AdTheorent Holding Company, Inc. (NASDAQ:ADTH) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Ladies and gentlemen, thank you for standing by, and welcome to AdTheorent’s First 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that this conference is being recorded. I’d now like to turn the conference over to your first speaker, David DeStefano, Investor Relations. David, please go ahead.

David DiStefano: Good afternoon, and welcome to AdTheorent’s first quarter 2023 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me today are AdTheorent’s Chief Executive Officer, James Lawson; and Chief Financial Officer, Patrick Elliott. Before we begin, I’d like to remind you that today’s conference call will include forward-looking statements based on the Company’s current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today’s earnings release and our other reports and filings with the Securities and Exchange Commission.

All of today’s statements are made based upon information available to us today, and we assume no obligation to update any such statements except as required by law. We will also refer to both GAAP and non-GAAP financial measures during the call. You can find the reconciliation of our GAAP to non-GAAP measures included in our press release posted to the Investor Relations section of our website at www.adtheorent.com. All of the non-revenue financial measures we discuss today are non-GAAP unless we state otherwise. With that, let me turn the call over to Jim.

James Lawson: Thank you, David, and thank you to everyone for joining our first quarter 2023 earnings call. Today, I will discuss our high-level results for the first quarter, walk through some highlights and update you on macro and industry factors. Then I will turn the call over to Patrick, who will provide a more detailed look at results and provide guidance for the second quarter and full year 2023. I am pleased to announce that AdTheorent’s revenue performance in the first quarter of 2023 was near the high end of our guidance range. Active customers grew by 31% or 10% year-over-year to 346 as of March 31, 2023. We exceeded our guidance for adjusted EBITDA and we surpassed sell-side expectations on both revenue and adjusted EBITDA.

As we look back on the quarter, I am proud of what we accomplished. As I discuss every quarter, our broader business mission is clear, and that is to capture a growing share of programmatic ad budgets by offering a media buying platform that drives both greater performance for brands and greater efficiency for media buyers. The market wants our data flexibility, ID independence, bidding performance and advanced optimization tools, and pricing transparency. Our more advanced media buying platform leverages machine learning technology and statistical data-driven learning instead of relying on outdated user ID retargeting methods. The demand for our unprecedented capabilities continues to grow as we consistently deliver superior campaign outcomes for our customers.

This competitive advantage gets stronger every quarter as we lean into innovation and expand our technological advantage over other DSPs. Our go-to-market efforts continue to centeraround four key areas of investment with an increased focus on larger and more strategic customer opportunities, and these investments are paying off and laying a strong foundation for meaningful revenue growth. Notably, Direct Access revenue grew 19% versus the fourth quarter of last year. CTV revenue increased 17% year-over-year. Our health vertical grew 19% year-over-year, and our audience builder offerings are driving stronger pipeline generation. I’d like to make a few comments about each of these focus areas. First, we are pleased to see enthusiastic early adoption of self-service or direct access on our platform.

Our direct access offering makes the industry’s best programmatic brain available to media-buying traders. Combined with our full-service offering, we are now scaling in the market with one AdTheorent solution that caters to the demands of both self-service and managed customers, doubling our market opportunity. Q1 was our most active quarter to date for self-service adoption, showing impressive growth in active customers, new clients, total client spend, media purchases, and impressions purchased with activity spanning key verticals, including CPG, travel, health, and education. As we scale direct access, new customers and a growing pipeline are validating our purposeful differentiation from other DSPs, opening bigger opportunities. Customers are choosing us because we can drive cost efficiencies and superior KPI performance since our performance models do not rely on expensive third-party audiences.

And as a result, our platform can put more media to work for advertisers. In the past, I’ve shared details about our differentiated tech, including our suite of platform optimizers and why they’re special. Here, briefly, I’d like to tie that back to why it matters, how it wins us business. We are seeing this as we scale our self-service offering. Our platform’s price optimization tools help push beyond conventional bidding tactics like so-called bid-shading within a given auction. Unlike traditional bid shading tools, our platform optimizers also ensure that buyers bid in the optimal auctions to realize maximum savings. In other words, buyers place their desired big in our platform will automatically move towards more efficient prices, passing all of the savings to the customer.

All of this takes place with transparency in both targeting and costs, with users having full control over how precise or selective the platform is in its decisioning. Media buyers seeking performance and cost efficiencies are choosing us because of these deep capabilities. As promised, we also introduced multicurrency support for direct access, opening up new client opportunities in Canada and setting the foundation for future international expansion. And we have a big launch midyear with our advanced health DSP and our enhanced and streamlined user interface. Second, we are driving strong growth and innovation in the healthcare vertical. Health is an important beachhead for AdTheorent. Our advantages are even more obvious here since large generalist DSPs lack the techniques, safeguards, or solutions to operate effectively in this vertical due to stringent privacy laws and industry-specific data use rules.

During the quarter, these advantages drove 19% growth in our healthcare vertical, including strong growth from our AdTheorent Audience Builder, or ABi. We won 16 ABi campaigns, driving great results for customers across a variety of KPIs, including prescription lift, site action, and brand awareness lift. For example, during the quarter, we ran a ABi-built predictive audience campaign for an over-the-counter skin care customer that drove a 6% brand awareness lift, outperforming third-party audiences. On the same campaign, ABi-built predictive audiences outperformed third-party audience segments by 20% and 32%, respectively, on cross-device video completion rate or VCR and CTV VCR benchmarks. Additionally, during the quarter, a pharmaceutical company partnered with us to reach patients diagnosed with type 1 diabetes with the goal of converting them to this company’s prescription medication.

Using ABi we created predictive health audiences targeting type 1 diabetes patients who have received treatment and who have commercial insurance, utilizing in-stream video and cross-device banner ads to reach patients when they’re most receptive to making treatment decisions. AdTheorent exceeded the client’s display prescription lift benchmark by 230% and the client’s video prescription lift benchmark by 120%. What’s also interesting to note here is that we did a head-to-head test with two third-party audiences, and 85% of AdTheorent’s health audience reach was unique, demonstrating that the audience is built using ABi, are more successfully reaching the target audience. As discussed last quarter, our heavy product broadens and elevates AdTheorent’s offering, providing health advertisers with truly data-driven ways to create and execute highly customized and precisely targeted programmatic digital ad campaigns.

The deals in our pipeline are materially larger and more recurring in nature due to the merits of the ABi offering itself, the successes we are demonstrating in tests, and the nature of the commercial contracts we are pursuing. Looking ahead, we will further strengthen our health vertical by launching in early Q3, the industry’s most advanced self-service DSP for health. And during the summer pharma planning season, we believe we will be well-positioned to earn year-long commitments for 2024. Third, we are very happy with our progress in bringing to market our audience builder or ABi product across a variety of verticals following last quarter’s launch. Our ML-powered predictive audiences, generated by ABi, continue to see great success and adoption, landing 14 new campaigns during Q1 and driving superior performance for customers.

For example, for an auto brand, our predictive audiences delivered a 55% more efficient CPA compared to third-party ID-based audiences and drove 61% of the on-site conversions despite equal budgets. For a travel brand, we achieved a 21% higher VCR or video completion rate. And for a utility brand, we drove a 466% engagement list over the third-party audience segments. Looking ahead, we expect to continue to drive great results with predictive audiences, and we are working to incorporate third-party verification that will validate the effectiveness of this new method of audience targeting, which should drive more rapid adoption of our platform. We are actively speaking to media buyers about partnering at scale to sell our superior method of audience targeting and educating them about how this would be commercially beneficial to them.

These large media buyers need and want a technology partner who can use ML to analyze and activate immense data sets, theirs, ours, or third-party data, and they want to recapture the full benefit of their media purchasing power. Fourth, we are continuing to ramp our specialized performance CTV business through our platform. Our CTV offering wins because we offer a unique product that delivers superior return on ad spend, advanced attribution, strict privacy protections, and seamless omnichannel coordination. No other programmatic platform offers better outcomes-based CTV capabilities and our commitment to CTV innovation drove 17% growth to $2.9 million in Q1 2023. CTV is now 9% of AdTheorent revenue versus just 6.1% in the full year 2021. Strength was driven by new CTV deals and a new CTV supply-side platform partnership with FreeWheel, a Comcast company that allows us to offer a more comprehensive suite of video advertising solutions.

Additionally, we initiated a data partnership with iSpot that gives our models access to data from millions of smart TVs, helping us measure the impact of CTV on business outcomes compared to linear TV. We continue to invest behind CTV, including our recent development of connected live CTV offerings, which feature live premium broadcasting with the benefit of AdTheorent-targeted ads, our data-driven ML capabilities, including forthcoming program-specific targeting and reporting, coupled with the greater consumer receptivity to live TV ad formats as demonstrated by our performance data, will make connected live CTV another growth pillar for AdTheorent. We expect CTV strength and growth to continue and accelerate as our platform is adopted at scale.

Switching to innovation. We are a notable and disruptive leader in ad tech with a steady stream of meaningful innovations that are driving demonstrably improved ROI for our customers. Each quarter, I like to share the progress made by our hard-working and entrepreneurial team to build and deliver transformative products. During the quarter, we advanced several innovations that should improve return on ad spend for customers and enhance our growth trajectory, including natural language processing in our models, predictive extension, and our new product catalog feature. Customers are excited about these innovations, and we expect them to contribute to our growth as we progress through 2023. Let me talk very briefly about each of these. First, I have previously discussed our incorporation of Natural Language Processing, or NLP, into our predictive models, and I would like to provide an update about how that is advancing our business goals.

NLP is a subset of machine learning that allows us to analyze the text of web and app inventory through a variety of methods. We use one of those methods, page categorization to inform our models about the most important and unique keywords within the inventory of bid requests. In a short time since the conclusion of NLP testing in Q3, NLP has organically become a major data point referenced by our CPA models because of its ability to pinpoint high-value impressions for our clients in real-time. We have seen conversion increases as high as 39% when compared to models without NLP. This is another example of AdTheorent leveraging industry-leading technology to our clients’ benefit without reliance on cookies or persistent IDs. During the quarter, we also developed and introduced into the market our AdTheorent predictive extension solution, which is a proprietary method to use search and social media engagement data to inform our predictive models and improve our programmatic impression scoring.

In other words, using this solution, we can incorporate engagement data from Meta or YouTube, or Google Search as additional signals, significantly improving our models. For example, in a campaign we ran for a large healthcare advertiser, consumers exposed to AdTheorent’s programmatic ads before Google search converted at a 94% higher rate than those exposed to search and social alone. This offering is another way AdTheorent otherwise disparate data elements to offer real value to advertisers. Finally, as we previewed on our last call, we successfully launched a product catalog feature during the quarter, which enables remarketing of products to individuals based on their interactions with an advertiser’s website. For example, if a consumer views a specific car model on an auto website, that consumer can be retargeted at a later time with a unique brand ad that is dynamically created featuring that specific car.

This flexible framework has significantly improved ad performance and driven exceptional results for customers. AdTheorent remains committed to introducing additional solutions to enhance its growth trajectory and drive value for its investors. And we believe that our continued focus on innovation and improving customer ROI, position us for success in the rapidly evolving digital advertising industry. Part of what enables us to continue investing behind innovative product enhancements and drive more value for our customers is our very strong balance sheet and highly favorable margin and cash flow characteristics. On a trailing 12-month basis, AdTheorent delivered 20% adjusted EBITDA margins and 11% free cash flow margins. We have now generated positive adjusted EBITDA every quarter since going public, and we remain debt-free.

This affords us the ability to maintain the investment cadence necessary to execute our product roadmap and establish the foundation on which we will generate durable long-term revenue growth. Before I conclude, let me update you on what we are seeing from an industry macro perspective. While some of the near-term dynamics we have been discussing persist, including reduced or deferred ad budgets, campaign delays, and vendor consolidation, which protract sales cycles, we are pleased to see consistent and strong month-over-month pipeline generation and customer enthusiasm for our offerings. We are increasingly driving the adoption of our platform across larger media-buying organizations and establishing long-term commitments. This pursuit of bigger and more strategic commercial deals comes with a longer sales cycle, RFIs, evaluations, and platform diligence.

But we are confident our efforts will pay off and this work will put us in a strong position when macro conditions improve. So in conclusion, we are happy with our progress in Q1 2023. Our financial performance came in near the high end of our guidance range for revenue. Active customers grew 10% year-over-year. We exceeded our guidance for adjusted EBITDA, and we surpassed sell-side expectations on both revenue growth and adjusted EBITDA. We’re also seeing continued strength in areas of investment, such as self-service, our audience builder products, health verticalization, and CTV. And as always, we’re making steady and significant progress in our efforts to improve platform-based return on ad spend for customers, which in the end drives the adoption of AdTheorent DSP and revenue growth.

We are confident in our ability to continue to deliver exceptional results for our customers and drive long-term value for our investors. Thank you for your support and confidence in AdTheorent. Now I will turn it over to Patrick.

Patrick Elliott: Thanks, Jim, and good afternoon, everyone. As you have seen in our results, 2023 started as we anticipated, and we achieved our revenue and EBITDA goals for Q1 despite the challenging macro environment. First quarter revenue was $32.7 million, down $1.6 million or 4.6% versus the prior year. This decline in revenue reflects continued pressure from challenging economic conditions and constrained advertising budgets that started in the second half of 2022. This was partially offset by strength in our areas of investment, including CTV, health, and direct access. CTV grew 17% year-over-year. The healthcare vertical delivered 19% growth, driven by the introduction of ABi and health-predictive audiences. Impressively, Direct Access grew 19% sequentially from Q4 despite Q4 being a seasonally strong quarter for advertising relative to Q1.

We are encouraged to see the positive response to our self-service offering, with an increasing number of key players switching their campaigns from competitors to us. These trends continue to support the direction of our strategic investments, and we remain committed to investing in the tremendous opportunities for growth ahead of us. Turning now to expenses. Our disciplined approach to managing expenses while investing in strategic initiatives allowed us to deliver solid financial results in the first quarter. Adjusted gross profit for the first quarter, defined as GAAP revenue less traffic acquisition costs, was $20.9 million, representing 64% of revenue. This compares to 67% of revenue in the same period of the prior year. The lower AGP percentage was due to impacts from softer pricing on some campaigns, given the current macro weakness.

Total operating expenses, including TAC and stock-based compensation, were $35.9 million in the first quarter, down $2.1 million or 5.4% from Q1 2022. The reduction in operating expenses was driven by a modestly lower headcount and lower insurance and professional fees related to initial public company costs in the first quarter of 2022. Offsetting these declines were impacts from the inflationary environment related to labor, data, and T&E and from new investments in our platform data as we create expanded performance-driven verticalized solutions. Adjusted EBITDA for the quarter was $470,000, down $830,000 compared to the first quarter of 2022, largely due to the modest declines in year-over-year revenue. Building on our historical track record of prioritizing profitability, we successfully managed operating expenses and exceeded our Q1 EBITDA outlook.

Moving to the cash flow. We generated $2.9 million of free cash flow in the quarter compared to $2.1 million in Q1 of last year. This increase was largely due to less cash paid for professional services and the elimination of cash interest on our debt. We also capitalized on an incremental $570,000 in software development costs related to our platform investments for Direct Access and other initiatives. Despite these investments, we were able to convert a higher percentage of adjusted EBITDA into free cash flow in Q1, consistent with our historical trends due to the collection of customer receivables from revenue generated in our seasonally higher fourth quarter. We exited Q1 with a strong cash and liquidity position to pursue growth opportunities.

At the end of the first quarter, we had $75.3 million in cash versus $72.6 million at the end of Q4, a $2.7 million increase. We have no debt on the balance sheet, and we continue to have access to $40 million on our revolving credit facility with Silicon Valley Bank, now a division of First Citizens Bank. Moving to our outlook. For the full year, we reaffirmed the outlook we provided at the start of the year across revenue, AGP, and adjusted EBITDA. We expect revenue to grow in the second half of the year and for the full year, driven by strong demand for our new products from customers across a variety of verticals. We are encouraged by progress in our key investment areas as our health and audience builder products, CTV, and Direct Access revenues offset macro pressures.

This forecast assumes no further degradation in the macroeconomic environment. For the full year, we continue to anticipate adjusted gross profit to be between 64% and 65% of revenue compared to 66.1% in 2022. We anticipate adjusted EBITDA to be between 16% and 19% of adjusted gross profit compared to 20.3% in 2022. This is due to investments we are making to enhance our platform offering and accelerate our time to market. We see significant opportunities ahead, and we will continue to invest strategically in the business. Looking to the more immediate future, we expect the difficult macro conditions, pressure on customer ad budgets and timing of campaigns to persist in the second quarter. For the full year 2023, we expect the quarterly seasonal revenue composition to look more like 2021 than 2022.

This translates to a roughly 9% revenue decrease in Q2 2023 versus Q2 2022. Adjusted gross profit for the second quarter of 2023 is expected to be consistent with Q1 at approximately 64% of revenue, down from 66.7% in the second quarter of 2022. We expect adjusted EBITDA in Q2 to be down similarly to Q1 on a year-over-year basis. In summary, we are pleased to have achieved our revenue and EBITDA goals for Q1 despite the challenging macroeconomic conditions. We continue to see growth opportunities ahead, particularly in our areas of investments, such as CTV Health and Direct Access. We are committed to investing in our platform and creating expanded performance-driven verticalized solutions to support our long-term growth. Although we anticipate continued pressure on customer ad budgets and challenging macro conditions in the second quarter, we remain confident in our ability to achieve our full-year outlook.

AdTheorent has remained consistently profitable and generated positive free cash flow, enabling us to strategically invest in growth opportunities to enhance shareholder value in 2023 and beyond. At this time, we’d like to transition to the Q&A session moderated by the operator.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Dan Medina from Needham.

Operator: Our next question comes from the line of Maria Ripps from Canaccord Genuity.

Operator: Our next question comes from the line of John Blackledge from Cowen.

Operator: Our next question comes from the line of Andrew Boone of JMP Securities.

Operator: Our next question comes from the line of John Roy of Water Tower Research.

Operator: There are no further questions at this time. I will now turn the call back over to Jim Lawson, CEO, for closing comments.

James Lawson: Thank you very much. Before we wrap, I just want to reiterate our excitement around the direction of our business. Our performance in the first quarter of 2023 reflects our ongoing commitment to innovation and customer success, and we believe it is an important step in the direction of our much bigger goals. While the operating environment has been challenging, we are guiding for growth in the second half of the year, and we believe that we have the pipeline and the customer interest to support that. I’d also like to take this opportunity to thank the incredible team at AdTheorent for working tirelessly to deliver on our commitments to our customers and our shareholders. We know that this is the beginning of something significant to investors and analysts, thank you for joining us this afternoon, and thank you for your trust and support. We look forward to sharing further updates in the near future.

Operator: This concludes today’s conference call. You may now disconnect.