second quarter. So there are drivers of growth there. I think to go back to where you started the question, the activation in the company is always no longer just one product. We've always said it, but we had such an outsized success with ABS that the message got a little lost. And so the fact that we have all these multiple drivers of growth, and we're able to show growth overall that's ahead of the ABS growth leads us to see how we're going to continue to grow even though ABS is no longer the growth rate that it had in the past few years.

Got you. And let's talk a little bit about the moat opportunity. It's kind of a unique moment in the industry. How has DV positioned itself out of the gate to win customers from moat initially?

So we've been winning clients from moat for a long time. right? And it was included in our assumptions like we've been working to gain those clients for a while and to some of the names that we mentioned that we signed this year from moat with Pepsi and Haleon. Those are large [indiscernible] deals that, over time, in a natural process would take their time through an RFP and we'll kind of get ultimately to win. Now obviously, with moat announcing that they're closing on September 30, the RFP season is like this short everybody needs to figure out what they're going to do as of October 1. So it's a bit of a -- it's a unique situation where every client is looking for a new solution. It's an intense moment where the opportunity for us is once we have a client, the average length of one of our clients is 7-plus years for our top client. So it really is important for us to win this client. One thing that's unique about the shortened RFP season is that clients don't -- clients are looking to replace what they were having with moat first. And then we'll talk about upsell, right? So rather than having a very sophisticated product offering and solution that cuts across all of our products, we are first going in and doing a like-for-like. And then over time, we will upgrade upsell to activation products side, et cetera, et cetera. Moat's offering was measurement on a pretty basic level. So all this is to say we're winning our fair share of them. it's going to start at an entry level. And then we'll be able to upsell to the other products that we have.

And because Moat's product that was more basic in nature. Is that like the upsell and the cross-sell opportunity is that potentially larger for these clients that you've won because of the suite that you have in this week that moat didn't have? And I guess how should we think about the cadence, right? You mentioned, hey, we're just going to walk in the door at X, but when should Y really think should start to decline?

It will be -- just to size the opportunity, I think there's probably 1.5x more revenue coming once we get activation inside, et cetera, et cetera. So it is definitely going to have an impact in '25 and '26 I just said '25 and '26. I think it will take 12 to 18 months for the client to get used to our products. And for us to be able to go in and explain the other solutions and then get them to upsell it. So I would expect 12 to 18 months.

Got you. Once the dust settles here after the period of, I don't want to say chaos, but opportunity. How should investors be thinking about the competitive landscape of the industry? And does anything materially change now that Moat isn't a part of the landscape?

As I said, we've been winning clients against Moat for a while. And so it was an obvious distance third player in this space. So I think the immediate impact is just it has accelerated the time where you have a third player that no longer there. The landscape in general is we've been in the business 10-plus years until our closest peer, right? So we've been against IS for 10-plus years. The dynamics there don't really change except that you have this moment. I think what is a bit -- what is also available in the industry is a single point solution. It is an attractive market. A lot of the wins are still greenfield. The market is growing and both companies are growing and profitable, right? We're growing faster. But we're both growing and we're both profitable because the market is so large right? There's still a lot of advertisers that don't use verification. So we're bound -- it's bound to remain a very competitive environment. I think Moat going away just great at this moment in time, but it doesn't change the other dynamics in the business. We still have more interesting products, more statistic products, products that others don't have in the industry, even the single point solutions are not able to replicate something like Scibids. For example, the pre-screen tool we have on YouTube, which is the beginning of activation. There really isn't something else out there that's the same. So we feel very good about product innovation as the reason why we are gaining and creating a gap between ourselves and IS and overall scale, right? At some point, the advertisers will want to have one point of reference that is a benchmark to measure verification across all of their buys. As one company becomes larger, I think that achieved that a little bit, and we're on ways to do that.

And maybe just let's talk about AI real quickly. It's the topic of ad spend, it's the topic of the day for what seems like primary. Where it rolled does AI play in your business on a differentiator for the company?

So AI has -- AI helps on the product side -- so it's -- everybody is talking about AI, but we've been using machine learning for a long time to essentially accelerate the time it takes us to put products out. So I'll give a very simple example. Once you figure out how to do brand safety sustainability and one language AI and machines can help you do that same brand safety and suitability in multiples of languages. And that kind of accelerates the time that you can put products out. It also helps us be sure about how we verify. So on video, which is now the largest part of our volume right, if you're verifying the quality of a sunset, you don't have to really do frame by frame. If you're smart enough to get the machines to be smart enough to say, sun's coming down. Every frame it's kind of the same, until there's something that changes in which case then do verify. That creates an efficiency and speed to market of our product. There's a lot of efficiency that we're gaining. They're becoming obviously in our financials, like we have a very high gross margin number, and it's actually increasing partly because of what I just described here, which is machines are helping us do things faster and cheaper, which means that we're able to invest in not just humans to do classification, we're able to reinvest into data scientists and other types of engineering resources. So it's having an acceleration impact on the way we do our business.

And let's maybe touch on the financials here with the last couple of minutes. You guys have been a double-digit grower with 30% EBITDA margins for some time now. And I guess this is a bit of a high-class problem. But I guess, how should we be thinking about the trade-off between growth and profitability as we move forward? And then maybe a follow up on some dashboard.

Yes. So our strategy has been -- we've gone to the point where our -- because of our strategy, which has been, if there is superior revenue growth, we'll continue to invest into the business, right? Because that's the big differentiator. When we -- when both IS and DV, one public were essentially the same size. We're now over $120 million larger than they are. And that, we believe, is a good indicator of we're verifying everywhere for more clients, and we have more scale. We're able to achieve that by innovating into the business, but still achieving a 30% margin, right? We won't always have to invest this much to revenue growth, right. So at some point, there will be kind of a deeper discussion around the trade-offs. But right now, we're not seeing it, right? We have higher percent revenue growth. getting larger. And so we're able to continue to invest at a 30% margin. But again, at some point, we won't have to invest as much as we have to continue to show revenue growth. We're not there yet, but we'll obviously keep an eye.

And then with kind of the strong cash generation that you have, a clean balance sheet you had the buyback recently how should we be thinking about the use of cash moving forward?

Yes. So we have over $300 million, no debt, as I said, capital allocation for us is investing in the business because organic growth is very strong, find M&A opportunities that can accelerate that organic growth in terms of product and innovation or geographic expansion. And now this year, we've also introduced buyback, which to us is just part of the natural evolution of where we can allocate some of our cash. We keep an eye on stock-based comp as a barometer of what a reasonable buyback program looks like. So it's the cadence is pretty predictable at this point, right? And it's kind of tagged to the stock-based comp number. So we have a lot of opportunities to use the cash. It is a good problem to have. M&A remains something that we're very interested in continuing to pursue.

Awesome. That's all the time we Nicola. Thank you so much. Thank you, everyone, for joining us.

Thanks for having us.