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

Okay. So I think in the interest of time, we're going to keep the -- we're here at Day 4. We're going to keep the train moving along the tracks. Thanks, everyone. I know people are still finding their seats in the back of the room, but it's my pleasure to host the team from DoubleVerify here on Day 4 of the Communacopia & Technology Conference. Nicola Allais, CFO. Thanks for being part of the conference.

Thanks for having us.

And being back at the conference. You've been here before. So we'd like to celebrate our return guests and always great to have a conversation with you and the team. So maybe start big picture, I always like to level set for folks in the room and who are on the webcast and maybe know the story as well. Why don't you give us a little bit of background of the company and just level set what is the company most focused on today?

Yes. So DoubleVerify is a company that provides protection and performance to advertisers who advertise on the -- for their digital advertising spend. What we do is we help advertisers make sure that their ads are placed in an environment that's fraud-free, viewable, brand safe and brand suitable. We do that for both the Open Web and the social media platforms. We're integrated basically in all the large platforms that we need to be integrated with. The clients that we have are generally large brand advertisers that are looking for ways to make sure that their ad spend is in the right place. We've been moving over time from just protection, which is keeping away from bad stuff to performance with the same data set, which is once you can tell an advertiser don't be here, you're better here and you improve your ROI. It's a company that's been growing double digit on top line. We have 30-plus percent margin for several years going. And what we're focused on right now is really the performance side, as I said, just improving ROI, helping clients put ads where it's going to be brand suitable and increase the ROI.

Okay. So the 2 biggest themes here at the conference are the current macroenvironment and AI. I think we're going to talk about that. I think we'll talk about AI as we go through our conversation, but maybe start with the macroenvironment. So there's a lot of mixed data points out there around both advertising and the broader macro. You obviously had some clear messages coming out of your own earnings a little over a month ago now. Why don't you talk a little bit about what you're seeing in terms of performance and outlook in this environment for the second half of '24 to level set? Maybe I'll ask a few follow-ups, if possible.

Yes. Look, I think the mood is cautiously optimistic that it's not going to get worse. It is a bit uneven. There are many items that need to come to play in the next few months. There's changes in interest rate. There's the elections, which this season, in particular, it feels like there's a lot of dollars going into the market, which might have some impact on brand advertisers saying, "I'm going to sit it out partly because CPMs might be very high," but also because the content might be something where rather than using our tool and very specifically know where they can put their ads, they might just say, "I'm going to sit it out for a little bit." So there might be a little bit of an air pocket. I think the overall sentiment we have is that it's cautiously optimistic. It's absolutely clear that it's too early to get a sense for what '25 would look like, right? All this needs to happen, and then we'll see how the advertisers feel about next year.

Understood. So specific to something you've called out, you've talked as a company about this cohort of 6 advertisers that experienced headwinds in the first half of the year. Any update on how those advertisers are performing more recently? What you're looking for in terms of signs of recovery there? And are you still confident that that's very idiosyncratic and somewhat ring-fenced as a cohort?

Yes. So I'll start with the last question -- the last statement. Yes, we feel like it's very much contained to these 6, it hasn't spread to other CPG or retail companies. So this is a cohort of advertisers that is essentially lowering their ad spend for the year based on issues that are very specific to the companies themselves. One of them is closing retail store locations. Another one has some issues around the specific divisions that they have. So that leads to an uneven spend pattern. These clients are our top clients, right, 3 of the 6 are in our top 10. So as they're lowering their spend, obviously, has an impact on our results. It remains uneven. In the Q2 call, we said it, and that's basically what we're sticking to, which is uneven. So as we get into '25, we anticipate this group to come back to a more normalized spend pattern. But it's likely that some of them won't, right? As a whole, as a cohort, I think it will become a situation where it's probably not at the same rate of growth as the rest of the company.

Okay. Clear. The other big debate around advertising trends is the widely defined category of CPG, where at least from our work, what we hear is there's a lot of volatility across the category. That vertical, in particular, while it has mixed data points, you called it out, excluding the cohort of 6 as an area of strength on the most recent quarter. Talk a little bit more broadly about what you're seeing on CPG and what you more explicitly were trying to call out coming out of last earnings?

I think the one thing to remember here is we're still -- we still have a lot of opportunities to grow. And we still have a lot of new verticals, new channels where advertisers were not able to use verification and they're now using verification. So once you get into an actual area like CPG with the clients that we have, say, Mondelez or Unilever. These clients are growing with us because we're able to provide services that were not available necessarily in the prior years, right? So all of the sudden, you have brand safety and suitability on meta. That's growth that is unrelated to what's happening in the macro space. So that is where we're seeing a lot of good traction. And some of those contracts are doing better than what we expected because we're still not penetrated everywhere, right? So when you get down to the actual clients and growth, that's kind of outside of the overall macro sentiment.

Understood. Okay. Let's move beyond the current ad environment. I think the messaging there is super, super clear. I do want to talk about what you talked about there last, the building blocks for growth medium term and longer term. Let's turn first to social. That's been a nice contributor to growth. If you look back over the last several quarters, especially short-form video, you referenced Meta. How would you frame the advertiser adoption levels on those 3 major platforms? You've got Meta, you've got YouTube, you've got TikTok. And how do you see the unlock of things like brand safety and suitability on the Meta feed contributing in the quarters ahead?

Yes. So to level set, we are now where we have tried to get to, which is brand safety, brand suitability and all of our measurement tools are available on all platforms. It took a while to get Meta to get there. That is the first immediate opportunity we have. So only 50% of our top 100 were using the product before brand safety and suitability was launched on Meta, which was at the beginning of this year. We have the extra 50% to go after. We know we can get the penetration there, YouTube is the example where we're 90% penetrated and we've had brand safety and suitability since 2019 on that platform. So first and foremost is wider application of the measurement tools on Meta. We signed 30 new clients to the Meta products since we launched brand safety and brand suitability. Not all of them are in the top 100, but it shows how -- there is traction. Clients were really waiting for that before they were going to turn on the product. So that's on the measurement side. TikTok and YouTube, which you mentioned have had these products. TikTok actually wanted to launch with the product, and they did, which had a bit of an accelerating impact on Meta wanting to have it as well. So that's the measurement side. There's a lot to grow there. Social in total is still only about 20% -- less than 20% of our total revenue. It's 60%, 70% of all spend for advertisers. Like that's the gap that we need to close. What we've learned through launching the Meta product, the brand safety and suitability on Meta is that the real power of the tool is what we're going to be focused on now, which is opening up the activation side of social. So that's the longer-term opportunity that we're going after now, especially from an R&D perspective. And to just set the stage, the power of our tool is you use the measurement data to inform your activation data that then allows you to bid on impressions that you know are going to be good for you, right? So you use that data to inform the product here and then all of a sudden, you have a loop of data. That exists on the Open Web. It's already existed for many years, and we've been very successful there. That's what we need to replicate on the social side. It's going to take some time because we need to integrate with every single platform.

So I do want to go over a little bit deeper on that to close the loop on this. So when you look at that activation side, we get this question a lot from investors. How should investors think about the timeline of closing that loop from moving from where you are today on brand safety, suitability towards activation? And what are some of the gating factors? So what are some of the execution hurdles you're trying to get over to build scale on the activation side?

So unlike the Open Web, it's going to be an integration platform by platform. So that alone tells you it's going to take a bit of time. The good news for us is we already have this for YouTube. We have a product in the market. It's a prescreen tool. It already exists on YouTube. We've been in market with this for several years. So we know what the model looks like. We know what the data is that we need. We need to replicate that with every other platform. Your question is the timing. The timing is dependent on the platforms wanting to kind of get there and understanding the power of the tool. So it's a business development effort. The technology and the know-how, we know how to do it on YouTube. So it will take a little bit of time to understand how each platform is different, but it's really about when the platform is ready to work on it. So we're working with 3 platforms. The big one will be Meta. And since they just launched the measurement side, it is going to take a little bit of time from business development to kind of get there.

Okay. Understood.

In other words, it's not '25.

Understood. Okay. Maybe putting a last question and a finer point on the social opportunity. You've recently announced partnerships with other social platforms. We had a number of those companies here yesterday, Pinterest and Reddit were both here. Yesterday, I spoke to the CEOs of both. Both of them talked about where they're trying to take their platforms. We believe this is my opinion that you're going to play a role in that. How do you see those partnerships evolving as you look out over the next couple of years?

Yes. So they are part of the pool of social platforms that we want to be integrated with, like our theory is you want to verify everywhere, so that the advertiser uses our data wherever they're putting their dollars. They are part of the conversation we're having around integrations for prescreen, preactivation tools. They're -- in totality, they're much smaller than YouTube and Meta in terms of contribution to our business, but it's very important for us to be available everywhere an advertiser is verifying -- and sending their apps.

Got it. Understood. So it's really the ubiquity of having the whole landscape, so that you become in many ways like someone? You have to be bought?

Correct, yes. Correct.

Understood. I want to turn to connected TV. How do you think about that opportunity over the medium and to long term? Obviously, there's some partnerships there. We think about things like Netflix and Amazon Prime Video. And how do you think about some of the key products that have to be built to scale those efforts around connected TV in the years ahead?

Yes. So connected TV, the opportunity for us on connected TV is -- lags the one on social, right? Just in terms of immediate revenue opportunity. Social will be the one that will have a bigger impact for us in the medium term -- short, medium term and then CTV. The CTV opportunity is large. We're already -- we quoted in the second quarter 55% growth of the impressions measured from CTV. We have the products. We have the products. The CTV environment is still very much tied to a supply that is constrained a little bit. So Amazon is an opportunity for that supply to open up. Currently, advertisers are saying, look, I'm just going to grab what's available because the supply is kind of constrained. Once you get more platforms to play in the space, Netflix and Amazon, in particular, I think the supply side will open up, which will do a few things. First of all, it's going to reduce CPMs, which we're seeing already, then it creates a need for the platforms to differentiate their inventory, and that's when we come into play, right? So rather than just buying Netflix, whatever Netflix has available, we'll be able to go in and get show level data, which is not yet available. That's going to be the unlock, right? The unlock in the power of our tool. We're working with NBCU to figure out what that product looks like. You have to look from a technology perspective, where we are. We're working on it. Once the platforms open up to show level data information, then our tool will become really powerful for the advertisers, and we'll see more volume.

Okay. So the third building block I wanted to talk about, we talked about social. We talked about connected TV, maybe pivoting to retail media. How do you and the team think about that opportunity long term? Which platforms and networks are scaling well currently? And how do you plan to increase adoption, penetration over time?

So retail media networks in the continuum of the opportunities. Retail media is happening now, right? Social is -- there's a lot to build and then CTV is a bit further out. Retailer media is a great opportunity for us. Basically, what it does it allows us to work with an advertiser and then be able to verify not only on-site but off-site, right, once the user is going from, say, amazon.com to all the other websites. This is where our data gets used. It's growing really fast. So this is on the supply side. So we have deals with the platforms and the deal handles on-site and off-site inventory. Last quarter, we quoted on the Amazon side 50-plus percent growth for it. It's growing really fast. It's very interesting for us because it goes to advertisers that wouldn't otherwise work with us directly, right? So let's say, Skull Candy is an advertiser that probably wouldn't have a relationship with us directly as the level of ad spend is too low. But through an off-site relationship on, say, Amazon, all the sudden, our data is used for an advertiser like Skull Candy. So it's a very interesting opportunity to continue to grow with smaller clients. The relationship is with Amazon, which is really good, right? So it's with the advertiser, but then we get all access to all these other advertisers.

Okay. Understood on Retail Media. It was just over a year ago you purchased Scibids. A year on, what are the key learnings from the integration and the product launches so far? And how are you guys as a team thinking about the key unlocks on the path to where you want to take this business around $100 million of revenue looking out over the next 5 years?

Yes. So quickly, Scibids is on the activation side of the business, and it allows to create a more dynamic way of bidding on inventory. So up until the Scibids product, clients could use our product to say, yes, a bid on this. No, don't bid on this. All of a sudden with Scibids, you're able to bring in new KPIs into that equation saying, "Maybe I will bid on this" because it's reaching a certain KPI that I have, and maybe I will bid on this because it's at the right CPM as opposed to kind of having a yes-no decision that we were doing before we had Scibids. So yes-no decision was great because it took you -- took a lot of bad stuff away, but it created a situation where the impression volume was so small that the CPM was getting too high. So Scibids allows you to be much more dynamic on what you're bidding. That means more inventory comes through us. For the advertisers, the power Scibids is, it creates an even more direct way of seeing that the ROI is there when you use our tools. So we bought this a year ago. We have 3 learnings as we've done it. We consciously decided to first focus on go-to-market, not the product integration. And for go-to-market, we have 8 of our top 100 that are using it in addition to the Scibids clients that were already using it. We are using it as a tool to work with clients that don't necessarily use our measurement tool. So you can bring your own algorithm. So if you think about it, we can have a client that's not using our measurement or using somebody else for measurement, use the Scibids tool. And we have a specific example of that happening, right? A client is using another provider for measurement, but they can still use the Scibids tool, which is an interesting way for us to start conversations with clients that we don't have on the measurement side. So it's been very, very good. We're very excited about it, and we called out a $15 million to $17 million impact in 2024. And in the second quarter call, we kind of say we're feeling very good about that range. And we're feeling good about hitting the $100 million by 2028. It's a very strong, powerful product that's not -- no one else really has.

Okay. Great. Probably the #1 question we get away from the macroenvironment is just a broader competitive environment. And there was an interesting nuance in the digital advertising landscape with Oracle's decision to exit Moat. So I think maybe a 2-parter for me just. Number one, what are you seeing in the competitive environment? When you go in to win business, who are you competing with? What does that landscape look like? And how does Oracle decision maybe change the competitive landscape and change some of the nuance around client conversations?

Yes. So Oracle announced that they were closing Moat. Moat was a distant third player. They've been a distant third player for a while. Basically, Oracle kind of bought the company but didn't develop the new products the way we've been doing. And so it was always a third player. It's a platform that we've been taking clients from anyway. So this year, we announced Pepsi, Uber, Ulta Beauty, those were Moat clients that were coming over to us, right? So we've been gaining share from Moat for quite a while. The fact that Oracle shut down the business just accelerates the time to go after those clients, right? Like everybody needs to have a new provider by October 1. So there is a very discrete 3-month very competitive period to get the client. And it is competitive, right? What we've learned is the product was pretty basic. We knew this. So we are providing a basic product first, which will obviously have some impact on the overall price mix, right, because they're coming in at a low price and then we'll be able to upsell them to activation, Scibids, et cetera. So it's going to take an 18-month period or so before we see the entire benefit of winning the Moat clients. As I said, it's an October 1 deadline. So as we get to our Q3 and Q4 calls, this is when we'll be able to announce our fair share of the ones.

Okay. Understood. We'll look for that update in the coming quarters. The other flip side of the competitive environment where it feels like there's been a tremendous amount of noise in the investment landscape this year is around pricing. So why don't you help us better understand the state of pricing in the industry and how to think about some of the levers around pricing as you think about the medium term for the business?

So the way we think about -- our strategy is to verify everywhere and be able to just go wherever the advertisers putting their dollars. We don't direct those dollars, right? And so if you think about that strategy, we want to be -- we grow with the volume that the advertisers are putting through the digital ad space. And price is almost an output of that strategy, which is let's verify wherever they are. And then we keep a fixed price per product, but the price is going to evolve if all of a sudden we have more international business, for example, where the CPMs are lower and so the price of our product is lower. The price will change if all of a sudden we have more social where we don't yet have an activation product that's attached to it, right? So pricing, we're not taking down pricing just to take on pricing. We're not taking up pricing just to take up pricing. It's kind of an output of where the ads are going. The reason why there was some noise in the industry is because it is a 2-player market, right? And so there were some -- there's always this concern that at some point, it's going to be a price war. We are in a large growing space. It's very underpenetrated. Even our competitors showed increasing CPMs when they reported in the last quarter in their 10-Q. So it is -- this is not a price war because there's so much to go after. Moat will have an impact on price, right, because they're coming in with a low-price product. But overall, it's pretty stable and it's a fairly rational market when it comes to price.

Okay. Understood. Maybe turning to Authentic Brand Suitability. How do you view the runway for that as a continued growth driver going forward? Where are we in terms of adoption levels now across a mixture of advertiser types, geos, things like that?

Yes. So ABS has been a super product for us. It's on the activation side. It's a 5-year-old product now. It's by itself $130 million. The reason it's so powerful and so successful is because it's a unique product in the market. And so advertisers are really focused on trying to get this product. It was a premium priced product. It grew at extremely high rates. And we're getting to the point where out of the top 500, there's about 175 that are not using it. When we first launched the product, we thought the top 100 would use it, and that's it because it was a premium priced product. It turns out that many more clients are interested in it. So there's still 175 of the top 500 that need to use it. And even within the clients that are using it, one of the reasons why it kept growing is because they kept using on more and more and more of their inventory. The path of growth for ABS is it's unlikely we'll get back to the same growth rates, right? It's now a product that has reached serious scale. The opportunities for us is to go after the other 175 that don't use it. There is some thinking around how do we create a version of the product that is priced appropriately for outside of the U.S. because it is very premium. It's on the activation side. So we're trying to think about creating the opportunity where other inventory that's outside of the U.S. will be able to use it at a price that's commensurate to what the CPMs are in those markets. But the good news for us is that activation, which is where ABS was even in second quarter with ABS now and not growing as fast, still grew 12%. There's other items in that line including Scibids, which we talked about entering he prescreen tool that we have on YouTube that actually allowed us to grow double digits on that line without just being reliant on ABS. That's the new story for us. We have many drivers of growth even now that ABS is so large and not growing the same rate.

Okay. Understood. Very clear. I want to pivot to -- we've talked a lot about what you're building, product side, platform side where the company is going over the medium and longer term, bring it back to the investment cadence. So maybe talk a little bit about the balance between investments and long-term growth while also continuing to maintain cost discipline, thinking about margin expansion over the next couple of years. How are you thinking about striking that balance against your key priorities?

Yes. So our strategy is, first of all, to keep an eye on revenue and see if this is a market where at some point you will have one company that becomes a de facto standard in currency, right? Because the way it works is this is a product that agencies understand they might refer to other companies. Some of the large companies will see who's using what, et cetera, et cetera. So there is -- we think there's a very large strategic benefit in becoming the larger player as fast as possible. And we've started to grow the gap, right? If you look at us versus our close competitor, we're kind of the same size when we both went public a few years ago. We're now guiding to $120-plus million larger company than they are. And that's our strategy. Can we become basically large enough that advertisers and agencies see us as a de facto standard and currency in the market? That means that we intend to continue to invest as long as we see that gap continuing to grow. We're investing at a 30% margin. We're able to do that. We've maintained 30% margin all the way through. The investments are around R&D. There are specific pockets where we continue to invest on commercial, for example, to launch the Scibids products, right, and explaining the Scibids product in the market. But really the focus is on R&D innovation coming up with the next product figuring out how to do social prescreen, for example. With an eye on 30% margin, we, frankly, could not -- could decide to let the margins grow. It's not in our strategy right now. We've achieved quite a bit of synergies also on the gross margin. We're well over 80%. So it's a very, very profitable business model. We're choosing to invest at a 30% margin, so that we can continue to grow that gap on the top line.

Okay. Understood. Very clear on balance being struck there. Maybe building on top of that, one of the questions I'd like to sort of bring these conversations home with is capital allocation. So you just talked about investing in growth. Obviously, other aspects are doing M&A. You did Scibids, ways in stimulating inorganic growth, potentially maybe returning capital to shareholders over the long term. What's the current state and priorities of your capital allocation policy?

So we haven't been public for very long. And so we're now getting in the phase where we do -- we generate a lot of cash, right? We have over $300 million on the balance sheet right now. We've initiated this year a stock buyback, right, which is part of just figuring out the proper allocation of our cash and proper capital allocation. If you think about the priorities we have is continue to invest for organic growth, as we just discussed. And that might have a lag, right? We might be investing in a product that doesn't show results for a few quarters, and that's okay for us. Investing in the organic growth and scale is priority one. M&A is about finding opportunities that accelerate the product road map or accelerate our geographic expansion. I think Scibids is a perfect example of what we're looking for, right? It enhances the product. It creates a new avenue to use the same data set that we have anyway, and it just accelerates the time for us to do it as opposed to building it. And then I think stock buyback, we kind of peg that to the stock-based comp number that we have. I think that's the reasonable expectation that investors should have, which is we're kind of going to peg it to that. It's going to be repeatable at a regular cadence. And I think that that creates a nice capital allocation for now.

Okay. Understood. We only have a few minutes left, and we're trying to end all these conversations on sort of a forward-looking set of questions. So maybe for you, in particular, what do you believe is the most misunderstood piece with respect to DoubleVerify when you look out over the next 3 to 5 years? So let's call it over the medium term. And as you're sitting here today, what's the theme or the surprise you think you find that investors maybe aren't focused on with respect to you or the digital ads landscape that maybe we'll be talking about in a year from now? That's my plug that you'll be hearing a year from now.

Yes, I heard it. I heard. What do you get when you get 3 times in a row, you get something.

You'll have to come back and see. You have to bag this.

So I think we've done a good job explaining the opportunities, right? There's plenty of pockets of opportunities, right? Social, there's an opportunity to replicate what we did on the Open Web in terms of activation to measurement. CTV, people understand the unlock. Scibids, people understand the unlock as well. There is a transition that's happening right now that's away from a company where we were building on the Open Web, the measurement to activation, connection. And now we need to do the same thing on social, and then we need to figure out CTV and then we need to figure out retail media network. I don't think there's much -- everybody understands the opportunity. It's really going to be about the cadence to get there. And so this year, we did start talking about a transition because it is a transition, right? You're moving away from a fully developed measurement to activation dynamic on the Open Web to building it on social and then figuring out CTV. So really, the unknown is the timing of all these opportunities. If you're saying -- if you're asking me in 5 years, those opportunities will be in play, right? It's just a transition to it and what really comes first, and that's a little bit of timing around business development because we do rely on the platforms to either open up on social or giving us data on CTV. There's not much we can do there besides just continuing the business development conversation, as the advertisers become aware of how good that would be for them, too, right? And then they can put pressure on the platforms themselves. So it's really -- it's a transition. But if you're asking me in 5 years, all of that will be in play. And the math on what that means for the company is pretty simple to figure out, right? So we have a lot of growth drivers. This is a year where most questions started with what's happening with ABS, right? Because that product was really very strong for us to what are all the growth drivers and when are they coming to play, which is a good conversation, right? It's a good transition, but it might take time. I think the thing that's going to may be surprised when we're talking a year, AI is pretty disruptive. It's a positive for us because it allows us to do our job more efficiently and really finding synergies around COGS, but also around engineers. So it is a positive there. It is a positive for us because it creates and allows content creation at a level that's so customized that the advertisers, if they know they can target it and use brand safety and suitability tools that we have to kind of enhance the ROI specifically to that medium of that content, that's very good, right? So AI allows for a customization that allows for better performance for the advertisers. That's really great. So I think that will be something that will be interesting to see how disruptive it is. I mean, if you were talking earlier today about ChatGPT and how that's even disrupting the search business, which we don't participate in right now, but that could also be very disruptive and create more volume for us to add -- to verify. So I think next year, we might to be sitting here and saying, well, all of a sudden, there's all this extra volume that we didn't have. Last year, when we were here, we were talking about short-form video content coming online, right? It just came online, all of a sudden, there's more volume. I think that will be something that we're talking about where there's -- here's more volume for us to verify, which is a good thing.

Understood. I always appreciate the opportunity to have a conversation. Please join me in thanking DoubleVerify for being part of the conference this year.

Thank you.