Integral Ad Science Holding Corp. (IAS) Earnings Call Transcript & Summary

Welcome back, everyone, to the Software Conference where we have the pleasure of introducing IS team. Lisa is with us, CEO; Joe is CFO; and Jonathan is also with us. He is VP of Investor Relations. He had spent 7 or 10-plus years at Blueshirt helping advise East Coast-based companies, spent 3 years at the NASDAQ as the VP of Listing and Capital Markets and brings a tremendous amount of experience in investing, in IR to the team. So I want to welcome everyone together. And thank you, Jonathan, for being part of it. I think what you're going to find here is an incredible team. Lisa and Joe, both worked at Amazon. Lisa also had a chance to work for one of the best software companies in the world. So from the leadership perspective, very rare to find the quality of the leadership on both software and Internet combined. And I think that's what makes Lisa really unique among many other things. So Lisa, thank you so much for taking this off. And for those that are still kind of coming up to speed on your story, maybe you can just set the 40,000-foot view from your side and maybe we'll follow up with Joe after and we'll let him go through kind of why leave Amazon to come here. And ultimately, what's driving the financials at such a great rate. Give us a little sense from your side and we'll let you guys kick off with that. Thank you.

Hi, Brent. Thanks for having us, and good morning, everyone. I'm Lisa Schneider, CEO of IAS. I joined IAS 2.5 years ago, shortly after the Vista Equity Partners acquired the company. As Brent had mentioned, I've spent 20 years working for global tech companies, including Microsoft, Amazon and Yahoo! building ad businesses. I'm very passionate about all things related to technology and data and honored to be CEO of IAS and on this incredible journey. So in a nutshell, what we do at IAS, we're a leading global ad verification company. And the way we think about that, think of the Nestle video ad running on YouTube. Our software solutions verify that the Nestle ad was viewed. It was viewed by human and not a bot. There was no fraudulent activity. That Nestle ad ran adjacent to brand-safe and brand-suitable content. The last thing that Fortune 500 brands want to do is run adjacent to violent content or hate speech. And in addition to that, we also more recently launched a contextual targeting solution, helping the Nestles of the world, programmatically seek out segments that they want to run their brands adjacent to in terms of contextual environments, but also contextual environments that they want to avoid. We're a global company. We've been around for over 10 years with over 2,000 customers around the globe. The majority of our customer base, over 90% of our revenue is advertiser direct and we also have a robust publisher business with over 150 strategic publishers. Joe, would you like to introduce yourself?

Yes. Hi, everyone. As Brent said, I came from Amazon, Joe Pergola, Chief Financial Officer. I started out my career at Ernst & Young and worked in the Capital Markets role at Time Warner and then post MBA, have really been building best-in-class companies in finance divisions across Yahoo!, CBS and The Weather Channel. And Brent, I love that question of why did I leave Amazon to come here. So there's a few things. Of course, a bittersweet, but at the end of the day, main one was, Lisa Schneider is legendary at Amazon till to this day. I love that when I had the conversation with my leader over there when I was making the jump. He said he would be the only person he would allow for me to go work for, outstanding reputation, I've known about her in a career for quite some time. And then the entire leadership team and the mission of IAS. While I was at The Weather Channel, I was actually a customer of IAS. So truly embrace the ROI value proposition of digital media quality there. I know your other question was about our financials, if you'd like me to jump through, I could walk you through our business model.

Okay.

Good. Sounds good. Okay. So as you know, we have a very agile and scalable business model where we're focused on high revenue growth and margins, and our solutions are always on and they're measuring all impressions on behalf of our advertisers. And we partner with our top global advertisers and marketers, a significant amount of the Fortune 500, and we serve over 2,100 customers globally, supported by about 11 offices worldwide, 8 countries. It's been really interesting in this virtual time during COVID and we've had incredible acceleration internationally across LATAM and APAC and we're adding great customers at the regional and local levels there. And we break out our customers across our financials in 3 ways with 2 main differences. First, our advertiser direct and our programmatic revenue represents all of the spending from the buy-side customers. Those are our advertisers and marketers that we work with. And then our supply side revenue, those are our publishers and that's where it's reflected those relationships that we have with them. Our average top customers have spent over 6.7 years with us. And coming out of Q2 '21, our net revenue retention was 142%, high watermark first, of course, and we continue to expand our large customer base that spend over $200,000 with us. As of Q2, that group stands at 187. That's a plus 21% lift period-over-period. So those are our customers. I always like to make sure that everyone understands who those are. And then with regards to our revenue model, it's primarily based on impression volumes and we transact with our advertisers with fixed CPM rates. It's independent of the media rate CPM that our marketers and advertisers work with and we continue to work with those top advertisers to sign multiyear minimum impression commitments. And what that allows for is not only the revenue growth and the acceleration with our long-term customer base but a lot of visibility into our forecasting in our business. And then key drivers for us as we accelerate through this digital-first lifestyle, it's that increased consumption on premium video and CTV and use of our contextual control products via the programmatic channel, those are all premium price for us, which continues to drive our business model.

We talk in the software industry about a rule of 40, if you're 30% top line, you get a 10% margin. I think last quarter you had the rule of 89, with an incredible top line at 55% and EBITDA at 34%. So you're hitting more than double what the software industry talks about. I understand, look, we've had a surge of digital ad spend come back, you're helping ensure that, we'll obviously come into tougher comps and market will theoretically slow down relative to what would happen, obviously, still stay strong. But when you think about what's enabling you to have such a balanced model of great growth and margin? It's fairly rare in the tech industry. What's the secret sauce? Why is this happening? Why is this sustainable? And I'm not asking in saying you're going to have a rule of 89 forever?

I would say rule of 89 similar to net revenue retention of 142% is a high watermark for us. We really looked at rule of 60 as a North Star for our business, focused on that top line revenue growth. We've been very efficient. There are some timing there, return to office costs, things like that, hiring ramps and other things that continue to power our investment in product and technology. What I would say rule of 60 North Star. But as we continue to expand internationally and our programmatic business, as you saw, it went from 34% to now 42% of our portfolio, we continue to create that efficiency that drops more dollars to the bottom line.

And Lisa, I think doing all of our due diligence on you guys, when we talk to advertisers, they were very clear. It's different in SaaS where you might have 5 different SaaS companies, but it's very clear when a large global brand makes a pick to ensure they go with one. They don't go with many. Like you guys are pulled into some of these big, big global brands. Maybe give us a perspective of why that dynamic exists in your market and we don't see that in any other market.

Sure. So it is a dynamic we've seen at IAS, especially the last 18 months that more and more of these Fortune 500 global marketers, brands like Nestle, Coke, Glaxo Smith Kline, Adidas, who are all global strategic accounts of IAS customers. More of these brands are taking brand safety and brand suitability to a much more strategic level at the C level of the companies. They're looking for one global verification partner to work with and they're leaning into IAS. And we're seeing more of these brands sign strategic global accounts, 2 to 3-year contracts with IAS and it gives us tremendous opportunity to both cross-sell with those accounts and then also upsell them with new products and expand into new markets. A big differentiator for IAS is our global footprint. Our revenue split is 60-40. 40% of our revenue is based internationally because we've been in the international markets for over 8 years. We have deep, deep roots both in EMEA and APAC. We continue to invest in emerging markets like Latin America and Southeast Asia. And I would say that's one of the biggest differentiators between us and our competitor is our deep global footprint and a big reason why these global marketers are choosing IAS.

We get the question, why can't Google, Twitter, Snap, TikTok, all these platforms, why are they not offering this as part of their own solution? Is it easy to say that you just need independent auditor that is in this and you will become the independent provider? How would you address that question?

Sure, great question. The story, a quick story I'd like to share is, when I joined IAS, having spent 20 years in the field, working closely with customers, meeting global sales organizations, I'm customer obsessed is one of our company values. And I went on a customer listening tour. I met with 50-ish customers, partners and the consistent piece of feedback I heard was IAS earned the business of trust. Marketers trust that we are an independent third-party verification company. They trust the accuracy of our technology and they never want a Google or a Facebook to grade their own homework, as these marketers move more and more of their linear TV dollars to the social platform. So being the Switzerland of the Internet is just so important for these marketers and we will continue to build trusted relationships with them.

It seems like you've had a very good relationship with Google. Can you just maybe talk to what you're seeing there as it relates to that partnership?

Sure. It's an area, a partner, I personally spend a lot of time with Google coming from companies like Microsoft and Amazon. I so believe in the power of global, scalable platforms and driving deep integrations with these platforms. Google, in particular, we have a very trusted relationship with them. We are so far under the tent with Google. We have joint product road maps every year. We launch roughly 2 to 4 products with Google annually. And many of these products are first to market. So for example, Google auto-tag, which enables marketers to launch verification solutions seamlessly across the Internet. It's embedded in the Google UI, push of a button for the marketers. Second example is our contextual targeting context control solution that we launched about 17 months ago. We are still the only verification provider to offer contextual targeting in Google's DV360 in their DSP. So Google is just a tremendous partner and we'll continue to partner closely with them.