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

Welcome, everybody. Let's get started. I'm Ron Josey, I cover Internet sector here at Citi. And look, this is always a treat for us because we're going to talk, deep dive in online advertising. We've got Lisa Utzschneider, IAS's CEO. We've got Tania Secor, IAS's CFO. And I think everyone here knows IAS focuses on measurement optimization platform. We've actually been talking about this for quite some time. So we'll let you, Lisa, tell us more about it. But thank you very much for coming. I think you've been with IAS for 4.5 years...

5.5 years.

That's exciting.

I know. Hard to believe. Thanks for having us.

Absolutely.

So let's just kick off level set. Tell us a little bit more about IAS and what we do.

Sure. So IAS, we're a leading measurement and optimization company. We're global. We've been around for now it's almost 15 years. The majority of our customer base are advertisers, Fortune 500 brands. We have over 2,000 advertisers that we work with. Think of leading iconic brands like Nestle, Coke, Verizon. And we work with these brands to ensure that wherever they're running their digital advertising that their ads are viewed. They are viewed by human and not a bot, and they run adjacent to brand-safe and brand-suitable content. In addition to working with the major brands, and that makes up over 85% -- roughly 84% of our revenue, we also have a robust publisher business, making up 14% of our revenue. And again, we are a global company. Internationally, it's a big differentiator for us. International revenue in the second quarter was 31% of our total revenue.

Got it. That's very helpful. And because 15 years, international is a big part of the business, but also in the hundreds of millions -- billions of impressions, I think, on a daily basis. So you have a very good purview of everything advertising. So let's start off on just where we are from a macro perspective. Talk to us about what are you seeing in advertising on one hand. We cover the Internet sector. We cover online advertising. Performance seems to be doing very well. Brands had a little bit of hiccups, maybe. I would love to hear your thoughts where are we on the online advertising world. How would you characterize that environment?

Sure. Happy to speak to macro landscape. So it's been this way for a very long time in advertising that brands want to be where the consumers are. They want to connect with consumers. And when you look at the digital landscape, where consumers are spending the majority of their time, I know I see this in our household, they're spending their time, in particular, in 2 areas with the global social platforms, right? Billions of users are on social platforms every day, viewing content, creating content, sharing content. And then the second area where users are spending a disproportionate amount of their time is viewing streamed content, so in the CTV landscape. So there are 2 areas in particular with digital, it's social platforms and CTV. That's where users are spending a lot of their time. And as a result, that's where brands are shifting their linear TV budget digitally.

Would you characterize the mood -- I'd love your thoughts on social and CTV are made for that and everything else. But would you characterize the mood stable, strengthening, unsettled within the online advertising world? Are your brands, your 2,000 brands, are they more comfortable spending more? Or how do you see, in 2Q is better, I believe?

Yes. So, our products and services have never been more relevant than they are today. And I can explain why, especially with brand safety and suitability. But when you sit and talk to the brands, what they deeply care about in addition to connecting with consumers, they deeply care about transparency. They want to understand where their digital ads are running and they deeply care about ROI. They want to get the best bang for their buck with every dollar that they invest in digital advertising. And that's a big reason why we're focused on digital media quality but we're also pivoting from an insurance play where we're ensuring wherever brands are running their ads, right. That it's viewed a brand-safe, brand-suitable shifting from insurance to performance because, again, advertisers deeply care that their ads are performing and, again, that their spends are very efficient.

Yes. Got it. And maybe when we think about all these new formats that are coming on, whether it be social, CTV and video, we hear a lot about Amazon's DSP, for example. How do you think about all these opportunities? I know it's hard to force-rank the opportunities, but talk to us about how you view the broader opportunities as we move from an open web to more of a closed web based on your comments, social, CTV?

Sure. So from a macro level, I think there are a couple of shifts we're seeing. Macro softness in display, video up because of the consumer adoption of social platforms I was speaking to before, in particular, short-form video. When you see that explosive growth across the social platforms, whether it be Meta, Meta Reels, YouTube Shorts, TikTok, it's because of the creation, sharing, user adoption, consumption of short-form video, and that means opportunity for IAS. The reason it means opportunity is for a couple of reasons. The first is we've launched a technology last year called Total Media Quality. It's a multimedia classification tech where we are running this technology in the live feeds of the social platforms where we're able to cross by video image audio techs frame by frame. So every single second of a 30-second video running on TikTok, we're classifying it and we are detecting what within that 30-second video is brand-safe and what is not brand-safe. This technology, we're seeing tremendous adoption rate across TikTok, across YouTube, across Meta, and it will only continue to grow with that explosive adoption of short-form video that I just spoke to.

That's great. And that's a good segue into social. I think social is increasingly a big part of the overall business. Tania, I want to say social grew in the 30s in 2Q, 34% in 2Q.

34%. Yes.

And so -- and you're partnering with every major social site. And so when you talk to your 2,000 brands and you have -- we can partner with TikTok and Meta, and they have exposure short-form reels or short-form video. Just talk to us about how these brands think about social overall. Are they that stable to their overall investment or, call it, advertising mix? How has it evolved is my question. Social evolving with all the brands.

Yes. So, at a macro level, and you can see it with some of these major tech platforms in their quarterly earnings calls, right. You can see, again, the explosive adoption of short-form video of advertising spend, increasing with these social platforms because of short-form video adoption. And as a result, you're seeing, as Tania just mentioned, our Q2 earnings growth in social, it's because of the adoption of Total Media Quality. So it's a tremendous runway for our business. Our sales team is very focused with this product on cross-sell and up sell with our advertisers. Both the advertisers that are currently running on the social platforms, going after new advertisers to drive adoption. But with that, we're also launching additional innovative products on the social platforms to increase volume. So a good example of that, one of the top requests from our brands this year is misinformation detection. And the reason why brands want misinformation detection is because of the upcoming U.S. election. They just don't want their iconic brands running adjacent to any form of misinformation. And so we heard the advertisers' feedback loud and clear. We moved misinformation detection launch earlier into 2024. We launched it in the second quarter, both on TikTok and Meta. The brands are thrilled because they can rest assured IAS we've got there back. We'll help them with their brand equity. It's also a reflection of our commitment to data science, to innovation, to ML, and continuing to leverage both AI and ML to ensure we're differentiating ourselves and driving value for our brands.

That's great. And so, I mean, the election is coming up, I think a lot of the social platforms might say they're not really as focused. We want to see sort of continual advertising adoption versus these peaks and valleys or tentpole events. Maybe anything to think about from an election perspective, is that something.

Sure. So, what we shared in our Q2 earnings call is that -- because we often get asked a question about political advertising, how meaningful is that for your business. It's not material to our revenue. It's actually small from a revenue contribution. But again, I can't emphasize enough how important it is that we launched misinformation detection, again, so that the brands can rest assured that when they're running digital advertising during the election season that their brands don't run adjacent to misinformation.

Right. Maybe one last one on just social. So when we were in Cannes back in June, I know you all were there. Two-part question. Part one is, how was your trip to Cannes?

Productive.

Productive. I'd love to hear more about that. And then two, I think it was announced, you partnered with Pinterest, with Reddit, with Snap, on top of Meta, on top of TikTok. So pretty much every social platform is now enabling IAS technology. How do we think about each one of these different plays? We just talked about short-form videos as a big deal for Meta, TikTok, probably Snap and YouTube. How do we think about Pinterest and Reddit and the others?

Yes, sure. So, it was very intentional of us in 2023 to place our bets on the larger social platforms first to prioritize innovating and launching total media quality across the largest platforms, being Meta, YouTube, and TikTok. And we were thrilled to announce new partnerships and expanding the volume, expanding the runway and launching brand safety and suitability with Pinterest, with Snap, and with Reddit. The first 2, second and third quarter, Reddit will be in fourth quarter Again, we're listening intently to what the advertisers are asking for in terms of expanding our product suite, which expands our runway in terms of driving adoption and driving up volume.

And this has driven the brands, basically, requesting that these platforms have this capability.

Correct. So the brands ask us, please extend it into the social platforms. But also, for us, it was very intentional to prioritize the largest platforms first, get the technology up and running, and ensure the adoption rate was quite high, and then pivot to the social platforms that we had just mentioned.

And this is all brand-driven, so brands are asking for this.

Correct.

Yes, which is really -- I think that's a key comment.

Yes.

Got it. So very helpful on social. You said Cannes was productive.

Very productive.

I'd like to hear about that. We'd love to hear more.

Sure. So, I hope everyone is familiar with what Cannes is and going to Cannes, but it's an annual industry event where we spend a full week engaged, speaking with major brands, with platforms, with publishers. I called it productive because it is literally back-to-back from dawn until late into the night. But what made Cannes particularly interesting this year is it was right off the heels of Oracle announcing that they were shutting down the Oracle advertising business. So if I'm sure you're familiar, Oracle announced, I believe it was June 11, but mid-June during their quarterly earnings call that they were shuttering the advertising business. And coming into Cannes, it was top of mind for all of Oracle's partners and advertisers, and platforms. So, it gave us the opportunity at Cannes to start engaging with a variety of players about their Oracle advertising that was running to share our capabilities and differentiation. And then I call it the Summer of Oracle, but throughout the summer, and we talked about this in our Q2 earnings call, that we've been pitching and we've been engaged in dozens of RFPs. We also shared that we hired over 20 Oracle employees. A big reason for bringing them over is Oracle has a reputation in the industry as having incredibly strong talent. But secondly, I was personally in a bunch of the pitches, and I kept hearing the feedback, IAS, how are you going to service the volume of incoming business? How are you going to quickly integrate given that Oracle publicly shared that the end date, the turnoff date was September 30. So hearing that feedback, again, we're customer-obsessed to IAS and listening to the feedback of these prospective customers, I realized we needed to beef up our support and be able to quickly integrate and bring on these partners and customers. So that's also a reason why Cannes was incredibly productive and in addition to hiring over 20 Oracle employees yesterday, I don't know if you saw our announcement yesterday, but we also announced a new Chief Operating Officer, Marc Grabowski, who I'm thrilled is joining IAS. He was the global CRO of Oracle advertising. And we also announced a new Chief Product Officer, Srishti Gupta, who was the CPO at Rokt for a year, and before that, spent yes at Amazon running their ads measurement business.

That's amazing. There's so much to go off on this.

I'm telling you, Cannes was productive.

Yes. So let's talk about these dozens of RFPs. Are these primary -- and so just with Moat and Oracle shuttering into September, the race is on. I think -- I'll get into financial in a second, Tania, but the dozens of RFPs primarily with new to IAS clients potentially. And talk to us about how these clients typically come on board, meaning you start with brand suitability and then maybe you upsell over time. In other words, whatever we see in the back half of this year, talk to us is about the upsell side of a typical client, not just...

Sure. I'll keep factual on this one with Oracle. So when you take a look at Oracle's business and the business lines they were running, they were running Moat measurement, which is similar to IAS measurement verification business. Grapeshot, which is contextual targeting, which we offer context control. And then third, they had an audience data marketplace, and we don't play in the audience data space. So, the opportunity is the first 2 business lines. From a prospect perspective, there are 3 types of prospects from a client perspective, big brands, publishers. Oracle had a fairly robust publisher business, both in the U.S. and EMEA, and platform business. So we've been pursuing the first 2 businesses I had mentioned and the 3 customers that I have mentioned. And again, it's been a compressed timeline because Oracle's customer base understood. It was publicly communicated the September 30 to shut off. So, this summer, there's been a lot of whether it be head-to-head tests. Understanding our product tech road map, testing our capabilities, sharing the differentiation of our product portfolio, sharing our service plan in terms of onboarding and integrating. But with those 3 different customer types, the integration and onboarding is very different.

And when we think about the integration, the onboarding, and going live in September 30 date, how quickly can a client come up to speed or get on?

A client can get up to speed very quickly.

And Tania, I think a few wins were factored into the back half guidance. Can you talk just a little bit that?

This closed in our second-quarter earnings call that we had won several RFPs. And as a result, we had factored that into our increased guide for the full year 2024.

And maybe talk just a little bit more, why choose IAS, it's a competitive offering competitive bid. So, what did IAS offer that these clients wanted that have already committed for the back half guidance? So, the value prop of IAS relative to others.

Sure. How much time do you have? Exactly, there's a clock. So differentiation of our product tech portfolio. So, we have our core verification solutions that I've already mentioned. But an area that we definitely are differentiated is everything I spoke to around brand safety and suitability. That's an area that Oracle didn't invest heavily in. And the fact that our total media quality product is much more sophisticated, the technology granular. We're proving out that we are helping brands find higher-quality media within the social platforms. Our thesis is higher-quality media leads to higher ROI. So everything related to what we're doing in brand safety and stability. Secondly, on the optimization front, differentiators, including we have a robust product pipeline. We've launched new products this year with optimization, including made for advertising, that's detection of, I call them, clickbait sites. Our pre-bid, post-bid attention product, our total visibility product, which is a complete differentiator or a competitor does not have where we are providing, again, transparency, that's what the brands are looking for into the investments they're making around supply path optimization, and also being able to help the advertisers drive efficiencies with their investments programmatically, which ultimately leads to driving higher outcomes. And then a final differentiator is our Publica platform, which is a leading CTV platform where we are working with the major OEMs out there on helping them better optimize and drive higher yields within their platforms. So that's a list, but it's the differentiation across our product portfolio, our investments in data science and tech. And then also, I want to reinforce our investments in service and global service in particular, and our ability to quickly onboard clients.

That's great. There's a lot going...

There's a lot there.

So I want to jump off on a lot of that. But maybe bigger picture, Lisa, you've been here for 5.5 years. We started our conversation about just broader how are things going? I think it's arguable that -- and IAS have been around for 15 years, I think you said. But now we've got all these newer growth vectors, if you will, or verticals, whether it be social and short-form video, CTV made for advertising. I love the TMQ comment that you were talking about before, and the list goes on and on. So maybe taking a step back, help us understand how, from a client, your 2,000 clients, how their journey with IAS has evolved from a required spend to now maybe doing more. You talked about pre-bid, post-bid, so things are changing here. I'm curious how the value prop has expanded.

Sure. So that pivot from insurance to performance. So earlier years, viewability, my ads were viewed, invalid traffic detection, fraud detection, early days across the open web, pre-bid, post-bid. Moving into the social CTV landscape. Again, increase of video, short-form video, in particular. Leveraging ML/AI to classify all things running within the live feed, video image, audio and text. Moving to brand safety, all of that being post-bid. Future, lots of runway with pre-bid social, so social optimization. We're currently offering pre-bid social on TikTok and LinkedIn. We have an exclusive...

And looking at the audience, maybe just tell us a little bit more about that.

Yes. So what pre-bid means is -- there's pre-bid and post-bid. Post-bid is confirming for L'Oréal that their L'Oréal ads did not run adjacent to anything that was brand unsafe or unsuitable, confirming their ads were viewed, confirming there was no fraud detected. But what pre-bid means is before the brand runs their impression, having the opportunity to bid on an impression before it runs. And again, the opportunity for IAS and working with our brands is to help advertisers bid on impressions that have higher quality media, higher potential to deliver ROI before they run their impressions. And from a pre-bid perspective, in the social landscape in particular, it's very, very early days. So as I mentioned before, we're running it in TikTok today, but think of larger social platforms like a YouTube, like a Meta where we continue to hear from the brands, they're looking for pre-bid social opportunities.

Super helpful. And maybe one last. So I was going to ask about video and CTV earlier, but I think this was a great conversation. Tania, I'm coming to you after this question. So video and CTV, tremendous opportunity. It was up 22% and 20-plus percent in the quarter, I feel. Would love to hear about the broader opportunity in CTV, how that landscape has changed overall. I think IAS has offered almost every streaming advertising -- every streaming services add tier. So talk about the broader CTV landscape and how IAS is going after this opportunity.

Sure. So we get a lot of questions about the opportunity in CTV. And as I mentioned before, it's one of the top 2 areas I know in my house where users are spending their time, right? Viewing stream content and on the social platforms. In terms of viewing stream content, when you look at streaming platforms like Netflix, we have launched viewability and invalid traffic, that started 2023 with Netflix when they launched their ad-supported tier. But I think where the meaningful opportunity is with the streaming platforms is in programmatic CTV. Platform like Netflix, they had announced a partnership with Microsoft. The DSP they were running with was Xandr. This year, they're opening up to additional DSPs, which opens up programmatic CTV. And when you speak to brands about where are you really concerned when it comes to content that's potentially not safe for your brands, it's not necessarily in a premium channel like Netflix, it's in programmatic CTV inventory. So lots of runway within programmatic CTV as the Netflix of the world open up their platform, open up their inventory with the DSPs. Amazon, earlier this year, I think it was coming out of CES, announced opt out in opening up Prime Video to 100 million subscribers. So again, it's early days, but that's where we see tremendous opportunity is within programmatic CTV, in particular.

And has Amazon really turned it on or are we still early days on the Amazon opportunity with the opt out or, call it...

I would just call it first pitch of the first inning of the baseball game.

For overall or just Amazon?

Amazon.

Amazon. I'm fascinated. We, of course, stream like you do, how many times there's moments of Zen within my YouTube TV channel, whether it's on CNBC or whatever, just the Olympics itself. So packages have not yet sold or fully sold out. And so I think there's...

Yes. And you may refer to it as moment of Zen. I think of it as a moment of opportunity and runway for IAS.

Yes. Agree. And you mentioned Publica. Talk to us more about how that is that strategic differentiator as we're in the first inning for Amazon and overall?

Yes. So Publica, we acquired Publica shortly after going public as a company a few years ago. Big differentiator for IAS. It's a leading CTV platform. And as I mentioned before, we're working with some of the top OEMs, Samsung being our largest strategic partner with Publica, for a couple of reasons. So if you think of Samsung's platform and interface with Publica, we have a unified ad auction, header bidding, dozens of integrations with SSPs. Think of that as helping Samsung better monetize their programmatic CTV inventory, driving higher yield for Samsung. We also have an ad server. So we're serving all of the ads within Samsung's interface. And then, also, solving a really important challenge in the industry is frequency capping, lack of frequency capping. And we have what's called SSAI stitching, where we're stitching the creative real time within the stream of Samsung's interface and trying to solve that problem that, for example, I don't get the same canned ad over and over, which is highly inefficient for the brand and a poor user experience. And because of our stitching capabilities, we're improving the user experience, for example, on Samsung's interface, but also creating more efficiency for the advertising investments.

Going on. That's great. Maybe, we'll open it up to questions here in a second. But Tania, let's talk about the business and like the results that we've seen, and specifically, the typical question, how do you manage profitability and growth. We're growing, I think, mid-teens. We're also operating in a mid-30% EBITDA margin. Talk to us about how the business manages both growing at that rate given all these opportunities we just went through with profitability.

Yes. No, good question. So it's something we spend a lot of time thinking about. We have a very large and expansive TAM, multiple growth opportunities for IAS, many of which Lisa talked about. So our priority is top line growth, but it's a balance. At the same time, we have demonstrated over the past few years, our ability to drive operating efficiencies as we operate, and that's freed up some OpEx. So there is operating leverage for us to reinvest in the business. Our priorities remain investing in our R&D capabilities, particularly around data science. We're also investing in our go-to-market strategy with our sales and marketing team and G&A investments to help scale the business. We are really pleased that since IPO, we've been north of 40%, rule of 40 -- sorry, north of rule 40 for the past 3 years. And it's really a balance, but large and expansive TAM. So making -- driving efficiencies but making investments in the business to drive that top line growth.

And maybe digging a little bit more on the driving efficiencies. Where did you see those efficiencies?

Yes. So over the past few years, we've really looked across our talent and optimizing our talent. We've brought in -- almost 2 years ago, we hired a new Chief Technology Officer who's really made important investments in our platform, but also driving efficiencies with the productivity of our engineers, and we've been reinvesting and hiring new engineers, and the same on our go-to-market strategy as it relates to sales.

Super helpful.

And I can just add to what Tania said, because we get asked this question a lot, too. Given the sophistication of our classification technology, to the point you made earlier, we process a lot of data, and classifying within the live stream real-time in the social platforms and seeing that growth, we're incredibly thoughtful and mindful of that classification capability. And how do we ensure we keep a high bar from a tech perspective to make sure it's like best-in-class and keep costs down. And something that we're incredibly proud of, last year when we launched the product on TikTok, it was a bell curve, right? So as you are processing because we're processing every single frame and it's highly granular, what it means is we're processing more data, which is training the models, which is getting the model smarter and more accurate, and being able to detect the unsuitable content faster. And so, the cost, we saw this bell curve where it's flatlined so that the tech is just humming, and we're maintaining costs, but we continue to offer a highly differentiated product and value for the customers.

So, we're about 35 or so minutes in, and we haven't mentioned AI. Seems to be the right time to do that. And so I love the answer, new CTO coming in and the bell curve. How is AI and ML sort of changed that approach or improved -- nothing's changed, improved the approach?

So IAS, we've -- science is in the name of our company. We've been leveraging and working with AI for several years. Many of our products are backed by AI. So Total Media Quality, our pre-bid attention, our made for advertising. The list goes on and on. And another area tied to this that I am deeply invested in is that we continue to invest in our best-in-class data science team. We give them the room to run. We give them the opportunity to launch products like misinformation detection. We also have deep fake detection in Beta right now in the open web, where we are experimenting in areas like face swapping. We could spend an hour talking about face swapping, but making sure that we are launching products that are differentiated, but we're also innovating for the future. And we give the data scientists a lot of room to run in the sandbox, again, by leveraging AI/ML. And then one more comment on AI. We've also been incredibly creative about leveraging OpenAI to accelerate the launching of our products, to accelerate things like language translation. We saw this with TMQ last year by leveraging OpenAI. I think we went from -- it was 7 or 10 languages to 90 languages within 24 hours with...

That's interesting.

It was amazing. With high accuracy rate. So we're all in on AI, all in on science and again, innovating on behalf of our customers.

Super fascinating. One more from me. We'll open up for questions. Maybe, Tania, I think capital allocation priorities might be an interesting topic, I think, $100 million in cash. I would love to hear how you -- what are the capital allocation priorities of the company?

Yes. Yes. Our net debt overall is $24 million. So we have a very healthy balance sheet, continue to generate very strong [Technical Difficulty] and our capital allocation priorities. But our investment in the business is our priority right now, which we do through building, partnering, evaluating M&A opportunities. You have seen that we have been paying down debt, but it's a very flexible revolver. We pay it down to reduce the interest expense, but we can redraw if there is an M&A opportunity in front of us.

Super helpful. Any questions in the audience. I think you'd go in. Yes. I think we'll have a mic come in.

[indiscernible] your client ad spend. I guess that's how you get paid. So how do you go about forecasting your business and how much visibility we have into their ad spend?

Maybe repeat the question, or the question is on visibility.

Yes. Thanks for the question. Yes, 85% of our revenue comes from advertisers, 15% from publishers. We have a thorough process where we spend a lot of time with sales in the voice of the customer. Our revenue model is a negotiated CPM directly with our advertisers multiplied by the volume in the period. We have client contracts that last 1 to 3 years with minimum commitments. So we have a robust process internally. We have visibility up typically 1 to 2 quarters out. And we look at all the dynamics that Lisa talked about in terms of new product launches, new logos, how we're pacing with upsell and cross-sell. And as you've seen, we've had a very strong net revenue retention of 112%.

And to that point, with the visibility 1 to 2 quarters out, Tania, I think you just said, if a client -- if one of the 2,000 clients pull back on ad spend because of their own issues, do you see that ahead of time? Or you -- we get paid for impressions. So how does that work?

Yes. The way to think about it is, especially with the large global contract clients, we have contracts with them 1 to 3 years. Our average client has an 8-year -- our top 100 clients have on average 8-year tenure with IAS. And with the benefit we have in our model is we have a negotiated CPM with our clients, so we're not exposed to changes in media pricing. But from a volume perspective, that is variable. So we are not -- we're insulated, but we're not immune to volume variances.

Understood. Right. We have time, probably, for one more question. Well, with that, we're at overtime. So thank you, Lisa. Thank you, Tania. Very much appreciate it.

Thank you.