Viant Technology Inc. (DSP) Earnings Call Transcript & Summary

All right. Well, thank you very much. Good afternoon, everyone. My name is Chris Kuntarich. I'm part of the UBS U.S. Internet team. Happy to have Tim and Chris Vanderhook, here today with me from Viant. And yes...

Thanks for having us.

Thanks for making the trip here.

But let's just jump right into it. I guess where the conversation starts a lot for the ad tech space is, look, this is a very competitive space. I guess compared to other demand-side platforms, how should investors think about kind of buying unique value proposition?

Yes. I think for us, we start with the customer focus. We're very focused on what we call the mid-market, it's not the Fortune 500, it's below that. And we're looking for basically U.S. national advertisers, is kind of the way that we classify it, not a Fortune 500 international conglomerate. And I think that customer focus is number one. Second, we represent only the buy side. Many ad tech players represent the buyer of the ad and the seller of the ad. We view that as a conflict of interest, and we only represent the buyer to try and get them at the lowest price possible. Third thing we have is our patented technology called the Household ID. We talk a lot about it. As cookie dilution comes out in '24, we believe the Household ID in that patented solution is going to be a huge boost to our business.

Anything else?

I would just say, from a product standpoint, we have kind of a North Star product vision called autonomous advertising. We talk a lot at our Innovation Day just around how DSPs are as complex as Bloomberg Terminals. And really, what we want to do is simplify that user experience and really -- it's really about growing our total addressable market. But essentially, we want to create more automation in these platforms to make them easier to use that also have superior campaign results as well. So I hear a lot of other platforms talking about that. You hear people talk about AI, but we've been talking about it for several years that we really want to simplify that user experience with automation.

Got it. And as we kind of look out into '24 from here, what are those top 2, 3 priorities that you're looking at?

Well, I think right off the bat in 2024, a huge tailwind regardless of any macro, I'm sure we'll get into that, but CTV is going to grow, and it's going to be a monster, just like it is right now. And there's so much money moving out of linear television into CTV that, that growth is unstoppable. So that's a big focus for us. Specifically there, we have a program called Direct Access, where we -- basically, content owners are integrating and connecting with us, the DSP directly. That lowers fees for our customers, and it's great for our customers, and it's also helping us win new customers as well. Common thing, when you go out in the market with clients, it's "Why would I buy CTV through your platform versus another?" And it's "Well, do you want to buy through middlemen or do you want to buy direct from the largest content owners in the world?" That's helping us win share. We just launched that this year, but it's going to remain our top priority next year.

I think the second thing that's happening in 2024 is Google with their Chrome web browser is going to take away third-party cookies from the entire industry. Cookiepocalypse is what it was referred to a few years ago. It was supposed to happen in 2021. That got delayed to 2024, but they've confirmed that it's happening. And again, citing that Household ID, we're not relying on cookies in CTV, it's naturally a cookie-less spot, but we think that's another huge growth engine for Viant as that starts to roll through. And the way it's supposed to happen is it starts in Q1 and will be completed by Q3. So Q3, back half 2024, cookie dilution should be a big growth driver for Viant.

Makes sense. I guess just on Cookiepocalypse here, to use the word, how has the conversations been so far? Are people already actively moving budgets? How do you think about that as kind of a contribution here to your '24.

I think marketers and their agencies have certainly been exploring options, I would say, over the last 2 years. And really, what is that? They're not looking -- they haven't been moving budgets out of Chrome into other channels per se. But if they're going to move money from linear into CTV, it's inherently cookieless. So they have to have some cookieless solution, and that's why we've done really well with our Household ID. But I think as this deadline is coming near, marketers are still in the educate-me mode, "What happens when Google rolls this out, starting in the first quarter? And when will I feel the impact?" And we're pointing to Q3, is when we think you'll feel that impact. And I think it's going to -- what's going to happen is when we tell marketers, it's going to be very similar to the changes that iOS rolled out with the IDFA. You immediately saw in platforms like Meta and Snap results go down, and then they shifted money. So we see that marketers, they certainly -- you've seen it in our growth over the last 2 years looking for in these other channels for an alternative solution. And I just believe that, that will really materialize in the second half of next year.

And just to add some color to that, I mean, Google just rolled out a document for the industry on how to interact with their Chrome web browser just yesterday. So the documentation came out yesterday, with a scheduled release of finishing in Q3 next year.

Very helpful. You brought it up before, Chris, I guess just the simplification of the dashboard is complex as a Bloomberg Terminal here. Just help us think about kind of where you think the low-hanging fruit is to do that. Like what does -- help us think about kind of the timeline of that potentially starting to really bear fruit for you?

The low-hanging fruit is with your current existing customers, these traders that operate in these platforms. If I can make the user experience better for our customer, I'm going to win their loyalty. A lot of these marketers and these agencies are using 2 to maybe 3 DSPs. So we're all kind of somewhat fighting for a share of wallet. And we definitely see that as we release more and more automation on the platform, we see more budgets. More specifically, a great example of that is our AI Bid Optimizer. That is an AI model that dynamically changes the bid price to find the lowest possible price for any given publisher at any given moment. And contrast that to a human had to do that all day long, and the real thing is that they weren't. They were changing the bid price maybe 1 or 2 times a day. But when we can do that, in theory, on a second-by-second basis, they don't have to do as much work. Now all of a sudden, they see, "Hey, my CPMs go down. I'm getting savings, my return on ad spend goes up" and "Oh, wow, my pacing on these campaigns is even better." They just start shifting more money, and that's really the low-hanging fruit right there. I think the longer term is more around increasing our total addressable market. The Bloomberg Terminal has thousands, maybe tens of thousands, maybe of customers, eTrade has millions, so that's the way we think about it. So we today still rely on a large marketer or a marketing organization to buy programmatic. We are looking forward to who buys [ search ], who buy social. There are millions of businesses out there, and we think that opens a larger TAM for us.

Got it. And I think on the last earnings, and you mentioned about half the customers are now using the AI Bid Optimizer, and they were seeing the CPM benefit to something around -- average savings of about 35%. I guess just between those 2 metrics, how should we be thinking about those over kind of the coming quarters here as far as where those metrics are going? And then, how it kind of unlocks budget?

Yes. I think that the savings will stay relatively where they are, let's say, through the end of the year. We do have some planned improvements on those models coming next year, early next year. We think that there's some low-hanging fruit for even greater savings. So with greater savings, those customers then are reinvesting more money into more media, reaching more customers -- potential new customers and the results continue to improve. And again, that drives more spend.

And just to add to that, AI Bid Optimizer is a premium product that we offer. So to give you an idea, if it's driving 35% savings, we keep 20% of the savings that the AI model is driving. So it's actually driving premium pricing for us in the market and expanding our margins or our take rates, as we call it, in the DSP. So with that adoption continuing to scale, we see it actually expanding our margins over time.

And in theory, every customer, we believe, should be using this, the fact that we're just over half. The other half, we regulate -- our people will talk to them [ about ] why are we not using it because look at the data, I think it's just them getting a little bit comfortable. The automation that's out there is you somewhat have to socialize it. I think people are still "Well, hey, that was a core function of what I do." But once they start using it and they're getting better results, it's easier to use, they're adopting kind of a new method of working. So it's natural, but we think that, that largely plays out by midpoint next year. I expect the vast majority of our customers will be using it.

Got it. And I guess kind of the third leg of the innovation still in my mind here is really around Chat with Data here. You've rolled that out right around your Innovation Day, it's really about kind of democratizing data science here for the folks, the triggers and such that don't necessarily no sequel here. I guess the question is, how should we be thinking -- kind of similar question is, how should we be thinking about that timeline for adoption and scale here? And just kind of what have those early learnings have been so far?

Yes, I'll start. I mean Chat with Data, if you think about a typical organization, you have a data science team who sits there and you have a marketing team. When the marketing team wants to know, "Hey, how many of our customers are high income versus low income?" or is trying to slice and dice to get more insight into who their customers are, that's really where Chat with Data kicks in. Historically, to answer that question, you needed someone who could write a SQL query or write Python. So it took a technical skill set, getting to democratizing data science. Now, the marketing team, through natural language, can ask that question through chat of the data and receive the answer they're looking for. And I think that's what we're talking about, is it's no longer the back and forth of 2 teams, which may take a few days to get an answer, and ultimately, is it's priority #1 to answer that. This now makes every programmatic trader a data scientist per se to get the information they need to actually drive results for their campaign.

I would just say that just to remind everyone, the Chat with Data is really a UX effectively on top of the Viant data platform. And think of the Viant data platform like a GBQ, think of it like that. It really -- marketers who are using it, so of our top 10 customers, 7 of them, 7 of our top 10 use the Viant data platform because they have data scientists, and they get exponentially better results than their competitors. And that's why they -- and if you're getting better results, you're going to spend more, and we're going to get a larger share of wallet. Now we're trying to, "How do I then get that to all of my other customers who don't have data scientists?" So that's really what the opportunity is. We think we can create more of our top 10s out of the rest of our customer base. We don't -- it's not a widely adopted product across our 300-plus customers again, for that fact. But we really think that we can do that next year as we roll this out. But in the end, with cookie [ deprecation ], there is going to be a huge level of importance on first-party data, customers CRM data, their sales data. Any interactions with their customers, they need the ability to use that in their advertising. Any platform that can enable that easily for customers is going to do really well. And that's really at the core, that's what we're aiming to do. So we think that adoption -- as we roll that out next year, we have a limited beta going right now. The learnings are good, but they're already -- they are -- the customers that are using it are predominantly the ones who already use the Viant data platform. and they are data scientists. But the difference is we're letting the business people within that organization, they're the ones who are then using it, and they're getting learnings out of it as well. So as we roll that out in Q1, I think that we'll have -- I don't believe that we're going to have over 50% of our customers next year because it's a little bit of a different beast than the DSP. But we do expect that we'll have good adoption of that, and it's going to drive our spend next year. It's going to be a meaningful driver.

And I think, just to add to it, it's also a second revenue driver for the company, so we negotiate with the DSP a take rate, as we've described, and the data platform is also an additional premium product that we cross-sell the DSP customer on to be able to do it. So it's a second revenue stream. It's blue ocean, as Chris described. Very few companies are using it today because of that technical in-house need of data scientists. But we see this, again, expanding the revenue, driving our margins and increasing our revenue in a big way as adoption starts to come through. And the mid-market agencies that we focus on and the mid-market advertisers that we focus on, they just flat out don't have in-house data science teams, they lack that ability to bring it on. So giving this tool to them really does enable them to have that data science team, but it's the business operator in the marketing department that's doing it.

And as we think about kind of that go-to-market motion here, is that even necessarily the right way to be thinking about it? Is this going to be a salesforce driven? Or is it going to be something that we're going to be seeing -- the advertiser base is really going to be seeing in the dashboard here that we're just going to -- it's going to be pushed to them? How should we think about that adoption as it rolls out in 1Q?

I think it is going to be salesforce driven. Many of our customers have trialed or at least demoed the Viant data platform, and they understand its power. Again, it goes back to, "Hey, well, I don't have the engineering skill set to use it. I'd love to. So what do I do with it?" Now, that's why we created a Chat with Data, so that they actually can do it. We will push this through our salesforce, that will be the kind of go-to-market sales motion. At our Innovation Day event, number one interest, so if you were watching the live stream, you could then go on there and say, "Hey, send me more information on this." Number one interest was Chat with Data, by far.

Very interesting. I guess just maybe to kind of put a bow on it, the third would be obviously Direct Access here. We've talked about this a bit in the past, but just kind of what are we most excited about? We have the Bid Optimizer, we have chat with data, we have Direct Access. I guess kind of what are we most excited about? What's going to be moving the needle here the most in '24? And how should we be thinking about the impact of the other two over a medium to longer term?

I mean, our top priority, like I said in the beginning, was CTV. And so that's going to grow. But when we think about -- we think that we're of the size that we can continue to steal market share and grow faster than the market. We think that we've done a really good job of rolling out new products, and our customers have been adopting those. So as we have this year introduced Direct Access, it's about a little more than 25% of our CTV spend, is going towards our Direct Access partners. Disney just made an announcement and included us in that, and Disney is part of our Direct Access Program. We're focused in CTV because we believe the largest content consumption in CTV are the biggest content companies in the world. So I think that I'm most excited about that. I know it's on deck there. Our customers want to connect directly with content owners, and the content owners also are looking to maximize their CPMs and really maximize the amount of money they can get. So by connecting directly to the DSP, it's also driving it. So look for more names coming from us in the beginning of the year and some other announcements with those content companies that are going to be really exciting.

Very cool. I guess just to wrap up a little bit on the innovation side, I guess, really, how do we think about this from a cost side, right? Engineering headcount, I think you said it was already up about 30% year-over-year. What is this all going to cost? Like is it possible to potentially be delivering here kind of high single-digit non-GAAP expense growth next year?

Well, let's first look at what we did this year. We delivered 22% revenue growth in Q3, while operating expenses were down 13%. That's all AI being applied internally to our platform. So we're already kind of using AI to keep the expenses low, and we've seen a huge benefit this year. And I do think as we go into next year, it's not going to be negative in OpEx, but I think high single digit, low double digit, somewhere around there. We'll do a manageable increase in operating expenses, primarily to drive the adoption of the new products on the sales team and the go-to-market team. But from there, we do see -- the great thing about ad tech in general is the operating leverage in these business models. And we challenged our internal team this year in 2023 to prove it to the investment community of what that operating leverage will look like. And if you track us in Q1, Q2, Q3, and of course, we're in the middle of Q4, but you kind of see that leverage kicking in. And so as more ad spend kicks in, we're going to maintain cost to a very manageable number, high single digits, low double digits. And you should see more EBITDA kick off because that's the way this business model works.

Got it. Let's talk macro here. Larry had called out on the 3Q call that demand was steady throughout the quarter and that you saw strength in retail and consumer. So I guess just kind of two questions here would be, yes, really we've seen other players in the space here that had a more pronounced impact from what's been going on in the Middle East. I guess, why do you think Viant didn't see it? I know you had mentioned before that -- is it a customer base thing? How should we be thinking about this?

I think there's two things. Number one, we're U.S.-focused only. So we are -- if something impacts the United States, okay, that would potentially impact our revenue. A lot of the geopolitical risks that are out there are international. And so it doesn't have an effect on our business. So we feel very good about that. Just going from there, it's just about driving the innovation, driving expansion of the products throughout our salesforce in the U.S. I think one of the big areas that we're winning on is just gaining market share. The product is performing very, very well in market. The knowledge of cookie deletion going away, the exploration of new solutions that are out there is what's driving our business. So I think part of this year and why we're outperforming is market share gains and our U.S. focus is really why we're different than some of the other players that you mentioned.

Got it. And I guess just from our ad tech perspective, it still sounds like a low budget visibility type of environment that we're dealing with here, but that was really kind of the dynamic that we were dealing with last year as well. So it's just any puts and takes that we should be thinking about whether that you're having in your conversations as you're thinking or as we're all thinking about kind of budgets really for next year?

Yes. Well, I've said this a few times, I remember what it felt like at this time last year. I feel a lot better this year.

A lot better.

Last year, maybe just think about it, I mean no one had any idea what was in store for 2023. What was the economy going to be like? And I think that what was happening was there were a lot of companies and our customers thinking about the brands direct. A lot of them are going through cost exercises, and many of them hadn't actually executed those yet. They're getting close to the holidays, whether or not they were going to do those. So they really hadn't put out their annual budget yet, they haven't really forecasted that. Their teams didn't know, their agencies didn't know. So I mean it was -- no one knew anything last year. And I think you saw that in the Q4 guide. A lot of the Q4 guidance were pretty brutal last year. Now, as I look forward into how we feel right now and looking into next year, we feel like we do have a lot more visibility. But I do think by comparing it to pre-COVID levels, I just think it was a different time. And I think that there's just so much more at play, geopolitical issues, obviously, the economy interest rates. There's so many things that are out there right now. But the one thing that I'm seeing, we've been in business for -- this will be our 25th year. So the first big thing we ever saw was 9/11. I mean everything stopped for 30 to 60 days. And I -- just you watch how long it took us as far as America to respond and business to respond, it took a while. All of a sudden, you see COVID. Fast forward, COVID happens, we responded pretty quickly. I mean, yes, ad spend stopped, but it was back within 30, 45 days. And I think that where businesses are getting a lot better at dealing with a lot of these distractions out there and operating a little more fluidly, but the downside to that is, is that you're not getting it maybe isn't as forward planned as we'd like. But I still feel good about the visibility next year.

Yes, I would say, more than a decade ago, it was annual planning. 5 years ago, it was quarterly planning. Post-COVID, it's monthly planning, with a rough idea quarterly of what the expenses are going to be. And I think that doesn't really go back because that agility is great for businesses. One of the benefits of programmatic advertising is if something does go wrong, you can hit pause. We would be the first one to be paused, but we're the first one to be turned back on as well. And what you're seeing at the macro level is linear TV budgets are pouring into streaming and Connected Television. And the flexibility that programmatic advertising gives marketers is the best that's out there. And so I think more and more, they're going to rely on programmatic platforms like ours because of that agility. It's a big advantage that we have over traditional approaches.

Got it. And I guess just maybe -- so we have a question here from the audience, but maybe just one more. Just thinking about you guys specifically, as we think about the conversation around '24, new versus existing customers, how should we be thinking about that kind of return to growth on new customers here?

Yes. I think we're going to see that. We talked previously just about some of our smaller spending customers that they take up the same amount of resources and just don't spend at the same level as the others in their cohorts. And it's really because they don't have -- their businesses are a lot smaller. These are a lot of customers that we signed in 2017 and '18. We think that, that largely rolls off by the end of the first quarter as they have their annual MSAs outcome renewed. So I think that you're really going to see the new customer growth. We're pretty bullish on customer growth next year.

Got it. A question from the audience here and the direction I was going, just on the CTV side, it'd be great to hear more about the CTV opportunity. Why is this so compelling for advertisers, what platforms will receive more of the spend than others, Prime Video versus YouTube versus some of the other streamers out there? And from where will the CTV be taken? You're talking about linear. How should we be thinking about some of the other digital channels, if that's coming from there as well?

Yes. I think the primary driver is linear television budgets. And I think the advantage that Connected TV versus linear TV is that it's addressable, meaning you know who the end user that you're going to deliver the ad to is by either e-mail address or whatever it may be. That's what we mean by addressable. So you can show ads to the users that you believe are higher likelihood to buy your products and you're going to save kind of all of your ad impressions to go after that in-market audience we call. Versus in linear, it's 1 ad shown to as many people are watching that channel and that budget. So there's more waste in linear television. There's more precision in Connected Television. We'll see where Google Chrome goes. I mean its potential online video budgets could move into Connected TV. I would say, in general, as an industry, everybody is focused on the Connected TV opportunity from the buy side, the customers that we serve. And you're seeing the sell side, companies like Disney, they're moving their content from linear platforms into streaming platforms as the first window. And I think that was the tectonic shift that really made streaming pick up post-COVID, is that the content -- the best content was going to streaming first for their subscribers. And so I don't really see that changing from here on out. Any other...

I really think Tim had said, it's addressable, yes. So you can, in theory, show 1 ad to one household, and in another household, it's a different [ ad on the same ] program. You don't have that ability in linear. But why I think its the real opportunity is the measurement capability. We've long held the television, even linear television, it works. It works really well. A 30-second video ad works a lot better to drive consumers than a static [ banner ] of ad. So I think that, that is largely going to play out. I think that there are ad formats like display ad formats that get over-allocated performance right, that marketers think perform a lot better than maybe, say, their television ads. But I think now that it's going to be in CTV, we're going to see a rebalancing act of that. And I think that marketers are going to see the true value of video on the big screen.

And just to add to that, when you think of search advertising, a lot of times, the Ford Motor Company will buy the F-150 brand term, we call it. When you think of the consumer who typed in Ford F-150, what prompted them to do it? Before in linear television, you couldn't measure did they see a TV ad and then went to Google and drove a search and then clicked on the search ad and came, search got all the credit. But I think most of us in the advertising industry know that television is driving people either direct to the advertiser's destination or to the search engine. And so I think what's so powerful about Connected TV now is that we can measure television ad exposure, search performed and then eventual purchase. And I think search has a potential negative impact of budgets when you can drive, you can generate the searches by showing TV ads, if that makes sense. Television advertising drive search advertising, and that drives sales activity to the end destination, the end advertiser's website. Now with Connected TV, we can kind of measure that entire journey. And I think budgets are going to fly back into television once the marketers really get that data and can see the impact.

Got it. Just one part of the question I want to come back to and I add it on my list to touch on as well was just the Amazon side and what Amazon is doing here with the Prime ad-supported tier being the default. How are you guys thinking about how that impacts your business and the broader CTV opportunity?

Yes. I mean there's content owners like Disney, and then there's platforms like Fire TV, Roku, Samsung. The platforms are in a great position as well. They get a huge chunk of the advertising, they're licensing content directly. And then, of course, we'll see which platforms gain the biggest market share. I think Amazon is in a tremendous position. We saw this with the announcement from Netflix on the content side, moving into ad-supported. When you hear more advertising, getting inserted in television, that is what drives our business, is buying that advertising on behalf of marketers. And so that's music to our ears. We're not directly integrated with Prime Video today. It's what we call a walled garden. But as you've seen these walled gardens, more and more, the walls are coming down, and they're opening up to third-party players like us to drive that revenue in a programmatic way. Instead of hiring more salespeople and pounding the pavement to get more dollars in, they plug in programmatically with us, and we bring a mid-market advertisers coming from states that they don't have a salesforce in, states like Alabama. All across that mid-market region, they love partnering with us these big content owners because they are not really focused on tractor supply, they're focused on Comcast or Amazon as an advertiser, these big names, big brands. So to me, it's a huge opportunity as these platforms continue to scale. But we'll see which one, in terms of market share, ends up being the biggest.

Got it. And just I know we're starting to run a little tight on time here, but the political landscape in '24, that's going to be a key driver for CTV. How should we be thinking about how '24 is going to shape up versus '22 midterms versus how it was in 2020 and kind of key differences here that we should be keeping in mind?

Yes. I would say, in '20, we underperformed in '20 in political. In '22, I think we did a little better, I think we highlighted we were low single digits. We think we're going to do a lot better than '24. We think it's going to be meaningful. And really, it's because of our penetration -- much of the political dollars, it's all in the mid-market. Madison Avenue is not planning political campaigns. So we think that bodes really well for us, and we've made a lot of inroads there. So we're excited about the opportunity...

I would just add that, when political dollars were planned, linear TV was first. And I think that is what shifted as we start to move forward. It's now digital first, and they're going to try and add linear TV to reach the local markets because of the scale that Connected Television has now achieved. And so I think digital advertising, broadly, is in a very good position to be a huge beneficiary of political ad budgets, both in '24 and way into the future.

Well, I've got one last question here, if I can quickly sneak it in. It would just be -- we get this question a lot from investors, is just what is the right way to be thinking about the take rate that advertisers should be paying for the more premium CTV inventory that's going to be moving through the DSPs? Should this be a headwind for take rates, going forward? Or is this going to result in kind of mix higher?

I don't think -- and I've heard this before, I think that's more of a sell-side issue, certainly. I think if you think about upfronts, this makes sense historically. There's upfronts that are direct, they do direct, a marketer or the agency does direct with the content owner. And then there was what was programmatic that was kind of everything that was left over. Now what you're seeing this year and moving into next year, at least in our business, we're getting a larger share of those upfront dollars we used to not get. Now we're really getting them. And it's no different because the DSP still is doing a lot of the work. We're still in their bidding, buying, and that marketer still wants data-driven advertising. So that's not a headwind for us at all. I think on the sell side, they've created products to be able to make what was done over paper insertion orders to be delivered electronically. But inevitably, those dollars still have to sit in the DSP. So I think that some of the sell-side players have opened up products that have lower margins there, but we don't see that.

We'll end it there.

All right. Thanks a lot.

Thank you.