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Presentation

PubMatic, Inc. misses on earnings expectations. Reported EPS is $-0.11 EPS, expectations were $-0.09.

Operator: Hello, everyone and welcome to PubMatic’s Second Quarter 2023 Earnings Call. My name is Catherine and I’ll be your Zoom operator today. Thank you for your attendance today. This webinar is being recorded. I will now turn the call over to Stacie Clements with The Blueshirt Group.

Stacie Clements: Good afternoon, everyone and welcome to PubMatic’s earnings call for the second quarter ended June 30, 2023. This is Stacie Clements with The Blueshirt Group, and I will be your operator today. Joining me on the call are Rajeev Goel, Co-Founder and CEO; and Steve Pantelick, CFO. Before we get started, I have a few housekeeping items. Today’s prepared remarks have been recorded, after which Rajeev and Steve will host live Q&A. If you plan to ask a question, please ensure you’ve set your Zoom name to display your full name and firm and use the raise hand function located at the bottom of your screen. A copy of our press release can be found on our website at investors.pubmatic.com. I would like to remind participants that during this call, management will make forward-looking statements, including without limitation, statements regarding our future performance, market opportunity, growth strategy and financial outlook.

These forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. These forward-looking statements are subject to inherent risks, uncertainties and changes in circumstances that are difficult to predict. You can find more information about these risks, uncertainties and other factors in our reports filed from time-to-time with the Securities and Exchange Commission, including our most recent Form 10-K and any subsequent filings on Forms 10- Q or 8-K, which are on file with the Securities and Exchange Commission and are available at investors.pubmatic.com. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements.

All information discussed today is as of August 8th, 2023, and we do not intend, and undertake no obligation, to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. In addition, today’s discussion will include references to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net income and free cash flow. These non-GAAP measures are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our press release. And now, I will turn the call over to Rajeev.

Rajeev Goel: Thank you, Stacie and good afternoon everyone. We drove strong results with outperformance on the top-line, driven by the strength of our omnichannel platform and deep relationships with customers and partners. Adjusted EBITDA was $12.0 million, which includes the impact from a demand side platform customer that filed for bankruptcy. Excluding this impact, adjusted EBITDA would have been $17.7 million, highlighting the strength of our business model and our ability to drive incremental profit and generate healthy free cash flow. As we highlighted at the beginning of the year, we continue to focus on deepening our customer relationships and making highly focused innovation investments that we believe will position us for outsized share gains when digital ad spend growth inevitably turns upward.

This strategy continues to yield results and is strengthening our position within the ecosystem. We continue to build deeper, stickier relationships with customers. At the same time, we are adding new publishers and buyers to our platform. Our total number of active customers grew 13% year over year, and we are now monetizing inventory from over 1,750 publishers. In the last year, we’ve also increased the number of advertisers on the platform by almost 30%. New product innovation is driven by this same land and expand approach. The two major technology launches we have announced this year: Activate and very recently Convert, each significantly expand our total addressable market while providing incremental growth opportunities with our existing customers.

We do all of this on our owned and operated infrastructure, which allows us to deliver productivity and efficiency gains that we anticipate will improve, margins in the future. These efficiencies also benefit our customers, which in turn drive greater customer success and expansion on the platform. In the near term, the current digital advertising market continues to be fluid. Many advertisers remain cautious about the economic environment as they closely manage ad budgets in case of a potential recession, particularly around brand advertising. In addition, current supply growth is outpacing ad budget growth. Combined, these two factors are resulting in an industry-wide downward impact on CPMs or ad pricing in the short-term. This will normalize once ad budgets stabilize and start to grow.

As a result, impression volume on the PubMatic platform continued to grow in the second quarter, however CPMs were softer than expected, particularly in June with continued downward trends in July. Despite these headwinds, we remain in a leadership position. We have increased capacity on our platform toward higher value formats, optimizing for impressions that command higher overall CPMs. I am confident in our growing list of long- term revenue drivers and ability to gain market share. We have a strong and sustainable financial profile, and our deep technology innovation is widening our competitive moat. What’s more, we benefit from industry-wide shifts and consolidation. The current macro environment is forcing publishers and buyers to do more with less.

Publishers are looking to better monetize their inventory across a wider set of channels and formats, and they are abandoning homegrown technology and increasingly relying on technology providers such as ourselves. At the same time, buyers are seeking greater efficiencies and control across their digital advertising supply chains. Both require integrating leading global, omnichannel, and transparent technology solutions that are market leaders in innovation. This trend is rapidly playing out across the broadcast industry, resulting in a shift from traditional, guaranteed upfront media buying to a scatter market, or programmatic approach. Publishers, including large CTV publishers, are following suit in order to maintain access to advertiser budgets.

As we predicted at the time of our 2020 IPO, we are seeing the programmatic disruption of CTV take hold. As a result, we delivered over 30% growth in CTV, and our pipeline of tier one streamers is growing. We are in active conversations with dozens of CTV publishers, including some of the biggest names in streaming media. We have new and expanded partnerships with premium video providers including AMC Networks, DIRECTV, Fox Digital, TiVO and Warner Brothers Discovery EMEA. Accelerating this pipeline is Activate, which provides publishers with unique buyer demand not available elsewhere. As buyers continue to consolidate via Supply Path Optimization, we’ve increased our sales focus and investments in this area. As a result, activity from SPO continues to climb.

In the second quarter, SPO made up over 40% of activity on our platform, an all-time high. Our long-term expectation has been that SPO would eventually reach 50% or more of total activity, and we are well on our way to reaching this milestone. Not only is SPO a significant contributor to top-line growth, but it’s an important driver of incremental, long-term margin expansion. Our continuous reinvestment of profit into targeted innovation underpins our long-term growth strategy. With generative AI, we can further expand and accelerate our innovation. While still early, we are seeing gains in engineering productivity across many use cases, including building proofs of concept for future products. We’re also seeing greater efficiencies through use of generative AI to increase automation, such as software testing.

As a result, we have already started to shift hiring away from software testing engineers to feature development engineers. It’s still very early in the application of generative AI and we continue to experiment with many different opportunities. Exactly three months ago, we launched Activate, our end-to-end SPO solution that enables buyers to execute non-bidded direct deals on PubMatic’s platform while accessing CTV and premium video inventory at scale. Activate represents a nearly $65 billion expansion of our total addressable market. We couldn’t be more pleased with the industry reception and interest that this highly innovative product has received. We’re seeing traction and enthusiasm across every region and having active agency and advertiser discussions with several dozen accounts.

We are hard at work building more features into the platform based on our vision and customer input. While we are scaling up existing customers and adding new ones, we are investing in building out a global customer success team to help our customers expand their usage of Activate. Over the next couple of months, we will extend the availability of Activate from the Americas and EMEA regions into APAC. Two weeks ago, we launched Convert, our unified solution for commerce media that leverages our global infrastructure, ad monetization expertise, and customer relationships. Over the years, we’ve built relationships with retail and commerce customers, and have gained a deep understanding of the unique technological challenges they must solve for in order to build out their multi-pronged ad businesses.

One of the biggest challenges that these retailers or commerce media participants face is the fragmentation of the advertising ecosystem, and the complexity that it creates. For example, a grocery store chain may use one platform for their onsite sponsored product listings, another for onsite display and video ads, and yet another for offsite audience extension across the open internet. Not only does this require their teams to learn multiple systems, but their advertising data is also proliferated across various partners, causing challenges for closed loop reporting and optimization, in addition to privacy or data security concerns. For advertisers, this challenge is multiplied across the different retailers they want to work with. Our latest offering, Convert, is built to solve these challenges by centralizing commerce media capabilities in a single, self-service platform that offers onsite and offsite monetization across a variety of ad formats, including our newly available sponsored listings capability.

For the past two years, we have been building the new platform to work for both traditional retailers as well as high-transaction businesses such as transportation or food delivery providers, travel companies or any scaled commerce company that processes transactions. We have seen strong interest among commerce companies around the globe, including rideshare provider Lyft, and Wallapop, a leading European classified listings site. By integrating sponsored listings into our existing omnichannel solutions: CTV, video and display, all onto a single platform, agencies and advertisers can easily access all available inventory and programmatically deploy working media dollars with the same transparency in fee and pricing structures that PubMatic is known for.

Major media buyers like dentsu, IPG, and MiQ are partnering with us to help their advertisers more efficiently scale access to commerce media inventory and data. With the addition of Convert to our growing software suite, including our SSP and Connect, we now offer a comprehensive solution for commerce media that allows commerce media networks to tap into PubMatic’s nearly two decades of success helping media and data owners safely and securely monetize their assets programmatically. With this launch, we are significantly expanding our total addressable market by $10 billion and growing. Much of this TAM expansion is from performance marketing budgets, which will allow us to further diversify our business beyond brand ad spend. I’m extremely proud of our team and all that we’ve accomplished so far this year.

We’ve increased impression capacity to accelerate the shift in our business toward higher value formats and channels, while also significantly expanding our TAM with the launch of two innovative solutions. Our land and expand strategy is proving successful, adding more publishers to the platform and building stickier relationships with existing customers and partners. We remain a leader in a rapidly evolving industry and our investments and achievements today strategically position PubMatic for long-term, durable growth. We believe the industry will continue to consolidate, strengthening the leaders in the space that provide omnichannel, global scale and creating more opportunities along the way for technology innovation to play an even bigger role across the ecosystem.

I’ll now hand it over to Steve for the financial details.

Steve Pantelick: Thank you, Rajeev, and welcome everyone. Q2 revenue was $63.3 million, above guidance, and adjusted EBITDA was $12 million, which includes an unexpected bad debt expense related to the bankruptcy of a top 10 buyer. Excluding this one-time expense, adjusted EBITDA would have been $17.7 million or 28% margin. In Q2, we prioritized the initiatives that strengthen the foundation of our business and position us well for long-term growth. We focused on operational excellence, customer relationships and innovation. We delivered incremental efficiencies from our owned and operated infrastructure and generated $10.8 million in free cash flow. We increased activity from SPO deals to over 40%, an all-time high. And, importantly, we launched high value product innovation, with the recent launch of Convert, a unified self-service platform for commerce media and our buyer focused Activate offering last quarter.

These two new areas are expected to increase our long-term TAM by over $75 billion. Turning to the key revenue drivers in Q2, monetized impressions increased year-over-year while CPMs were lower. Reflective of the cross currents we are seeing in the macro environment by region and ad vertical, trends varied by format and channel. CTV continued to be a high-growth channel for us, driven by an increase in monetized impressions, partially offset by lower CPMs. Overall, CTV revenues increased over 30% year-over-year. Online video monetized impressions, across mobile and desktop, also increased, but experienced double-digit percentage CPM declines that pushed revenues down more than 10% year-over-year. Total omnichannel video revenues, which span across mobile, desktop, and CTV devices, declined 4% year-over-year and represented approximately 31% of total revenues.

Display monetized impressions, across mobile and desktop, grew year-over-year while CPMs declined. Overall, display revenues were down minus 1% year-over-year as compared to minus 8% in Q1. Display revenues represented 69% of total revenues. In terms of ad verticals, while the top 10 grew 8% year-over-year, we saw a divergence of trends across categories. Four of the top 10 verticals increased double digit percentages year-over-year led by the Food & Drink vertical at over 30% growth. Five of the top 10 grew in the low to mid-single-digit percentages, while Shopping was the only top 10 vertical that declined year-over-year in the high-single-digits. On a regional basis, EMEA grew over 16% year-over-year, while the Americas declined by 1%. In terms of the monthly progression through the quarter, April revenues were flat and May revenues increased year-over- year.

June revenues declined driven by softness in both online video and display CPMs. Turning to our operational strength, our Q2 financial results benefited from increased efficiencies and optimization of our owned and operated infrastructure. Overall impression processing capacity increased over 30% year-over-year, largely driven by software optimizations with minimal incremental CapEx. On a trailing twelve-month basis our cost of revenue per million impressions processed declined by 12%. The combined impact of our operational efficiency and business model leverage enabled us to achieve outstanding marginal profitability. Approximately 85% of every incremental revenue dollar above Q1’s level, converted to gross profit in Q2. This capability is a key differentiator for us and has enabled us to achieve consistent profitability for a decade while building the foundation for future growth.

In terms of operating expenses, Q2 GAAP OpEx was $45.4 million. Included in this total were incremental costs of $2.1 million related to our acquisition of Martin in September last year and $5.7 million in bad debt expense related to the bankruptcy of one of our buyers. Excluding these incremental costs, operating expenses increased less than 10% year- over-year. In Q2, GAAP net loss was $5.7 million, or minus $0.11 per diluted share. Excluding the impact of the bad debt expense, we would have delivered GAAP net loss of $49,000. Q2 non-GAAP net income, which adjusts for unrealized gain or loss on equity investments, stock-based compensation expense, acquisition-related and other expenses, and related adjustments for income taxes, was $1.3 million, or $0.02 per diluted share.

Excluding the $5.7 million of bad debt expense, non-GAAP net income would have been $7 million. Turning to cash, we are in excellent financial shape and ended the quarter with $170.9 million in cash and marketable securities and no debt. We generated $15.8 million in cash from operations and $10.8 million in free cash flow. Our consistent cash generation is an important driver for our long-term growth and market share gains as it allows us to consistently invest in innovation. As of July 31, we have repurchased 1.8 million shares of our Class A common stock for $27.5 million in cash. We have $47.5 million remaining in the repurchase program. Now turning to our outlook. In light of recent trends, we remain cautious about the next couple of quarters.

On the one hand, many advertisers, particularly brand-centric, remain cautious about the economic environment and are tightly managing ad budgets in case of a potential recession. On the other hand, current ad supply growth is outpacing ad budget growth. In June and July, we saw the impact of these factors with both softening of ad spending by vertical and pressure on CPMs. To illustrate this point, for the combined April and May periods, ad spending for our top 10 ad verticals grew 9% versus the same period last year. For the June/July period, the top ten ad verticals slowed to 1% year-over-year. A notable change in trajectory was observed in four consumer centric verticals: Shopping, Technology, Personal Finance and Arts & Entertainment. In aggregate, they were down 7% for the June/July period versus the same period last year.

Video CPMs took a 10% step down in July versus June. Display CPMs showed a similar pattern of softening in July. Our outlook for August and September assumes that CPMs remain relatively flat to what we saw in July. Given the progression of CPMs over the last 12 months, on a year-over-year basis, this translates to roughly 20% lower CPMs for video and 10% lower CPMs for display in Q3. On the positive side, monetized impressions continued to grow in July sequentially versus June and versus last year. July online video impressions increased over 20% year-over-year. CTV impressions increased in the single-digit percentage range as they were lapping approximately 300% volume growth in the prior July. And display impressions increased 5% over last year.

We anticipate these volume trends will continue through Q3. As a reminder, we are proactively taking steps to diversify our revenue mix by adding more higher-growth formats and channels. For the first half of 2023, we increased the number of high-value omnichannel video impressions monetized by 15% over the first half of 2022, while monetized display impressions increased 2% over the same time period. While these efforts will provide long-term, durable growth and margin expansion, they will not outweigh the soft CPMs that we project for Q3. We anticipate that Q3 revenue will be in the range of $58 million to $61 million. The format and channel projections underpinning this guidance are: display revenues will decline in the single digital percentage range; online video revenues will decline by approximately 10% year-over-year, similar to what we saw in Q2; and CTV revenue, which grew over 150% last year, will decline on a year-over-year basis.

Also influencing our near-term outlook is the recent bankruptcy of one of our top 10 DSP buyers on June 30th. We estimate that it will take several months for this ad spend to be fully redistributed to other buyers already integrated on our platform. This transition will reduce our second half revenue by several million dollars. In the long run, we do not expect this development to have a material effect on our business. Assuming macro conditions do not worsen, we estimate that Q4 revenue will grow sequentially from Q3, consistent with the lower end of typical seasonal trends. In terms of potential upsides, if CPMs declined at roughly half the rate we are currently assuming, we estimate it would add $3 million of incremental revenue per quarter.

On the cost side, we have been taking actions to drive incremental productivity across every aspect of our business and you can see the positive results in our Q2 financials. For example, we successfully added approximately 20% incremental processing capacity by the end of Q2, without a corresponding step-up in CapEx. This accomplishment means that we expect our second half GAAP cost of revenue on an absolute dollar basis will exhibit very limited quarter-to-quarter sequential cost increases despite impressions continuing to grow. As a byproduct of our leveraged business model, in the near term, we expect any uptick in CPMs beyond our current expectations to result in strong marginal profitability. We anticipate that over the long run these efficiencies will have a compounding effect and will drive higher gross margins for us.

As previously noted, our Q2 GAAP OpEx includes a one-time incremental bad debt expense of $5.7 million. Adjusting out this cost, we anticipate that Q3 OpEx will be roughly flat compared to Q2. We anticipate that Q4 OpEx will increase sequentially from Q3 in the low-single-digit percentage range as we add incremental innovation investments supporting our Activate and Convert products. Given our revenue guidance and our optimized cost structure, we expect Q3 adjusted EBITDA will be between $13 and $15 million or approximately 23% margin at the mid-point. Turning to CapEx, our capacity optimizations and operational efforts to drive higher value impressions onto our platform have been going well. We expect a further reduction in full-year CapEx and now project CapEx at $10 million to $13 million.

This would be a reduction of more than 70% compared to our 2022 CapEx of $36 million. We expect these initiatives and others in the pipeline will enable us to incrementally increase free cash flow over time. To summarize, over many years, we have built a resilient and durable business that is one of the world’s leading, scaled, global SSPs. In Q2, we continued making progress on the three operating priorities that I outlined last quarter. Number one, generate significant free cash flow. Through the first half of 2023, we have delivered more than 40% of last year’s level. It should be noted that with the recent DSP bankruptcy, we expect Q3 free cash flow will be below normal trends but we anticipate a return to robust free cash flow in Q4. Number two, position ourselves for revenue acceleration when ad spend and CPMs stabilize.

Despite near term pressure in CPMs, we remain confident in our long-term growth opportunity, as evidenced by our ability to continue increasing monetized impressions. We are building deeper relationships with publishers and ad buyers, expanding our TAM by bringing innovative new products like Activate and Convert to market, and scaling higher value formats like CTV and online video. We anticipate that our new product offerings will add to our revenue growth in the second half of 2024. And, number three, establish a new level of efficiency in our cost structure that will lead to margin expansion in 2024 and beyond. With that, I’ll now turn the call over to Stacie for Q&A.

A – Stacie Clements: Thank you, Steve. [Operator Instructions]. Let’s dive into Q&A. We will first start with Matt Swanson from RBC. Please go ahead, Matt.

Matt Swanson: Yes. Thank you, guys so much for taking my questions and congratulations on battling through the macro this quarter. I guess the first thing is, it really exciting to hear about both Activate and Convert, and obviously conceptually it makes a ton of sense for all the value this can add. But maybe building some context for us around that $75 billion, could you just talk about the use cases and customer types that maybe make the most sense early on in kind of the parts of those broad markets you’re focused on?

Rajeev Goel: Sure. Hey Matt, good to hear from you and yes, let me take that. So what we’re really focused on is we’ve talked about, I think for the last several quarters in this kind of slower economic period is really innovating to have the right solutions in place for where we anticipate ad spend growth is really going to take off when the market stabilizes. So key amongst those are Supply Path Optimization and omnichannel video including CTV with Activate and then commerce media with Convert. So combined it’s about a $75 billion TAM expansion, about $65 billion of that coming from Activate and then $10 billion and growing pretty rapidly in the commerce media space. And I think it’s worth noting that combined those two more than double our existing or double the total TAM, so pretty significant increase in TAM for us.

So in terms of the use cases, it really comes down to helping the industry build a more transparent, efficient, and data privacy or data secure and effective digital advertising supply chain. So all of the use cases are variants of how buyers can get closer to the owners of media, whether that’s a retailer or commerce media player or it’s a publisher or how they can get closer to data that could again come from a commerce media customer, could come from a publisher or from a third-party data owner and do that in a privacy safe way. And by focusing on that efficiency, so with omnichannel video and Activate connecting PNPs and PG deals or in commerce media helping with onsite monetization of sponsored listings or display and video or offsite monetization, it’s really about helping drive the ROI for buyers so they spend more on our platform then helping drive more revenue from the media and data — drive more revenue for the media and data owners.

So we feel really good about how we’re using our single platform, single omnichannel and global platform to extend further into these use cases and also leveraging a vast array of existing customer relationships. You look at, for instance, our Convert launch, its IPG, dentsu, MiQ on the demand side all existing customers as well as a combination of new and existing folks like Wallapop and Lyft and eBay, some of which we’ve been working with for many years and some of which are new.

Matt Swanson: And then, if I could ask for my follow-up kind of an actual follow-up on that, when we’re thinking about SPO and kind of the traction when you’re tying up new customers, do you think having a more well-rounded and kind of future proof platform, having some of these additional solutions that can Activate or Convert or some of the headway you’re making in CTV, like does that when people want to standardize, are those all things that are coming into these conversations so maybe benefiting even before they start to really monetize?

Rajeev Goel: Yes, absolutely. So a prime example of this is the Convert launch. So you see IPG and dentsu, these are big buyer customers that we previously announced Supply Path Optimization deals with. We’ve had a number of conversations with agencies where they’ve said, hey, we need to figure out, we as the agency, what our play is in commerce media, PubMatic what you’ve just announced sounds great. We’re already pushing more of our spend on to your platform through non-commerce media oriented advertising as well as through Activate. So come in and let’s talk more about the commerce media opportunity and how we can do more with you. And I think this is kind of part and parcel of what we typically see in a economic cycle, which is everybody has to figure out how to get more efficient, how to do more with less resources.

And a key part of that in our industry is relying on fewer bigger partners. And that’s why we always are talking about being omnichannel, being global, and having a single integrated platform. But advertisers and agencies want to rely on fewer platforms that are self-service and transparent to help them grow their business and become operationally more efficient. And we think we can really play a key role in that and use this timeframe when ad spend growth is muted to really lay the groundwork for outside share gains in the future.

Stacie Clements: Our next question comes from James Heaney from Jefferies. Please go ahead, James.

James Heaney: Great. Thanks for the questions. Steve, could you just talk about just the reasons for why omnichannel video is declining at a steeper rates in display business and then I think you mentioned that CTV revenue would decline in Q3, but wanted to make sure I heard that correctly. And then, just one for Rajeev, realize it’s still early, but could you just talk about how you anticipate commerce media to benefit your business in the holiday quarter? And then, just anything around your partnership with Kroger and how that’s evolved over the last year. Thank you.

Steve Pantelick: Great. Nice to reconnect, James. So with respect to the trends that we’re seeing, what we shared in our prepared remarks is, we actually had a pretty solid Q2. April was stable, May was up, and we start to see softness in June, particularly in what we describe as sort of brand-centric advertising. And that speaks right to video predominantly online and CTV. And so we saw a couple things going on. Number one, CPMs were becoming softer. We started to see that in June and we saw it take a step down in July. And so, with that sort of combined effect, you have sort of one category of downward pressure. The other fact is that overall, that pressure on CPMs has been building up on a year-over-year basis, so it looks more extreme on a year-over-year basis than it otherwise would look.

And so at the end of the day, what our focus has been is to make sure that we are getting more share in the market. And one of the measures that we really track very closely is monetized impressions. And so while CPMs have been soft for video, our monetized impressions have been quite robust as I called out plus 20%. And so at the end of the day, we’re going through a short-term cycle here where brand advertisers are being more cautious. You can also see that in the ad spend verticals. Shopping has been down for a couple of quarters, as has a couple consumer-centric verticals, technology personal finance and so all of those do have impact on the video segment. Now, the positive that I called out in Q2 was display trends were starting to improve in terms of revenue minus 1% versus the prior year and it was minus 8% in Q1.

And so the benefit of having a diverse platform as we do omnichannel platform allows us to take advantage of the different trends in the business. And reality is, at the end of the day, we have built a very scaled business and we’re broadly exposed to all the ad verticals. So it is sort of a function of macro pressures but we’re doing all the right things to make sure that we are well-positioned when ad spend stabilizes. Rajeev just described the investments and the outcomes in terms of new products that will be a big positive benefit for us in 2024 and beyond. So I’m not overly concerned about current CPM pressures because they inevitably will recover.

Rajeev Goel: Right. And James, let me turn to question for me around commerce media. So we are not anticipating any material revenue contribution from our commerce media solution this year. Obviously, we’ve just announced the product a couple of weeks back. So we’re really at the point of bringing initial customers on and obviously getting more feedback from those customers of features and capabilities they’re interested in. So we aren’t anticipating material revenue, but I think there are absolutely some upsides there. And maybe Kroger is a good example of that. So with Kroger, we have been working with them for several quarters and primarily in one of the four commerce media use cases that we’re focused on, which is inventory extension or finding users to bring back to their shopping website that may be looked at a chopping part or looked at a product and abandoned that without purchasing.

With our new release, we anticipate being able to add more use cases to that relationship and to be able to expand that revenue set. And it may be worth me just commenting briefly on what are those four key use cases? So two of them are related to onsite monetization. So first is onsite monetization via sponsored listings. So this is a very common shopping specific ad format that you see on commerce websites. And that is a new capability that we’ve launched. Second is onsite monetization of display and video ads. And so we’re already doing this with folks like eBay but now more recently announced Tripadvisor, Lyft and Wallapop. Third is the inventory extension opportunity that I mentioned with Kroger. And then the fourth is using our Connect data platform to monetize first party data with audiences attaching that to other media that’s flowing through our platform.

So companies like Epsilon and IOTA are using that capability. So we’ve been building these components now for a couple of years, and so we feel like now we can bring all of this together in a single self-service platform and be able to now upsell and cross-sell across a variety of different customers that are using single use cases cross-sell them into multiple use cases.

Stacie Clements: Thanks, Rajeev. Our next question comes from Jason Helfstein, Oppenheimer. Go ahead, Jason.

Jason Helfstein: Hey, thanks. So I just want to unpack the CPM weakness a little more. So first, does MediaMath have anything to do with it in the third quarter? Are they — like can you call that out as a headwind, and if so, how much?

Steve Pantelick: Sure. Just unpacking it some more, I mean, the reality is as I shared a moment ago, we are broadly exposed to many ad verticals, many advertisers, particularly brand advertisers. And so we do believe that there’s just general caution people keeping it very tight brain on ad budgets. And so in any supply demand ecosystem as we operate real time, when supply, let’s say expands and demand declines, the equilibrium point of course drops, i.e. the CPM. So that’s really broadly what we’re seeing. Now in terms of MediaMath, from our perspective, it does not have any long-term effect at all on our business. It’s really a function of just resetting that spend that had been going through that DSP and then getting it redistributed because you can imagine you have advertisers who have programs all lined up to go run on MediaMath, and now they didn’t need to decide where they’re going to put that spend, and it takes time to do that.

But we fully expect, given that we’re integrated with every major DSP in the world that that spend is going to come back to us. So in the short-term, we do see a couple million dollars of revenue being deferred through the over the next couple months. But I would expect that to be fully repopulated onto our platform down the road.

Jason Helfstein: And then, just let me just say, so let’s say’s a few million MediaMath; we can do the math on that. Are you seeing specific weakness in tech and telecom, and then any concern about media and advertising because of the Hollywood strike?

Steve Pantelick: So we are, we — one of the stats that I shared in the prepared comments was I took a look at the four consumer-centric verticals, Shopping, Personal Finance, Technology, Arts & Entertainment. And I took a look at the June/July period combined and compared it to the same June/July period in the prior year. On that comparable, we — that group of spend is down 7%. So clearly arguably a lot of those factors are feeding into that because that is a pretty striking change because the prior period in April — the let’s call it April, May timeframe, it was slightly positive. So there’s been a shift pretty significantly in the near-term. Again, these are short-term dynamics we believe. And at the end of the day, because we are diversified across many verticals, we’re going to get some upsides.

I called out the fact that Food & Drink is up strongly. And over as we head into the fourth quarter, I do expect seasonal uptick in both monetized impressions and CPMs. Not as strongly as we’ve seen historically, but I do expect that seasonality occur specifically because we are exposed to things like travel style and fashion and health and fitness. But there are weaker verticals that I just called out.

Jason Helfstein: Okay. Just last, I mean, look, I think everyone’s going to compare and contrast. Obviously you too called out strength in brand, they’re 100,000 pound gorilla. They’re everywhere, right? So obviously you don’t have the same geographic coverage of them, but just — and then on, look, I mean, retail media has been really strong. So I don’t know to the extent you might be seeing some weakness in consumer products, maybe we’re seeing just a more aggressive share shift into retail media out of like more traditional or more legacy categories and just retail media for you is just still building, and so you don’t get to capture that. So I don’t know, you don’t have to comment on that to just all bring into that –?

Steve Pantelick: I think it’s a great question. But let me just I do want to comment on it. From our perspective, the shopping vertical has been under pressure for about a year. We called it out in the fourth quarter, first quarter. And if you really under — look under the headlines, the consumer in the U.S. is really going to face increasing pressure as a lot of the pandemic dollars dry up. So we shopping, I’ll call it the — is the canary in the coal mine. Now, with respect to retail media, I think it’s very early days for anybody to be gaining significant share. There’s a lot of white space. And one of the big drivers of us getting into that space is it helps us diversify our business. We are today a brand-centric programmatic platform.

When we expand and grow in retail media, we are going to be taking out performance advertising, which will then, will be another big positive. And you may recall in the most recent earnings cycle the performance advertisers did fine, not great, but they did fine brand-centric all struggled in terms of CPMs. And by the way, the Google Network business, which is the most comparable to us, was down minus 5% in Q2 relative to our being flat. So I would say there’s not any share shift going on. It’s still a — the retail media is a young market. We are feeling really good about the tools that we built, and now it’s just about ramping them over time.

Stacie Clements: Thanks, Steve. Our next question comes from Dan Day, B. Riley. Please go ahead, Dan. We can’t hear you. Dan, if you’re talking.

Dan Day: Can you hear me now?

Steve Pantelick: Yes, we can.

Dan Day: Okay, great. Sorry about that. I just had a question with you launching Convert, you haven’t — to my, to the best of my knowledge, a traditional SSP hasn’t gotten in the sort of sponsored content listing sale of that inventory. Just how much more technically challenging is that than typical display ads? Like, I’d imagine you have to have databases of the advertiser SKUs versus retail inventory. Have you been sort of preparing for this for a while and built through that or maybe some growing pains early as you expand into this category?

Rajeev Goel: Sure. Yes. Hey, Dan, so I think I would agree with the premise of your question. The technology specifically for sponsored listings, which is one of the four use cases that I called out earlier is pretty different. It’s a more performance oriented as Steve called out and in some ways more search oriented ad tech stat, right? Where you might be on a retailer’s website and you search if it’s Home Depot, maybe you’re searching for shovels or mulch or something like that. And so that type of ad response there is going to be quite different in the type of technology needed to build that than brand, brand advertising, as you said, it requires SKU level integration into the retailer’s product catalog requires being able to associate the search term with the right ad units and, et cetera.

So it is something that has been a high degree of focus for us over the I mentioned about two years to build out these capabilities. And I would say broadly we’ve been building towards this moment. So our data platform Connect, which has been built over the last several years, also plays the key role, our core SSP for onsite video and display monetization. So, sponsored listings was really, I would say the key kind of missing technology component. And so that’s an area where we’ve been ramping an engineering team and really focused on building technology in this area. And look, this is the launch, so I want to make sure I kind of calibrate correctly. We think there’s going to be multiple years of ongoing innovation as we go deeper and deeper into this area to build performance, build capabilities, build feature breadth, et cetera.

And I think that’s one of the things that we are really good at. And so we look forward to that challenge and that opportunity, but we note that it is significant TAM expansion and it’s really core to many of the customers that we already work with, right? So doing onsite monetization for display and video for dozens of retailers, building, working with the buy side through Supply Path Optimization. These are kind of the building blocks that give us confidence that we can really deploy and scale up technology here.

Dan Day: Great. Thanks. That’s a very detailed answer. Just one follow-up. I’m sure one of the hot topics kind of across the ad tech vendors right now is this move towards attention as the new kind of metric people are looking at for campaign measurement. Just wondering if you guys see a role there for you to play as people move towards attention whether that’s sort of just kind of the middleman passing along through the bid stream, or if there’s kind of a way you can play in the monetization of that.

Rajeev Goel: Yes. So we’re very much playing in the monetization of attention metrics today. So we’ve announced partnerships with a couple of different platforms or technology providers like I believe Adelaide, Coles 360, a few others where they have the measurement or attention data. We integrate that into our platform. And then we can deliver private marketplace deals or open exchange inventory that meets a buyer’s needs for a particular attention metric. So it could be based on some audience cohort, could be based on time and view of ads. There’s a variety of different ways that each of these technology providers measure. And I think that’s a kind of exciting platform aspects to our business, which is we have the media, we have the buyers, we integrate in the attention metric vendors and then the buyers can find the inventory that they’re looking for on our platform, and we can make it easy for them to access that media.

And we are able to generate revenue stream both in terms of technology fees as well as our typical SSP fee in the process.

Stacie Clements: Our next question comes from Tim Nollen, Macquarie. Please go ahead, Tim.

Tim Nollen: Hi guys. I’d like to ask about the CTV topic again, if I could. A number of the traditional media groups have talked about some pretty good growth in their connected TV streaming advertising. We all know linear is weak, but it seems like CTV is kind of taking share from linear, so it’s kind of surprising to hear you talk about CTV demand falling at the moment. What I’m wondering is, how much of this might be related to supply of impressions, which I’m trying to understand what that really means. Is this supply relative to demand is going up, or the absolute supply of impressions is going up, which could mean all of these fast channels like Pluto TV and Tubi and all of that, Netflix with ads, Disney Plus with ads, all that stuff. So could you just help us understand a bit more what’s going on with the supply and demand components within CTV?

Steve Pantelick: Sure. Rajeev and I can tag team on this, but let me start out just to clarify a point. We’re talking about on a relative basis, right? We’ve been growing for example, Q2 of last year and Q3; we grew over 150% in terms of CTV revenue. So we’re obviously comping some pretty major changes. And in the third quarter of last year, we grew our CTV impressions — monetized impressions by 300%. So the point is that we’re not going to grow our CTV impressions 300% this quarter, Q3 2023. And so that’s the impact that you’re seeing. It’s an let’s call it a very challenging comparable, but the underlying trends of CTV are very robust. We continue to add more publishers to the mix. We can — as I think as you alluded to is the opportunity to monetize CTV programmatically is really where the future is going, and that’s the core solution that we built.

So I would not read anything into our current results other than sort of the short-term pressures of CPMs, right? Because CPMs have been declining due to sort of the macro pressures over the course of a year, a little bit each quarter. And so you see on a year-over-year basis, a bigger delta. Going forward, the areas that we’re investing in are all about driving CTV; Activate is a core part of our ability to continue to drive CTV business. And we are expanding our SPO relationships as we called out we hit an all-time high of 40% of our activity, and many of those SPO relationships are directly linked to high value formats like online video and CTV. So we are absolutely feeling like we’re on track, the monetized impressions are growing but in this quarter and potentially the next, we’re facing some big comps, but we have very confident in future trajectory.

Anything you want to add, Rajeev?

Rajeev Goel: Yes, Tim, just one other quick thing to add on your question about supply of impressions. I think there are — there’s significant supply growth in, let’s say the alternatives that ad buyers might buy. So not only fast and kind of traditional streaming as you mentioned, but also if you think about reels and shorts from Meta and YouTube, they call that big growth in supply. And so I think all of that growth in supply in a environment where ad budget growth is relatively muted that that’s a formula for some downward pressure on CPMs in the near-term, which I think is not a huge surprise.

Tim Nollen: Thanks. Could I just follow-up with one more, which is you both kind of alluded to this already, but I wonder if this — these dynamics going on right now, maybe drive more demand for the SPO work that you guys do in CTV specifically?

Rajeev Goel: Yes. I mean, I think in general we see a lot of demand for SPO, there’s a variety of factors for it. Buyers wanting to get more efficient, buyers wanting to get closer to the supply, buyers wanting to make sure that as much of their dollar as possible is going towards the things that they care about. So there’s I think a variety of different factors, the transparency, I think oftentimes they’re concerned about if I put my budget into a walled garden, there was this recent article or more than an article, but research report about ad spend in a particular wall-garden, where does your inventory, where does your ad budget actually run? So all of these things, I think are drivers for SPO and are continued growth there.

Stacie Clements: Our next question comes from Shweta Khajuria at Evercore. Please go ahead, Shweta.

Shweta Khajuria: Okay. Thanks, Stacie. Thanks for taking my question. I guess I’ve on cookie deprecation for next year, they — Google is sticking with the plan. So could you — and we’ve talked about this in the past when that was the topic of the day, but could you please remind everybody how you’re thinking about the potential impact, especially beginning next — half next — excuse me, beginning back half of next year and then beyond as it actually goes through. Thank you.

Rajeev Goel: Sure. Yes. So I think there’s been a lot of history as you noted with Shweta on cookie deprecation. So look, I think Google is seems like they’re pretty adamant about their timeline. I think the industry broadly is less clear on that timeline given, it’s become a antitrust authority process as well where the antitrust authorities are ensuring that there’s an even playing field. There’s a number of frameworks that Google has announced, fledge and topics and privacy sandbox. And we are actively participating in testing in those. I think there’s a number of open questions related to the technology that Google is rolling out. So I think the — I would say the independent verification of the timeline is yet to be determined.

All that being said, we think the — it’s prudent to plan for deprecation, whether it’s on Google’s timeline or otherwise. And so we’ve been hard at work, investing in a portfolio of different solutions, contextual targeting, private marketplace deals using modeled cohorts of audiences. So a variety of different solutions that move us beyond the cookie identity data with our identity hub solution. So I think the challenge I would say, writ large in this environment is that as long as there’s uncertainty around that deprecation timeline, there’s different levels of participation with publishers and with buyers around rolling out these solutions. So a lot of testing and kind of laying the groundwork has been completed. But I think it will take some time once the timelines are clear for the entire industry to kind of galvanize and move in lockstep towards adopting these solutions.

But that’s a process that we are focused on day in and day out.

Shweta Khajuria: Okay. Thank you, Rajeev. Any — just a quick follow-up if I could, anything that you can say in terms of the magnitude of the impact. I mean, even if you could talk about how much of your business is exposed to cookies today, if you can share that or what gives you comfort that you’re not going to be impacted meaningfully?

Rajeev Goel: Yes. So the majority of revenue on our platform has alternative identifiers to the cookie. So we have through those mechanisms that I mentioned earlier, we have a variety of different ways to deliver a target impression without relying on a cookie. So that gives us a great degree of comfort that once cookie deprecation comes, we’ll be well hedged in that sense. And then I think there’s quite a bit of upside, which is that as we move off of the cookie, there’s a lot more of a future around targeted ad delivery against opted and consumers. And CTV is a good example of that, where typically you’re logged into your streaming or TV device and there’s an e-mail address or some other mechanism for identity that’s being shared.

And the CPMs, because of the ability to target a superior tend to be significantly higher by several multiples than when there’s a cookie present. And so we think actually the cookie deprecation process, once it’s ultimately sorted could lead to a significant tailwind in the business in terms of delivering more relevant ads to the consumer and doing so at a higher CPMs.

Stacie Clements: Our next question comes from Andrew Boone at JMP. Please go ahead, Andrew.

Andrew Boone: Great. Thanks for taking my questions. I wanted to go back to CPMs, Steve or Rajeev, is there a way to compare current CPMs or 2Q CPMs to historical levels? Like are they 10% below 2019? How do we think about that versus kind of historical kind of cycles?

Steve Pantelick: Sure. So obviously, we look at trends going back into time. And one of the things that I think is a testimony to the strength of our platform is I took a look at our overall CPMs over the last five years, just sort of across all formats, all channels. And it’s been remarkably stable in the times when it has deviated a bit from that is in terms of macro environments that we’re seeing right now. So big picture, the reason why is that we have a diversified platform and we continue to invest in those growth areas that have higher value to them. So as things shift and sort of value creation occurs elsewhere, we are — we have the capability to monetize that. So that’s why we’ve been able to have quite a bit of CPM stability overall.

Now, when I take a look at, for example, the high value format like video, omnichannel video, CTV, et cetera, what’s been going on basically over the last year is that there’s been a little bit of what I call cuts, haircuts every quarter as you go along. And so cumulatively, when you just look at a point in time Q2 or Q3 versus last year, that’s why you’re seeing this 20% delta. But big picture the CPMs, obviously, different market environment back in 2019 haven’t deviated significantly over that time, but we are going through what described as a dip in the cycle, fully expect to there to be sort of a recovery. Now, the extent of the recovery, the timing, the magnitude TBD, but what I can be confident about is our ability to basically navigate that by continuing to innovate and making sure that we are always pointing our resources towards the higher value opportunities.

And that’s why we’ve been able to deliver relatively stable CPMs. The last thing I’ll point is, of course, throughout that time we’ve been monetizing and growing our impressions. And so we — that’s really gives us the long-term confidence about what we’re doing and the progression and the opportunity for us in the future. With a couple of quarters with some headwinds, that’s not a huge deal for us because we are very well capitalized, $170 million in cash, no debt, and an ability to continue to innovate. So we think this is a perfect opportunity for a company like ours who can actually position ourselves for when ad spend CPM stabilized to take more share. So obviously a lot going on in the market today, but if anything, it gives us more confidence about the trajectory that we’re on.

Andrew Boone: And just may be a —

Stacie Clements: Oh, go ahead, Andrew.

Andrew Boone: And just may be a little bit difficult, but just the dynamic between pricing and then impression growth, right? Understood, you guys are targeting higher value impressions. Is there a way to think about the impact though of lower CPMs in terms of maybe a headwind towards impression growth for 2Q?

Steve Pantelick: You mean in terms of towards Q3? Because in Q2, we saw both — we saw monetized impressions these are impressions that we sold. And we saw CPM slightly decline. In July, which is what I commented on, we saw, again, monetized impressions. These are the ones that we sold on our platform grow, but we saw pressure on CPMs. And so there, of course, at the end of the day, there is a relationship because we operate in a real time bidded environment. And so if there’s softness and demand, the clearing price on that supply/demand curve comes down that just Econ 101. So with demand coming down, supply either staying the same or going up, CPMs are the equilibrium point. And so that’s why we feel confident that we’re on the right track because the — we’re driving our volumes, which is really the health metric of our business.

And in the future, we’ve gotten more and more efficient as I called out on our call, we’ve reduced the amount of CapEx and so we are setting us ourselves very well for when CPMs still recover, the marginal profitability will be quite robust.

Stacie Clements: Thanks, Steve. Our next question comes from Max Michaelis at Lake Street. Please go ahead, Max.

Max Michaelis: Hey guys, just one from me. I know you guys were hurt in this quarter by that bad debt expense, and it’s going to kind of trail off into the next few quarters. My question is more, I guess it’s a 2024 question some other initiatives maybe you plan to implement just to increase profitability over the next coming year. Thanks.

Steve Pantelick: Yes. Absolutely. There are many things that we’re doing to drive profitability. I’ll just give you a couple of things that we’ve already done and things that we’re working on. But number one is as a company, we’ve always had the mindset of growth and profitability. And last quarter, Q2 was our 29th straight quarter with adjusting EBITDA profitability. So big picture, we know how to run a profitable business. The things that we’ve done in the near-term with some of the pressures in the macro is we’ve actually been, of course, finding more efficiencies. We increased our capacity, this overall impression capacity by over 30% with minimal incremental CapEx. And we did that through software engineering. So why is that important for the future margin opportunities that becomes embedded that sort of that capacity becomes embedded, but we don’t have the corollary of the depreciation or the CapEx. So margins will naturally expand as revenues grow.

Number two, we’ve been — obviously been very careful with managing our costs as a point of reference, we’ve kept our head — total headcount flat for the last couple of quarters. It isn’t that we’re not hiring people, we’re hiring a lot of people, but we’re putting them in different positions, repurposing folks, et cetera, towards high innovation areas. Again, that makes us more efficient going into the future. And then as we continue to drive bigger mix of high value formats, higher CPMs, relatively same costs, that will naturally have a positive impact on our gross margin and our bottom line. And that’s really how we think. And that’s while — why I’ve said in the past things like SPO, efficiencies, software optimization, all give us the confidence that we’re going to be able to expand margins in 2024 and beyond.

Stacie Clements: Thanks, Steve. We’re over time. So I’m going to go ahead and turn it over to Rajeev for some quick closing remarks.

Rajeev Goel: I want to thank everyone for joining us today. We continue to drive the business forward through a long-term lens. Our investment in SPO and high growth formats and channels are delivering growth. We’re deepening customer and buyer relationships and adding solutions that more than double our TAM. We also continue to diversify our business beyond display and brand-centric ad spend. Monetized impressions are up as we continue to add more premium supply to our platform. Ad spend will inevitably return, and CPMs will normalize. We believe that the areas we remain focused on will drive outsized gains over the long-term. We look forward to seeing many of you at our upcoming investor events including Oppenheimer’s Virtual Conference tomorrow August 9, and Lake Street’s Growth Conference on September 14.

We’ll also be hosting in-person meetings in the Midwest and the East Coast. Please reach out directly to Stacie to request a meeting. Thank you for joining us today.

Steve Pantelick: Thank you.