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

Excited to welcome DoubleVerify, Mark Zagorski, CEO, here at the tail end of day 1 of the tech conference.

I guess to start off here. So there's been a lot going on this year. We've had some great customer signings, new partners, new product initiatives, but then also some headwinds from the cohort of 6. So could you just kind of provide a balance between those segments and give investors an overview of the company currently?

Yes. So I think you laid it out pretty evenly there, which is we had a little bit of a mixed year. I mean, last quarter, we showed 18% growth, which was a nice uptick in growth. We'll end up the year with around 16%. That's what we're guiding to total growth for the year. And we definitely brought on some big customers and have launched some new solutions as well. We did have a drag from what we call the cohort of 6 who are some of our larger advertisers who because of anomalous reasons, pull back on spend for the year, didn't pull our products off the shelf, but definitely spent less than what we expected. And we had a slower ramp of some of our social solutions in the second half of the year. Those were the drags. But if you look at overall, how the business is performing, Q3, we had social growth growing at 21%. We had ABS, which is our activation product, which we'll do over $200 million this year, growing at back into 14% growth. We had our platform business grow at 30%. So strong growth in Q3. I think we've got some great green shoots with new customer closes that we had, both earlier in the year, folks like Pepsi, Haleon, et cetera, as well as more recently with some names like Google and P&G who've been added to the roster that I think can provide growth heading to '25 and beyond.

So if we're thinking about growth, 25% beyond now, it really comes down to a 2 variable model, right? MTM measured transaction, media transactions measured, volume and MTF, which is just price. So how do you think of the major drivers for each going into next year?

Yes. We've always been pretty clear that our focus is on driving volume period, right? Like we're a volume-based business, the cost of measuring or analyzing another impression is very, very low. So MTF is mostly made up of a cross-sell of how many different solutions we can sell on that single impression, right? Can we analyze it for verification purposes for brand safety, suitability? Can we analyze it for attention? Can we push it into a pre-bid solution? So think of our main focus on driving volume, secondary focus on looking at price. The headwinds we have on price right now are social, which comes at a slightly lower price. So when we put it into the mix, if it becomes a bigger part of our mix, it kind of has a lower impact on price and global. So outside the U.S., our pricing is obviously lower due to the fact that the CPMs or the cost of the media in those markets, particularly in APAC, is lower. So as we become more social and become more global, you're going to see MTF for the price we charge kind of going down. But the trade-off there is that platforms -- social platforms are huge volume drivers. So we'll still see volume as being the main catalyst for our growth over time. And as we've shown this year, we've been able to grow volume and still drive overall company growth without impacting margins.

There was a term we used a lot, I feel like during kind of like the IPO process, which was currency. And can you just talk a little bit more about what that means within your business and the importance of establishing yourself as a currency within the partner ecosystem, but also kind of within each of the formats?

Yes. So I think when we look at currency, it's a bit different than most kind of static measurement currencies, whether it's Nielsen or something like that. We look at our rules and the transportability of our analytics as being our currency, right? Because every customer has their own suitability requirements that they come up with. Every customer has their own viewability and different standards they determine. So that -- think of it as like a unique brand currency that they want to take and why we call it currency is because they want to take it everywhere they spend. No advertiser just spends on social or just spends on open web or CTV. They want to be able to use the SIM analytics, the same rules wherever they spend. And so a big part of our overall kind of mantra is verify everywhere, right? Whether that is doing so through open web and doing through DSPs like Trade Desk and Google or partnering with folks like Netflix or Meta. Netflix on the CTV side, Meta on the social side, ensuring that we are engaged with every different venue through which advertising is being sold and that, that advertiser, whether it's a huge CPG company like Unilever or a tech company like Microsoft, they can take those analytics that verification currency that they've established for themselves and be able to measure on Netflix, on Meta on the open web and then also filter out impressions in a prebid fashion, so not just measure against those things, but avoid impressions that don't meet their standards across those platforms as well.

So recently -- relatively recently, you had one of your major competitors leave the market. And so a common question we've been getting now is just on what the size of the overall market is. So if you could give us some color, maybe even based on penetration to your own customer base, how do you think about what your TAM is?

Yes. Yes. So a few years ago, we looked at the TAM as being around $20 billion of potential measurement and verification opportunities that exist out there. And obviously, we're just scratching the surface. We work with about half of the top -- global top 1,000 global advertisers. And in those cases, we may just work with one line of business in one country, et cetera. So we've got a significant amount of growth to go after. We think right now, when we look at kind of the addressable market, we take about 0.5% of the media transactions that are available kind of in the universe that we exist in. So still very small. We think there's a big long-term opportunity for us to not only go to those other 500 advertisers that we don't work with, but further penetrate the markets in which they exist in. So I think 2 interesting points to think about. First, being only around 30% of our measurement revenue is outside of North America, right? So -- and if you think about global digital ad spend, over half of it is outside the U.S. So we're underpenetrated globally. And the second thing is if you look at social spend. Now social, whether it's YouTube or Meta or any other social platforms, ex-search is, by far, the largest sector of ad spend that exists. Currently for DV, it's probably around $100 million or so this year of our almost $700 million in revenue. So we're underscaled there as well. So I think if you look at the growth opportunities, there's global penetration. There's new brands we haven't sold. And then there's new sectors that we're still just starting to scratch the surface on like social and even CTV where I think there's opportunities.

Yes, that's kind of a perfect segue into the next question. And so we are seeing increased spend, which you're benefiting from on social and CTV. Given the price though of those formats, the money has to come from somewhere. So can you just talk about if you are seeing any sort of headwinds to maybe like the display part of the business from that shift? Or is this more net new spend that's being opened up for these formats?

Yes. I think for the most part, CTV is I think, predominantly net new spend. A lot of that is coming over from linear and those are dollars we never had access to in the past. So I think that is incrementally positive to us. I think dollars shifting to social. We talked about in the earnings call, I think that is -- that is -- it's not a new trend, but it's a trend that I think is continuing to suck away from the open web. And for us, I think it's an opportunity. We still are building solutions that are comparable to our open web solutions in social. We're not quite there yet. We don't have a broad array of what we call prescreen or activation tools yet in social. And if you think about ABS, which is our authentic brand suitability tool in open web, that's a $200 million a year solution. We have nothing comparable yet in social. So I think, again, I mentioned earlier that social is a big opportunity for us. I think dollars shifting there are -- provide a great opportunity for us once we can get our product set comparable to what we have in the open web.

And then you do, do some dynamic pricing, right, of video impression costs more than a display impression. But I guess to me, it seems like the value you're delivering on high CPM, CTV, your customers are really benefiting. I always use this analogy that it costs more to ensure a car shipping across the country than it does a letter. And obviously, CTV costs a lot more than a display impression. So I guess the way I'm trying to kind of frame this is it seems like you're providing more value on a relative basis. Do you see a shift in terms of a long-term benefit on what you're able to pull back, I guess, from the CTV environment?

Yes. It's a question we've been getting for numerous quarters, which is as CTV continues to grow, your pricing isn't taking an advantage of that growth opportunity. We don't take a percentage of media for the most part like others who are in the ad tech space do. So whether you're a Magnite or Trade Desk CTV impressions if you're taking 10% of it and you're taking 10% of $30 versus 10% of $3, it's a much better deal for you, right? We have a fixed fee for the most part. On most platforms, we've experimented with some percentage of media. But I do think there's one thing that's a bit different. And again, just to be very transparent, we have to provide a solution that's commensurate. Right now, on the CTV front, the biggest -- one of our biggest drivers of value is our ability to provide very granular brand safety and suitability measurement, both on the prescreen side and the postpaid side. Most connected television platforms only provide app level data to us when it comes to brand safety and suitability, right? We do fraud verification, viewability, verification on an impression level. But when it comes to safety and suitability, it's at an app level. That's a specific strategic decision that those platforms have made because there's a lot of fear around cherry picking of content, transparency issues, et cetera. We've seen this before. We saw this with social platforms who are resistant to sending granular data. But we know once that -- those platforms open up and start sending more granular program level data to us, there's an opportunity for us to grow. And this gets back to your question, this is how we charge more, right? There's two things. There's one, changing the model a bit, but there's also ensuring our product is at the same level of granularity and transparency for CTV as it is for everything else we're in, including social, open web, mobile, et cetera.

And then maybe switching to social. Could you just talk a little bit about both the growth we've seen this year but that -- on the most recent quarter, you announced a lot of new partnerships, including an expanded partnership with Meta. And just kind of talk about how investors should think about that in terms of the ramp to when those start to see value?

Yes. Again, kind of going into that whole narrative. We've had relationship, for example, with Meta for years. But that relationship has been, for the most part, focused on providing viewability and invalid traffic measurement on the news feed, which is the biggest part of their business. This year, we launched brand safety and suitability measurement on the News Feed, which has gone well. We've added 60 new customers since the beginning of the year. 9 of those were top 100 customers, so some of our bigger customers launching. But we believe very similar to the open web that our real opportunity in social is when we cannot just report and measure against violations, brand safety and suitability violations, but actually help advertisers avoid them in the future. So the second half of the year, actually in Q4, we announced that we'll be launching a [ V1 ] brand safety and suitability prescreen solution across Meta. We think that's going to be a really nice unlock for us because the only friction that we've been getting from advertisers on the Meta solution that we launched was, hey, this is great. We love this thing. It's pretty cool. But I want what I have in the open web, which is I just don't want to understand there is a violation. I want to be able to avoid it next time. That's what we'll be launching. So I think it's a pretty exciting unlock. We also announced that we're working on a prescreen solution with TikTok as well. And these all complement what we're currently doing in with YouTube, where we have a prescreen solution across YouTube that we acquired through a company called OpenSlate a couple of years ago, and we've been evolving over time.

And it seems just kind of going through that compared to the answer from the previous question. What do you think, based on what you saw in social is going to be CTV's maturity curve to start opening up more? Are there parallels, are there reasons to think it won't happen the same way? Just kind of how you think about that?

Yes, So in full transparency, we've actually already started cracking that nut. So we started working with one of the major CTV platforms who's providing us program level data, and we are kind of driving a higher level of transparency to buyers on that platform. And whether it's causation or correlation? I don't know, but their volumes have grown 90% year-over-year with us. So I'd like to think it's because they're being [indiscernible] there. So I do feel that we are going to get to a different type of relationship with the CTV platforms. And there are definitely external factors that are driving that. Amazon coming into the ad-supported CTV business was like a huge earthquake, right? All of a sudden, tons of impressions got thrown into the mix. which changed the dynamic. It lowered CPMs, number one, but it also put more power into the hands of buyers. They had more options for premium CTV. When buyers have more options, they demand more transparency, right? So what that drives is a greater demand for those platforms who basically maybe haven't been providing program level data to do so. We saw this with the social networks, where there are basically 2 catalysts. The first was advertisers knocking on their doors saying you need to work with third parties in a more transparent way. The second was competitive impression, right? So we know that platforms are like Domino's. If one opens up, the rest will start to slowly go. We saw that with social. I think we'll see in CTV.

Yes. And we've talked about that previously, kind of this push-pull dynamic right, where maybe for Meta, being one of the earlier days you push. But then once you have the currency, people understand and you can use DV to buy on Meta, then all of a sudden new platform like a TikTok wants to pull you in to kind of share some of that respectability. And so is that kind of a similar dynamic that might come through CTV?

I believe so. I mean, look, I think another good example is Reddit, which has been an amazing success as an advertising story out of the gate. They were really smart. They were like, look, before we come to market, we need to have like third-party validation of what's going on. So they're sort of very early bringing us in and we -- even before they were like their IPO. They're like, "We're going to have verification partners and we're going to do this in a legit way." Netflix is another example of -- although they didn't go fully as granular as we want. Remember, they announced an advertising business and they started kind of trying to socialize it. And within 60 days of that socialization, they came back to us and said, "Oh, we've been told we need to have verification, at least a fraud and invalid -- invalid traffic and viewability." We're like, cool, so we launched with Netflix very early. So there is a dynamic now where we work with -- if you think about it, we work with the 2 largest CPG companies in the world, right, the top 2. We work with the 2 largest software companies in the world. We work with the 2 largest media companies in the world. And that kind of impetus and strength kind of opens doors. Like people don't care about double verifying, but they care about Unilever and P&G. They don't want a meeting with me. But when I say that, hey, the folks at Google or at TikTok, who are both advertiser partners, they're interested in kind of you guys opening up a bit, like that matters. So I do feel like we've now got to a point where the relationships that we have with some of these large advertisers is incredibly valuable to opening doors.

One thing we touched on briefly was the recent exit of one of your competitors. So in Oracle shutdown mode, so you brought up last quarter that you had a 70% win rate on those deals. And I've heard you speaking about some of those wins throughout kind of our time up here. Can you talk a little just about how a typical customer ramps, and then also how these might be similar or different?

Yes. So the -- these are very different kind of deals from kind of the nature of how they entered us into how they're going to scale over time. So think of a typical deal that we go after, and I'll use Microsoft as an example, like I was in Seattle in January and 6 months later, we end up closing a great deal with them. It was a long process partnership, working on strategic plans together, very little discussion of price and more about functionality, right? This was the exact opposite. When Moat decided to shut its stores, it was not a 6-month process, it was a 6-week process that was incredibly compressed. And it was get us a minimum viable product as cheaply as you can, as quickly as you can because we don't -- we're not going to have a solution in 6 weeks. Very different discussions. So why I lay that out there as we talk about ramping, it was literally doing triage with some of these customers, like get us something in here. And then we'll ramp over time. But like you just saved my life, don't try to sell me cosmetic surgeries right? And that was kind of where we sit. And I think -- so the ramping of these customers will be -- we looked at the lifetime value for all of these guys. We said, okay, our average top 50 customers have been with us for 7 years. Let's look at what we think our ramp can be of these customers over these -- over the next years and work with them to grow our platform across them. So it's a long way of saying, we're starting off small with some big names, but hopefully, they will become bigger customers over time as we expand our portfolio of goods with them as we grow our partnership with them globally, et cetera.

And then maybe thinking about those customers, but all your customers and the cross-sell opportunity, tremendous success with ABS. But now you're kind of running into some of the challenges of that success, which is once everybody has it, it's hard to keep having those same growth rates. How do you think about Scibids and Authentic attention if those are the right 2 products to kind of focus on as like the next stages and maybe relative to ABS or just the cross-sell motion in general?

Yes. So I think ABS, which has been such an amazing growth driver for us. I mean we still -- of our top 500 customers, we're still only penetrated with about 68% of them, right? So we still have some growth to drive out of that solution. And as we add new customers, we have upsell opportunities there. So ABS great solution. In that Monty Python movie, if you remember, like it's not dead yet, right? We've got a lot of life left in it. So let's look at kind of other catalysts for us. I think Scibids has been performing at the top end of our expectations. That is we've had good several dozen new Scibids customers so far this year. I think 15 of our top 100 customers have picked up Scibids. So I think that is a real the grower, we said we've got a $100 million target by 2028. I think we're on our way to that number. So I think that's a good one. Attention is still -- is small, growing at a really nice pace. Do I think it can be as big as an ABS or as a Scibids, that's going to be a tougher one. I think the market is still kind of -- I think the entire attention market right now is probably a $50 million market. So that's got to kind of get more legs behind it as a market, I think it could be that big. I do think that social prescreen is probably -- and particularly Meta, is probably one of our bigger catalysts. If you think about -- we'll do around $100 million or so in social measurement this year. Meta is a big chunk of that. If we can show the same type of penetration for prescreen on Meta as we do post-bid. And right now, our prescreen solutions are priced anywhere from 2 to 2.5x the post-bid, you've got a nice potential growth opportunity there. So I think that is really going to be a vector, which we're going to lean into is like what does prescreen social look like over the next several quarters and next several years?

When we're thinking about the cross-sell in general, I think one of the things we talk about with all these new products is shifting from brand safety kind of cost savings to performance, the revenue generation. Can you just talk about kind of like that dynamic of like is it repositioning yourselves with your customers to get them to kind of see you in another way?

Yes, I've been talking about this kind of evolution from protection to performance literally since the day I started the role here. And although it may seem like there are 2 separate things, we've always based it on a one kind of concept, which is -- what we've always done is take garbage out of the system, right? If you take impressions that someone can't see or that were generated by a bot or that are not brand safe, like what's left performs better? So we've always been a performance business, but we've just never said it. So I think, a, in our minds, the transition hasn't been as great. In our customers' minds, they always look this as really a protection business, right? With the advent of ABS which actually not only protected spend, but advertisers saw ABS drive better results and better ROI. I think that narrative started playing out with the addition of tools like Scibids, which not only can drive a more efficient spend, it can work with our safety and suitability tools to not only allow an advertiser to have better media quality, but do so at a cheaper price. And I think this is what we're going to see. When we talk about why we're excited about Scibids, I think it becomes the third leg of the stool. So if you think of -- we've got pre-bid, and I'm doing this -- if this is on audio now, I was going to be able to see what I'm doing. But we've got pre-bid and post-bid, right? You've got activation in our business, which filters. You've got measurement with measures. The third leg of that stool comes Scibids which can optimize. And what that can do is allow an advertiser to say, I want a very high level of media quality, I want to filter out the impressions that don't meet that level of media quality. But I want you to do so as cheaply as possible. So play with the bidding algorithm, right? And we do this right now through DSPs to try to manage all 3 of those criteria. That is unique to DV by far. None of our competitors have the ability to do that. We are doing that in the open web. We bought the company a year ago. In the last year, we both have grown it independently, but we've started embedding that in all of our discussions and are going to be tying those tools even closer together. So think of performance not being something that will protect and perform -- not protect or perform, it's protect and perform because that third leg of the stool is going to become an increasingly important part of way every buy is done for media quality and verification, not just in the open web, but increasingly in social as well. And that's something that we're going to work on as we roll into next year. We alluded to into the call is that we've been able to now implement Scibids in some social platforms to actually lower the cost of delivering high-quality media that still meets their safety and suitability criteria.

We're running out of time here. So I just wanted to double check. Is there anyone in the audience that has any questions? Wait for you to finish your drink. All right. So how should we think about kind of the strength of the adjusted EBITDA to be -- both in the quarter but also in the guide. And because both came without -- it wasn't margin beat, it was an absolute dollar beat without revenue upside. And so how should we think about how sustainable some of these efficiencies or cost savings are if we do get into a better growth environment?

Yes. One of the things we've always said is we've got a lot of leverage in our model, right? It's highly profitable. We kick off a lot of free cash flow every year, and we do so while still continuing to invest in innovation. Last quarter and rolling into this quarter, we were able to raise EBITDA guidance even though revenue kind of wasn't growing at a commensurate level, and it wasn't because we were pulling back on innovation, but it was actually based on a couple of things. The first being our sales and marketing spend is actually in a good place right now, right? We've talked a lot about investing globally to catch up with some of our competitors who have bigger footprints on sales outside the U.S. I think we're in a good place now, you're going to see that start to plateau. Innovation continues to -- we continue to invest in that. So that's not going to change. But we're also -- we've made strides on the gross margin, right? We started the year kind of guiding to 80% to 82% gross margins. Last quarter, we had 83% gross margins. That all drops to the bottom line. What's beautiful about that is the way we've been able to drive that in a large part, is by lowering cloud costs. Our volumes keep going up, but our efficiency to do -- to manage all of those impressions is getting better and better because we've launched tools like our Universal Content Intelligence solution, which lowered the cost of analyzing massive amounts of short-form video. Think about TikTok, Reels, YouTube Shorts is becoming a bigger part of our business. Analyzing that by using predictive modeling, not looking at every frame of a 3-minute video, but actually looking at one frame and using AI to decide in that 1 second in which there can be 30 frames a second, if not more, we only need to see one to predict what will happen. You don't need to look at every frame. That's lowered our costs. We drop that right to the bottom line, and I think that is the power of our model moving forward is investing in innovation, not just to make sure that we're competitive but make sure that we're doing what we do more efficiently while managing costs over time.

With that, we have 15 seconds. I don't think I can squeeze in another one. But Mark, thank you so much for coming back.

Absolutely. Thank you.