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

All right. Good afternoon. We are very happy to have Lisa Utzschneider, the CEO of IAS, with us.

Good pronunciation. Good to see you, [ Brian ].

Good to see you. It's been a while, but I can still pronounce the name correctly. So it's good to see you. I'm doing the interview on behalf of Matt Cost. He sends his best. But I will start with the disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please feel free to reach out to your Morgan Stanley sales representative. Some of the statements made today by IAS 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 by the company are based on assumptions as of today, and IAS undertakes no obligation to update them. Please refer to IAS' Form 10-K filed with the SEC for a discussion of the risk factors that may impact actual results.

Check. Okay. Let's sort of start -- let's start big picture. I think for everyone in the room, it could be helpful just to sort of understand the -- IAS' position in the digital ad ecosystem and how has that changed over the last couple of years as sort of a lot of the -- some of the dynamics have changed in brand versus performance, et cetera.

Sure. Hi, everyone. I'm Lisa Utzschneider, CEO of Integral Ad Science or IAS. I've been at IAS for 6 years -- 6-plus years, and we've been a public company since the summer of 2021. IAS plays a critical role in the digital ecosystem. We have integrations in breadth and depth across all of the tech platforms, all of the leading DSPs. We are a global measurement and optimization company. And what I mean by that is our customer base -- we have a robust advertiser customer base with over 2,000 leading advertisers, Fortune 500 brands. That's the core of our business, making up 86% of our revenue. And then we also have a robust publisher business with integrations with over 400 publishers. And what we do is we ensure wherever brands are running their digital advertising, their ads are viewed, viewed by human, not a bot, no fraudulent activity. And we also ensure that the brands run adjacent to appropriate content because as brands continue to shift billions of dollars into digital platforms, they really want to make sure an independent third-party verification company verifies the quality of their media.

Got it. Okay. That's a good background. Want to drill into a lot of those topics on the advertiser side and the platform supplier side. Maybe before we do that, let's talk about the macro advertising backdrop. There's obviously sort of discussions about the health of the consumer, where we are in the cycle, what's going on with tariffs, et cetera. As you're talking to advertisers now entering the 2025 budgeting season, what is the overall tenor? Are there any sort of pockets of strength or weakness you'd call out as you're sort of in the early 2025 discussions?

Sure. Early 2025, there are a few key areas that the brands care about. They care about performance, efficiency and driving ROI. And the reason for that is the brands are shifting billions of dollars from linear TV into digital advertising, and they want to make sure they get the best bang for every dollar that they invest in digital advertising. So with that, performance is an area we're very focused on, in addition to insurance, ensuring that the brand equity, brand reputation is protected wherever they're running their digital advertising. We're also making sure that we're helping brands with things like transparency, transparency and programmatic buying, taking the black box out of programmatic buying, ensuring that the brands, when they invest in programmatic, they understand where their investments are going, linking media quality data to cost data. So that's a big area of focus, both in the digital ecosystem in 2025, that performance with their working media budgets. I would say a second area of focus is all things related to social video. So when you take a look at the explosive growth of user engagement in the social platforms -- I know we see the [ My House ] users, they're creating video content, sharing it, viewing it. And the brands want to be where the users are. And with that, social video, the brands are investing heavily to be in that environment. And we've invested in classification technology that we can speak more to. And then the third lever I would say is CTV. CTV is the fastest-growing channel in digital advertising. And with CTV, that's where the brands are really leaning in, both in terms of investing in CTV advertising, but I would say, in particular, in programmatic CTV.

Great. Okay. There's a lot there to unpack. Maybe if we sort of think through the performance, focus, the social focus, the CTV focus, can you sort of bring it down to an IAS level of the products you're rolling out? So as you think about micro-level product innovation to address each of those, which should we be most focused on to drive more of those budgets toward your tools?

Sure. Let's start first with the performance or activation area. So programmatic revenue, it makes up roughly half of our revenue. And the way to think about programmatic is ensuring our IAS solutions at a pre-bid level are embedded in all of the DSPs. So if the brands want to go in, they activate pre-bid viewability, invalid traffic, brand safety suitability, also contextual targeting segments. But in addition to that, the brands, like I said before, deeply care about performance. And something that we announced at CES, my favorite place to go, Brian, Vegas, in January is our total media performance products, solutions, and this gets to the heart of performance and activation. And the way to think about these products is we're providing brands with greater transparency in where their programmatic investments are being spent. We give them the tools to understand how to drive up the efficiency. So how to ensure when they're investing $100,000 in Google DV360, which SSPs are efficient, dial them up real time, which SSPs are inefficient. But I'd say most importantly, linking that Total Media Quality that signals with the cost and the outcomes. And within this solution, the brands are providing outcome data so that we can better understand, okay, we're helping this brand greater transparency, drive up efficiency. Is it delivering and selling the products, hitting those KPI goals that they're looking for from an ROI perspective? The other area when it comes to total media performance that we're investing heavily is in AI. And we're leveraging AI to ensure we are optimizing capabilities like dynamic optimization so that we can dynamically optimize and provide the brand with better visibility at a pre-bid level, like here's all the data we process. Here are the types of quality media impressions where we know delivers a higher ROI. So at a pre-bid level, helping the brands understand bid on this impression that's higher-quality media will -- has a higher propensity to drive higher ROI. These suite of products, we are seeing tremendous adoption rate. We have been testing and running many of these products for a few years now. 2024, in particular, we saw tremendous adoption, especially with the mid-market channel, which tends to be performance advertisers.

Is there anything you can share -- I mean, you mentioned the Total Media Quality tool and you have some other generative AI or GPU-enabled capabilities. Is there anything you'd share quantitatively about the ROAS lift, the spend lift? Like how are your advertisers thinking through quantifying the benefits they're seeing from some of these new capabilities that you can build out?

Sure. So too bad I can't do a live demo right now. So what the advertisers have visibility into is what we call the QCPM, so the quality CPM, to understand the media efficiency, so media wastage, the lower-performing type of content we're keeping them away from, the higher quality inventory that we're leaning them into. And then from a cost perspective, how we're driving greater efficiency as they invest in programmatic buying that leads to a higher outcome.

Got it. Okay. Let's talk about Meta a little bit and the pre-bid partnership. It was last September, the beta launch where you have one of a handful of partners on pre-bid on Meta. What have you sort of observed so far in the early months of that partnership? And how do we think about that partnership sort of ramping and being a bigger contributor to the overall P&L this year?

Sure. So pre-bid social optimization, it was a great opportunity for IAS to partner with Meta to build the product. You might remember, [ Brian ], there was a -- we had a jump ball last summer, us and 2 of the other badged partners who are competitors, and Meta selected IAS to co-build the pre-bid social product. We did just that. We launched beta in September. We launched the product GA in fourth quarter. And we've been very pleased with the ramp that we saw both in fourth quarter and into Q1. The 2 other providers announced they launched mid-Q1 with the product. And it's being incredibly well received. And we're seeing things like helping brands, again, getting back to that point of efficiency, moving the brands away from media wastage. I know we shared 1 stat of 71%. We were able to reduce media wastage from 1 brand that ran in pre-bid social optimization. The other thing that we announced in mid-February, so as the brands go into the Meta interface at a pre-bid level, and they select, here's the content I want to run adjacent to. Here's the content I absolutely do not want to run adjacent to. Having greater selection in content categories really matters for the brands. And we launched additional content categories in Q1. We now offer 45 content categories as well as we launched additional languages, 6 more languages. So in total, we're offering 34 languages with the pre-bid social product. One other note is, in addition to launching it on Meta, we've also launched it on TikTok. And also important to note is that the advertisers, in order to activate pre-bid social, they need to have the post-bid measurement product of Total Media Quality running on Meta so that the pre-bid, post-bid, sort of that full life cycle, that is running.

I think externally -- I know we've done the monkey math over the years of the amount of impressions that Meta sort of could give you access to or expand your overall supply. Is that still the right way to sort of think about the Meta opportunity? Or if you were sitting in our seats externally, what's the better way to sort of gauge like the potential revenue opportunity?

Yes. So the way to think about the Meta opportunity is quite large in general. So if you take a look at -- if you step back and look at a few things. So prior to launching multimedia classification or Total Media Quality in Meta, we launched it in Q1 a year ago. So the product has been running for a year. Before that, we were running verification solutions, but around the live news feed. The live news feed makes up over 90%, I believe, of Meta's inventory, and we were thrilled when Meta opened up the live feed. So over the last year, we focused on driving adoption of Total Media Quality on Meta. We have driven really nice adoption, let's say, with our top 50 advertisers. These are major global brands that are adopting the product cross market, multiple languages across multiple brands within their portfolio. So very nice adoption there. That is represented in our Q4 results of 25% growth in social. The way to think about additional runway with Total Media Quality is this year, we're going to continue to grow the top 50, but cross-sell, upsell to the 51 to 100 advertisers so that we get nice adoption across our top 100 global brands, also drive adoption north of 100 in mid-market of Total Media Quality and then keep pitching and driving up the adoption of pre-bid social within Meta.

Okay. The Meta change, sort of moving away from third-party fact-checking or more of a community note like model, I guess, similar to X, how does that impact like the overall opportunity for you and sort of the way you fit into the Meta ecosystem?

Yes. Great question. So it was interesting being at CES and meeting with many of our large brands and platforms and holdco partners because you might remember, [ Brian ], that week of CES is when Mark Zuckerberg announced fact-checking going away live on Instagram, news to everyone. And then also, it was still up for debate if TikTok was going to be banned.

Still is, I think.

Well, we could go to TikTok, too. But because of those 2 events in particular during CES, it created a rich discussion with our -- all of our brands and holdcos about their social media strategy for the year. The feedback from the brands to us, they so believe in the accuracy of our technology, the sophistication of it. And the feedback from the brands, it was pretty consistent, if Meta does move over to community notes, IAS, we really hope that you're in there. As I like to say, we follow Meta's lead on that. But I do think it raises both awareness even more for the need for third-party classification within the live feeds of social platforms and just the dynamics that are going on at a macro environment level.

Let me ask about TikTok then because I think there still is a debate over -- hopefully, the next 30 days or so, we're going to resolve this -- so where TikTok ends up in the U.S. What have your advertiser discussions been like around TikTok, call it, since the start of the year? Are they deploying, holding back? Are they -- what is going on with sort of your client spend on TikTok?

Yes. What's interesting about TikTok, TikTok is also a great partner of ours. And a few things about TikTok, we launched the TMQ product on TikTok. And I applaud TikTok for opening up their live feed first. Over 50% of our revenue with TikTok runs internationally versus the U.S. So we have a sizable footprint internationally. And speaking to the brands that week at CES, it was fairly consistent. They all had a plan B. And -- in case TikTok did get shut off in the U.S. But the way we view it is we want our technology across the whole digital ecosystem. We are continuing to partner with TikTok, Meta, YouTube, all of the major social platforms. And we'll continue to drive value for the customer base.

Okay. Maybe we -- as we covered performance, social, let me go back to that other pillar you talked about in CTV. Walk us through sort of your CTV suite of products. And where should we be most focused to sort of ensure that you're capturing your portion, and maybe even more, of the CTV opportunity as those dollars continue to move?

Yes, sure. Great. So CTV, as I said before, fastest-growing channel. We were pleased with our 30% growth year-over-year in publisher in fourth quarter. CTV, yes, it's a long game, but it's also a tailwind for our business. The way to think about CTV, there are 2 sides to that coin in terms of what we offer. The first side of the coin on CTV is offering our IAS verification solutions within CTV platforms like a Netflix, right? We offer viewability, invalid traffic detection within Netflix. When we launched with Netflix last year, it's in their premium content. But where the real opportunity of CTV is opening up the programmatic CTV inventory with DSPs. So you see the lineup of the CTV platforms like a Netflix opening it up to other DSPs beyond Xandr. Amazon announcing -- that was a big announcement last year of Prime Video, opening up to 100 million subscribers opt out. I mean I could keep going, Disney+ has yet to integrate third-party verification providers as well as Paramount. So when you add all of this up and know that when programmatic CTV, we really see that accelerated runway, that's where the brands will really be leaning into our solutions, especially brand safety and suitability. So we see that as a huge opportunity with CTV and programmatic CTV in particular. The other side of the coin with CTV is Publica. Publica, we are so pleased with the growth that we're seeing in Publica. I know I spoke to that in our earnings call last Friday. But with Publica, in particular, everything Publica brings to the table to help platforms like Samsung better drive higher yields, higher monetization. So a few of the assets within Publica, unified ad auction, so integrations with dozens of SSPs, an ad server, we're serving the ads, for example, within Samsung's platform. We're stitching the creative real-time within Samsung's platform, addressing the frequency capping issue that you often hear from brands why they won't shift over more budgets. And we're continuing to invest in our product road map in Publica. For example, we are refining the bidding capabilities within the ad auction that we're seeing better results for our customers that is also driving higher revenue for IAS. So again, we're really pleased with the Publica platform, the differentiated value that we're driving the access to programmatic CTV for our customers.

Good color. Maybe one is on competition in general. It could be helpful for the room to sort of hear about the customer acquisition and new customer competition process. There sort of is yourself and one other large player in the space. When you're sort of negotiating initial contracts and sort of competing to win the business, one, just sort of walk us through how the contracts are structured big picture, so we sort of understand impressions, price, features. And then what are, in your mind, some of the current differentiators that you bring to the table to increase your win rates?

Sure. So when I joined 6 years ago, it was a 3-horse race, us, our nearest competitor and Oracle. Oracle announced they were exiting the ad business last summer, so we're now at a 2-horse race. And the way the jump balls work, that's what I call, when we're on the court, there are a few callouts. And we've seen this over the course of the last few years. The brands are so sophisticated when it comes to their assessment of which provider they're going to go with. They typically lead the RFP process. They lead the product tech diligence. They are very clear in the areas of the product road map that they want to go deep on, the head-to-head testing, international footprint, I could go on and on, level of service and support. So it's a deep, deep evaluation. And typically, when IAS wins in RFP, we're differentiated on a couple of fronts. And our reasons for winning include tech. We are all things deep in AI, science and tech. We could spend the next hour talking about how we're leveraging AI. The investments we're making in data science makes up 30% of our engineering org. The sophistication and granularity of our classification technology, the advancements we're making in our modeling of classifications so that we're driving higher accuracy, faster accuracy at higher velocity while maintaining and lowering cost, which is really hard to do. The brands are leaning into it as are the tech platforms like we talked about, Meta selecting IAS. So tech first and foremost. Secondly, international footprint, that really matters for global brands like Coke and Nestlé, that our technology is scalable, repeatable, consistent and accurate globally, that our technology is running dozens and dozens of languages in all of the markets that the brands care about. We have a larger international footprint. We've been in EMEA, APAC longer. We continue to invest in emerging markets like Southeast Asia, India. We announced December China. So that really matters. And I'd also say investments in support. We've invested in support for years in the Tier 1 markets, both account manager, so think of that as the big accounts, the white-glove treatment, as well as technical support. In terms of contract structure, with the big brands, the contracts are typically 1 to 3 years in length. A noticeable change that's different from 6 years ago to today, the big brands want to work with one of us, 1 provider. They want us to verify all of their digital advertising, as I say, right along with every single impression that runs on every platform, every device. And typically, the clients negotiated directly and then hand it off to the holdco to service the business.

Got it. That's good color. If anybody has questions for Lisa, please feel free to raise your hand. There will be mics running around. I have some more, but if you do have questions, please feel free to raise your hands. Since you brought it up, on generative AI and sort of GPU-enabled capabilities, maybe walk us through examples of technologies you're incorporating now that you weren't 2.5 years ago that are now being enabled because of GPUs and gen AI that are really sort of having a difference in either efficiency, go-to-market. Like what are some of those examples of tools?

I mean the majority of our products are powered by AI from, as I said before, our classification, our dynamic optimization, our language translation, misinformation, I mean, I could keep going through the list. And with everything right now that we're doing in leveraging our data, productizing our data, and what's so important at IAS, and we've stayed committed to this, is our investments in data science, as I mentioned before, that makes up 30% of our engineering org, we have great data scientists, I know I'm biased, but best-in-class. But the second thing that's really important, and it's hard to stay disciplined on this, especially as a public company, but I learned this growing up in big tech at companies like Microsoft and Amazon, is having the discipline to carve out some resources to innovate for the future, right? So we have our 2025 product road map. We are cranking along and shipping product and driving value and driving attach rate and all that goodness related to our 2025 growth. But I think equally, if not more importantly, we're investing for future years, 2026 and out. We're investing in areas, both in terms of modernizing our modeling, hearing from customers what are areas that they want us to invest in, things like misinformation, everything I talked about in activation and creating a test and learn culture where we don't have to productize this early day work that we're doing, but continuing to invest is really important.

That's good color. Questions anywhere? Asking about the mid-market -- I think you guys define the mid-market customers as those who spend $200,000 to $1 million?

Good memory. Yes.

Yes. So those advertisers, they often focus more on performance.

Correct.

So what are you investing in on the performance front to sort of really build out that suite of tools to capture those mid-market opportunities?

Great. So mid-market is a really important priority for the company. We've been investing both on the front end. So we're investing more in beefing up our mid-market sales team, mid-market support. With the summer of Oracle last summer, we brought on board more than 35 Oracle employees as well as Oracle's global CRO, Marc Grabowski. And some of these employees brought deep mid-market experience, which is turbocharging our efforts. On the back end, we're investing in all things related to performance and activation, in automation, in self-serve, make -- ensuring that our products are easy to activate and easy to understand the value. A good example is a product called Total Visibility. That came from a tech tuck-in, a small tech acquisition that we made a couple of years ago, where we're providing all of the brands, but many of them are mid-market, transparency into their programmatic buying, visibility, understanding if my $100,000 is running through these 20 SSPs. What are the 10 that are the most efficient, real-time turn them up. What are the 10 SSPs that are inefficient, turn them down. And ensuring with that data, linking it to the outcome data. And the mid-market clients in particular, they love this product. And they love it because we're both ensuring that their brand -- their advertising is running against high-quality media, but more importantly, they're seeing that QCPM that we talked about before. They were understanding the cost. They were understanding the ROI. And linking it to outcomes and feeding it back into the model dynamically is really, really powerful for mid-market.

Got it. Okay. Questions? All right. I have one more for you then. It's so interesting because you go through all these investor meetings. You have this panel. You have the conference calls and everything else, and you're asked a bunch of questions and you answer them. As you kind of compare the external questions you get as opposed to how you spend your time internally or the dashboards you watch or the KPIs you watch, where is there the biggest disconnect both in the opportunities they are not asked enough about and sort of the challenges and like the yellow lights that you're really watching to make sure that you execute on appropriately?

Between the questions that I receive from investors and the opportunity that I see?

Yes, both, opportunities and challenges.

I would say that -- I mean, my glass is always half full. So we'll talk about the opportunities. But I can't emphasize enough how important it is to invest in AI right now, to invest in AI and ensuring we're investing in the areas that drive the activation, the classification, the accuracy, the velocity at scale and sprint at it. And one thing I've realized is as a company, I want to share more about the tremendous work that our product and tech teams are doing when it comes to all things related to AI and science because it's incredible work. I would say that's the first thing. And then the second thing, I would say the importance of investing more in CTV. And as I mentioned before, it's a long runway. But programmatic CTV, the unlock of that, helping brands -- when you talk to brands, what are the 2 biggest reasons that you're hesitating to move those budgets over, it's 2 things, transparency, I want to understand where my brands are running in programmatic CTV. And our platform, Publica is able to provide better visibility and then also the frequency capping. And I think as an industry, we need to do more on that unlock because there's just so much opportunity there. And then the third area I would say is our investments in emerging markets. APAC, we're seeing growth in APAC and heading into markets like China that we announced in December. And that's purely based on feedback from major brands saying, we love the accuracy of your tech. We're running it globally. China is a very important market for us. Can you get IAS verification solutions in China? And I'm thrilled that we're already running in alpha in Q1 with the luxury category. And we're going to continue to double down on some of these new frontiers for verification. And excited to be back here again talking about all of the value that we're offering to our customer base.

Great. Well, Lisa, thank you very much. We're excited to watch all those progress through the course of 2025. Thank you very much.

All right. Thank you, [ Brian ]. Thanks.