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

All right. Good Wednesday afternoon, everyone. We're thrilled today to have IAS with us. Lisa and Joe are both here to talk -- live to talk through what IAS is, the -- all the excitement around the business, how you think about the competitive dynamics and everything going on on an advertising ecosystem. So it's great to see you.

Yes. Great to be here. Great to be here in person. Hi, everyone. I'm Lisa Utzschneider, CEO of Integral Ad Science. I joined IAS just over 3 years ago and have spent 20 years in technology, working for companies like Amazon, Microsoft and Yahoo!.

Yes. Hi, everyone. I'm Joe Pergola, Chief Financial Officer. I've been with IAS for about 2.5 years now, previously coming from Amazon and I've been in media and finance for about 25 years.

Great. Let me start with the disclosures. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk. Some of the statements that Integral Ad Science makes today may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements made today are based on assumptions as of today, and IAS undertakes no obligation to update them. Please refer to IAS' Form 10-K for a discussion of the risk factors that may impact actual results. Check.

Okay. So is this sort of table set for everyone. Talk to us, maybe, Lisa, about sort of a higher level picture of what are IAS' core 2 or 3 value propositions for advertisers? And how do you fit in to this really complicated online ad ecosystem?

How much time do you have? So IAS, we're a leading digital media quality company. We are global. We have over 2,000 advertising customers. So we're heavy on the buy side. And basically, we do a few things. So if you think about a Nestle video ad running on YouTube. Nestle, they don't want Google grading their own homework. What they want is an independent third-party verification company like IAS verifying a few things, right? So Nestle wants to know that the video ad was viewed. It was viewed by human and not a bot. There was no fraudulent activity. And also that, that ad ran adjacent to brand safe and brand suitable content. And that's an area, in particular, with brand reputation has become paramount given all of the unprecedented events that we've been living through over the last 2 years.

And continue to live through.

And continue to live through. That's right.

Let me just cover that topic for a second. There's a lot of unfortunate situations happening with Russia and the Ukraine and the overall, the macro world, how do you think about this type of situation impacting IAS in the near term and the long term?

Yes. So first, our hearts go out to the people of Ukraine. It's a horrific situation. And like I said, we've been living through unprecedented events over the last 2 years. So when you think about -- and we've spent time talking about this, the pandemic, Black Lives Matter, the unprecedented elections, the events of January 6 and the fact that as we -- it's so great to not be at home right now. But over the last 2 years, as society has been doing everything from home, working from home, living at home, the reality is that the user adoption of social platforms has skyrocketed, the same thing with viewing stream content. And marketers, they've had a difficult time navigating through the unprecedented times and, in particular, navigating through the social platforms, right? It's highly dynamic, unpredictable content, short-form video, and they're looking for a solution to help guide them, know which content is brand safe and which is unsafe, and that's where we come in with our brand safety and brand suitability solutions, the same thing with our contextual targeting solution in programmatic.

Okay. That's helpful. Programmatic is 1 of the 4 pillars that you often talk about, programmatic, international, CTV and social. So maybe grade yourself a little bit. Talk to us about of those 4, where have you made the most progress and you're really seeing it impact the model and the cash flow. And then as we sort of look into '22, '23, which of those 4 do you sort of see the most next-level execution to come to drive the business going forward?

Okay. So if I were to grade myself, a report card, a few things. So programmatic, since joining the company, we've doubled down in programmatic. It has absolutely been an accelerator and tailwind for our business. There were 2 parts to programmatic. The first is our prebid verification product. So all the things I was talking about before, viewable, brand safe, brand suitable, no fraudulent activity, we have prebid verification solutions integrated in all of the DSPs. But the second area, which has turbocharged our programmatic growth, and Joe could speak to the numbers, is a contextual targeting solution that we launched actually in the height of COVID, March 2020, when it really hit the height in the U.S., and it does 2 things. We create about 300 contextual segments. When we launched the product, we embedded it in The Trade Desk, and we've launched these prebid segments so that the Nestles or the Cokes of the world, they can identify what I call the set it and forget it. Here is the content, for example, hate speech that no Fortune 500 brand would ever want to run adjacent to. That avoidance category has driven significant growth for our programmatic business. We've seen rapid adoption, especially in the U.S., the avoidance makes up more than 90% of our revenue. And now we're focused on contextual targeting. Those are the segments that we are guiding marketers. We're proactively what is the content that they want to run their brands adjacent to and are suitable for their brands. Another reason why our context control product is in high demand is just the shifts that we're seeing in the digital ecosystem, moving away from audience-based targeting right away from consumer PII data over to contextual solutions and our technology, and I can spend time talking about the tech, but it is highly sophisticated and differentiated because our tech, literally, it reads the web, the page like a human, and we can classify content, both based on semantics but also sentiment or emotion of the page. And being able to classify content based on emotion like love or hate is very important to marketers because it means our technology can classify things like hate speech on the page.

Yes. All the contextual targeting and the reading of the content and the category you can target with, there's a lot to build there. You mentioned the tech. Where do you sort of see the next level of innovation in that contextual targeting and all those tools going? What are your advertisers asking for next in that product?

So it's been a journey with the advertisers, and there are a few things. So we're constantly creating new contextual segments for them based on their needs. A good example is fourth quarter, hopefully, we're getting out of COVID, and now we're back face-to-face, but creating new segments like luxury goods, right? There are more and more consumers out shopping for luxury goods or travel segments. But the other thing that we're looking at with these contextual segments is embedding them in things like, and I could spend time on social platforms, some of the technology that we've built within the live feed of social platforms. Again, to create greater, more nuanced, sophisticated ways for marketers to put their brands adjacent to content that's suitable for their brands.

Let's talk about social a little bit then. I mean it's interesting because for anyone who's new to the name, give us a list of all the social networks that you're already working with.

All? I mean...

Yes, all of them, right? Differences in inventory where you're integrated to pieces of all the social networks. And yet, I know we have to ask about TikTokers because of the content and the type of content that's on there. So talk to us about sort of learnings you've had with your TikTok integration. How port and how portable are some of those learnings to other platforms or other feed platforms from the other companies that could start with an ad like meta?

Yes. So I'll start macro and then I'll get to the tech. So when you take a look at the digital advertising landscape, roughly $350 billion market, that does not include search. Three platforms make up the lion's share of that between Google, Amazon and meta. They make up about 65%. And marketers, they're looking for more places to move their linear TV dollars over into the social platform. Up until last year, the social platforms didn't open up their live feeds to third-party verification companies. And marketers were hesitant to start running a lot of brands in the live feeds because they didn't know if it was brand safe or brand suitable. So take TikTok, for example, highly dynamic, massive amounts of volumes of inventory, short-form video, highly unpredictable, right? I'd love to see a show of hands, how many of you use TikTok? But brands are nervous. They want to connect with that younger demographic. They want to engage their brands with the users but they're very nervous about the unpredictable dynamic nature of a TikTok. And so marketers, they've been really putting a lot of pressure on the TikTok, the Twitters, meta to open up their live feeds for verification companies to come in and build brand-safe, brand-suitable technology. We did just that with TikTok in the back half of last year. We built 100% machine learning, AI technology. It's a multimedia technology, where we can classify video, image, audio, text, real-time in the feed. We can also identify in the video real time, that's a man, that's a man with a gun. That's a glass of milk. The AI is getting smarter. This technology right now, we're running it in 3 markets, so U.S., Germany and France. So that means 3 languages, which also creates -- adds more complexity. We've run it in about 80 campaigns, and we're receiving very positive feedback from the advertisers saying, "We are rest assured that when we're running our brand messaging within the live feed of TikTok, it's brand safe and brand suitable." One other thing about TikTok, and they've been a great partner, that they've publicly declared they want to be the most transparent social platform on the planet, and they're very committed to making sure they have sophisticated brand-safe, brand-suitable technology. The next step of the tech is we're working on a postbid measurement. Basically, the way that works is Coke. Coke is running their ads, let's say, in TikTok. We'll tell them, yes, this is brand safe, brand suitable, nothing questionable. The postbid measurement just confirms, "Coke, we're confirming all of the ads that you ran. You're good to go with the environment." We're also on track first half of this year to launch it in a dozen markets. So feeling really positive and excited about TikTok. Next stop will be Twitter. We're heads down with Twitter now. Twitter is a little -- it's not as technically complex because Twitter is more text-based, less video, but the beauty of the technology that we built in-house is it's portable, so we can pick up the tech in TikTok, move it over to Twitter.

Great. And we will stay tuned on any other announcements. I know there's been things in the press about meta, but I'll leave that there. What about YouTube? I feel like -- I get asked a lot by investors about TikTok, but not enough about your partnership with Alphabet and YouTube. Talk us through sort of how you interact with Alphabet and all the YouTube ecosystem as well.

Sure. So we have a -- I call it, we're far under the tent with Google. We have a very strategic enterprise-type relationship with Google. I personally spent a lot of time with Google, ensuring that we have a joint product road map. We co-innovate together. We launch first-to-market products with them and/or we have products that our competitors just don't have with Google. The other thing Google has completely embraced partnering with third-party verification companies. They recognize the importance that marketers aren't okay if Google grades their own homework. And I mean, I could roll off all the things we're doing with Google, but both on the DV360 front, Google's DSP, we're doing some pretty amazing things just providing more transparency to marketers. So it's less of a black box what they're running. And then in YouTube, same thing that we're ensuring that the videos that are running are high quality within the thresholds that marketers are looking for. And then we've also launched some cool automation with Google so that it's seamless. The experience is seamless for advertisers when they're running their verification solutions across the web. They've been a great partner, Google.

Got it. Okay. You mentioned competition. I know you never shy away from talking about competition. So let me ask you about that. It's largely a 2-player market to an extent. I would say globally, I know they are smaller players, but there's sort of 2 primary companies that have the suite of products like you do. When you do go through bake-offs or competitions for business with your competitor, what are sort of some of the key factors that enable you to differentiate and win the business? And what are the areas where you say, here's where we can improve to have a higher win rate?

Great question. So I'm as competitive as they come. as you know, and what I'd call was a 3-horse race. When I joined IAS 3 years ago, it's a 2-horse race. So when I joined, it was with Oracle and Moat and DoubleVerify. Now it's a healthy 2-horse race. So in terms of jump ball and differentiation, there are a couple of areas that -- where we are absolutely differentiated and is a reason why our win rate has been so high. The first is our international footprint. We are deeply embedded in EMEA and APAC. We've invested in emerging markets like Latin America, Southeast Asia, I could go through all the markets, India. The reason why broad global reach matters is that we're seeing this shift that more and more advertisers are signing deals directly with us. They're global deals, they're 2- to 3-year partnerships. And if you take a look at a global partner like Coke, they're running 500 brands across 200 markets. Our presence in those markets and our ability to launch scalable product, it really matters. So international, the differentiation of our tech context control is one. Another one is connected TV. So we made a strategic acquisition last year with a company called Publica. They are a leading video platform. So I could spend 3 hours on this on CTV. But the way to think about Publica and that the assets that they bring to the table, IAS is heavy buy side, 2,000 advertisers. Publica is heavy sell side or publisher side, deep integrations with leading video publishers like Samsung, Viacom, CBS, Philo. And when you think of -- and I could explain more about what Publica has, but the beauty of having both healthy buy side and sell side is the data, and we're able to leverage the data, both on IAS side and Publica to help marketers have greater transparency into where their ads are running in programmatic CTV. So huge, huge opportunity with CTV and a big differentiator for IAS and the reason why we're seeing more advertisers lean in to our solutions.

Well, maybe we could -- let's talk about CTV a little bit because I mean, I think, you have years of experience in the ad industry and it sort of feels like CTV has sort of been the next big thing for 10 years. I feel like CTV has always been wait until next year. As you sit here now and you have conversations with advertisers, whether it's Coke or anybody else, where have we made the most progress in getting dollars on CTV? And what are the hurdles we still need to overcome to make it easier to get more of the linear TV dollars to move to CTV in your opinion?

Yes. I would say it's a couple of things. So we are seeing the dollars move. I mean of the $350 billion market, CTV is roughly $25 billion, but growing exponentially. But when I talk to marketers about, okay, what will it take to move those -- really move the linear TV dollars over, they just -- their response is, "I just want to know where is my ad running in programmatic CTV," right? So if I'm Unilever and I'm running a Dove ad on The Today Show, talking TV, I know it's NBC, I know The Today Show. I know it's a 30-second spot. I know the content. I know it all, like I have the transparency. Before we -- the recent metrics that we launched, in programmatic CTV, all they know is device and app. That's it. And recently, because of the Publica acquisition, we just launched a product where we're providing transparency to the Unilevers of the world, showing them, here's the device, the app, the category, the genres, so they don't feel like they're operating in the dark. And I think bringing that transparency, driving higher yields for the video publishing platforms like a Samsung, helping them optimize their inventory. And then the third area, I hear this all the time, is frequency capping. I even see it in my house, the same app over and over, and that needs to be addressed both in terms of creative and frequency capping.

That's really a good color. I think before I ask another one about Publica, I actually wanted to ask another about the life cycle of your advertisers because you have a lot of different services. It's probably helpful for you to explain to the audience how do the advertisers start? What are the gateway products? And then talk to us about how the relationship evolves with your advertisers over time, more products, more upsell. And what does that do to the lifetime value of the advertiser or client over time?

Yes, I can take a crack and then, Joe, if you want to add. So the life cycles are different. So with the Fortune 500 advertisers, it is a longer sales cycle. But like I said, we're seeing this trend of client direct, global, verify all of my digital advertising wherever it runs. And so those deals, the life cycle is walking them through our product portfolio, understanding what their goals are. But the good news is because we now have wins under our belt, we have a playbook, like this is -- it's one thing to sign a global deal, it's another thing to execute that deal flawlessly. It's another thing to light that deal up in multiple markets on day 1. And I'm very proud of our team and of the fact that we have that playbook. We have these wins under our belt, and we are demonstrating over and over the ability to scale and light up these deals and then upsell and cross-sell. So there's that. But programmatic, being a growth driver, that's also accelerated how fast we're able to grow these advertisers because, for example, the context control, those segments can be lit up very, very quickly. They can be built quickly and lit up quickly. And so that's accelerated. And then the third area where we're seeing tremendous opportunity is the mid-market. So north of 200 accounts. Mid-market is an area, especially in the U.S., where our team is in place and they're really starting to put some nice wins on the board, and we're activating those deals quickly. Is there anything you want to add, Joe?

Yes. On the customer journey, last year, we saw a 30% improvement in those deal signing, the turnaround with the sales team. In addition to that, we -- as you see in our net revenue retention of 128%. Our top accounts are with us almost 7 years. It's that stickiness of our products, that trust. And then we're also dealing with higher and higher decision-makers, working with the chief marketing officers who are looking at their brands globally. And as we enter into those markets, lighting them up as well. So the customer journey, as Lisa said, cross-sell, upsell as we extend into new products into new markets.

Okay. Maybe a two-part then on investment. Lisa, I'll ask you first. So I know you took a lot of steps around the sales force and the sales team when you sort of came to the company. Where are areas where you still see opportunities to improve the sales force, hunter-farmer structure? However you think about, let me hear about that. And then, Joe, as we sort of think about investment for the year, talk to us about head count growth, areas of focus from an investment perspective, and how you think about margin profile.

So on this one, how much time do you have? So over the last few years, we've really transformed the company, top to bottom, go-to market, in particular, upgraded the sales organization, the customer service organization. And the areas where we're very focused on right now is ensuring that we are building trusted, deep partnerships with those Fortune 500 advertisers, hiring sales reps who understand how to develop enterprise-like relationships that are global, that is very, very different than having a client in 1 market. Global is a whole new ball game. And the other area, too, is investing in agencies. So we hired a leader last year who's very skilled at building strategic partnerships with the holding companies. So we're investing there. And then also, as I mentioned, mid-market is an area where we're investing. And also with our learning and development and training, we're constantly training our teams to understand the products more deeply, understand how to grow the accounts.

And on investment internally with the head count, as you saw Q3, Q4, we brought in over 100 heads each quarter. We're well on our way in our head count plan for the first half of this year is on the heavier side, really investing in that flywheel effect, powering product and tech and engineering towards those initiatives to drive that top line revenue growth. And the overall business model is very efficient. We're a rule of 60. As you saw with our -- the midpoint of our full year guidance, top line revenue growth 30% on the margin side.

Okay. Let me come back to Publica a little bit just because it is so fascinating with CTV. I think at the earnings last week, time flies, you talked about it being 8% of total revenue in 2022. I would be curious to hear about -- what's in that number? Is that the current products? Are there new products to come as we're sort of thinking about what is all in that 8% of revenue from Publica? What makes up that revenue base?

Yes. So it definitely is factoring in our product and tech road map and what we expect to roll out for our customers and monetize for 2022. As you saw when we acquired them in August of last year, they made up about $10.7 million at your -- contribution to IAS about $18 million pro forma. So if you take the midpoint of our guide and [ add ] 8%, that's well north of $32 million, $33 million. It's an outstanding business, both accretive to the top line revenue as well as our margin.

Okay. Time for 1 or 2 questions, anybody in the room?

We answered all of them.

I guess so. I think -- none in the room? Let me ask one more then. The sales force intensity as you try to go into the mid-market, how do you sort of foresee the sales force changing over time? How many salespeople do you need to work on a Unilever like client as opposed to mid-market? I imagine each salesperson will be responsible for multiple clients. So how does the sales force structure change over time?

So having run sales teams for a long time, I'm a big believer that when you build out a robust mid-market team, all boats rise. I like some healthy tension between field sales and mid-market sales. And I like, for example, even in the last few weeks, the team, they are putting great wins on the board. I mean I have so many bells in my -- we ring bells and we high five and we do the whole thing. But these are sizable deals in mid-market. And I like it if it motivates a field seller, say, wait a minute, that's a less seasoned seller who's really bringing in some nice wins. So I like that tension. I'm already seeing it, and it just creates a little competition internally. So that works. And then also having that partnership between field sales and the agency teams and sort of surrounding the advertiser both in terms of the holding company partnership. And then the other area where we have invested heavily is customer service. So a global account, over time, you want the -- we call them customer success, you want the customer success team trained up and equipped that they're handling the day-to-day account of Nestle. The seller is thinking about how can I upsell and cross-sell Nestle, but it's really the customer support team that's supporting them.

Great. Well, there's a lot going on, anxious to monitor all your progress throughout the course of the year.

Yes. Well, thank you. Thank you for having us.

Thank you, everyone.

Thank you, everyone. Thank you.

Thank you, Brian.

Thank you, Joe.