DoubleVerify Holdings, Inc. (NYSE:DV) Q1 2023 Earnings Call Transcript May 10, 2023

DoubleVerify Holdings, Inc. beats earnings expectations. Reported EPS is $0.07, expectations were $0.04.

Operator: Greetings. Welcome to DoubleVerify’s First Quarter 2023 Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Tejal Engman, Investor Relations. Thank you. You may begin.

Tejal Engman: Good afternoon, and welcome to DoubleVerify’s first quarter 2023 earnings conference call. With us today are Mark Zagorski, CEO; and Nicola Allais, CFO. Today’s press release and this call may contain forward-looking statements that are subject to inherent risks, uncertainties and changes and reflect our current expectations and information currently available to us and our actual results could differ materially. For more information, please refer to the risk factors in our recent SEC filings, including our Form 10-Q and our annual report on Form 10-K. In addition, our discussion today will include references to certain supplemental non-GAAP financial measures and should be considered in addition to and not as a substitute for our GAAP results.

Reconciliations to the most comparable GAAP measures are available in today’s earnings press release, which is available on our Investor Relations website at ir.doubleverify.com. Also during the call today, we’ll be referring to the slide deck posted on our website. With that, I’ll turn it over to Mark.

Mark Zagorski: Thanks, Tejal, and thank you all for joining us today. I’m excited to discuss our strong first quarter performance and optimistic outlook for the rest of the year. We started 2023 laser focused on a few key areas. First, on launching innovative, outcome driving products anchored in our deep expertise and legacy investments in machine learning and data science. Second, scaling our independently accredited core verification solutions across leading social and CTV platforms. And finally, expanding our partnerships with large advertisers and preeminent digital ad platforms around the globe. On all three fronts, we can confidently state that we are executing ahead of our expectations. In the face of a challenging macro environment, our performance remains resilient due to the efficacy and utility of our solutions and the deep trust we have built with all of our stakeholders as an unbiased, independent analytics engine committed to making the digital advertising ecosystem stronger, safer and more secure.

This steadfast vision continues to be DV’s Northstar, core to the value we deliver and proven to generate exceptional ROI for our customers and partners. Our first quarter results exemplify the impact of this commitment when it is embraced and empowered by a passionate group of DV team members in 21 locations around the world. We grew first quarter revenue by 27% year-over-year to $123 million, exceeding the top end of our guidance and significantly outpacing the growth rates of both the digital ad industry and our competitors. We saw strong, sustained and broad-based demand for DV solutions with each of our three business lines delivering double-digit growth. Advertiser demand for both our premium-priced authentic brand suitability programmatic solution and our social measurement solutions continue to grow, resulting in strong business expansion with existing customers and new customer wins.

We won numerous RFPs in the first quarter, representing meaningful expansions with existing clients including Merck adopting DV measurement and ABS in 60 international markets. Airbnb making DV Authentic Ad its measurement currency in multiple LatAm markets and Amazon Prime Video deploying DV’s proprietary pre-campaign activation and post-campaign measurement solutions on YouTube. On the customer acquisition front, in addition to previously announced Q1 wins, including Air France and Swarovski in EMEA and Mattress Firm in the U.S., we closed additional new logos in the first quarter, including Evoke Health and NY Presbyterian in the U.S., Daikin in APAC and the Public Investment Fund of Saudi Arabia and the Middle East. Our win rate across all opportunities remained above 80% with 67% of our first quarter wins being greenfield, which we define as wins where the advertiser wasn’t using third-party tools for the business that DV won.

This steady rate of greenfield wins exemplifies the underpenetrated TAM that DV continues to benefit from. These new client wins play into our successful land and expand strategy through which we grew the number of advertiser customers generating more than $200,000 over the last 12 months by 31% in the first quarter. With 45% of our top 700 customers using less than half of our key products in 2022, the opportunity to expand within our existing customer base remains significant. Our acquisition strategy also continues to pay dividends when it comes to client growth. By focusing on M&A that accelerates our product roadmap, adds complementary new technologies, and expands new local market coverage, we create growth opportunities across the DV portfolio and drive measurement currency ubiquity.

Since integrating our acquired social activation tools at the beginning of 2022, over 65 new customers have activated DV’s pre-campaign social solutions on YouTube and/or on Meta. Newly acquired resources helped drive growth across our international measurement customer base with over 60 new customers activating the DV Authentic Ad in EMEA since the fourth quarter of 2021. DV continues to outpace the industry and gain market share due to three key differentiators. Our rapidly growing scale, our industry-leading innovation and the deep level of trust we’ve built with our customers as an unbiased and independent partner. Beginning with innovation, DV’s innovation engine is fueled by the unparalleled scale and ubiquity of the data we capture and which is brought to life by the proprietary data science that drives our machine learning technologies.

AI and machine learning that powers it have become buzzwords with little explanation of how they drive differentiation and build advantages for the companies that leverage them. Let’s discuss how this works for DV. Head-to-head tests that show that DV’s ML supported pre-bid brand safety and suitability solutions consistently drive greater reductions in post-bid block rates than our competitors’ solutions do. We believe this is due to our differentiated and proprietary text and video classification technologies that leverage sophisticated models that have been built and trained over the last decade. The same is true for our fraud verification capabilities. The DV Fraud Lab consists of dedicated data scientists, mathematicians and analysts from the cyber-fraud prevention community, who have developed and trained DV’s proprietary algorithms, making them incredibly effective at identifying millions of bot and malware devices daily.

The growth of AI also may have an interesting impact on the utility and opportunity for our product suite as an increasing number of advertisers are wrestling with their approach to AI created content and their comfort with having ads associated with it. DV currently identifies low-quality content that may be algorithmically generated and is working with clients to determine how we evolve classification to meet their new demands. The data science rigor that powers our AI models is best-in-class, extending from contextual classification to fraud detection and now to attention. Today, DV offers the industry’s most robust cross-platform attention solution, which uses impression-level data, not limited to panels, to measure 50 unique data points related to the exposure and engagement of ad impressions that are first verified as viewable by DV’s industry accredited standards.

Last week, we were thrilled to make the leap from attention to action by launching the DV Universal Attention Segment, the industry’s first automated attention optimization solution for programmatic media buying. Powered by DV’s global attention data, our pre-bid Universal Attention Segment enables brands to improve performance by optimizing away from low attention environments without sacrificing scale and reach. Across numerous leading DSPs, any advertiser can activate DV’s Universal Attention Segment, including those that use our competitors’ measurement solutions, not only creating a fast, long-term activation opportunity but also unlocking a large measurement upsell opportunity down the road. Speaking of measurement, DV Authentic Attention measurement continues to gain momentum with first quarter test volumes doubling and campaign activations tripling year-over-year.

Nearly 80 advertisers have activated DV Authentic Attention campaign so far in 2023, exceeding the number of advertisers that activated campaigns in all of 2022. Our pioneering work and attention goes beyond thought leadership. DV has real attention to solutions that are at the forefront of driving attention as a currency and generating real results for our customers in market today. Let’s move on to one of DV’s most successful and important product innovations, Authentic Brand Suitability. Since its release in 2018, we significantly enhanced the value ABS delivers through the release of new performance driving functionality, including brand suitability tiers, CTV exclusion and inclusion list, page exception list and new content avoidance categories that outstrip any competitive offering.

On the heels of our successful price bifurcation for our standard programmatic products in 2022, we’ve also started to implement a bifurcation of ABS’ pricing by introducing a higher rate for ABS video, while maintaining the original price for display. ABS revenue grew 56% year-over-year in the first quarter, driven by a 55% increase in volume and a 1% increase in price. Our ability to raise prices even on our premium price products, while continuing to deliver strong volume growth, speaks to the value of our solutions deliver to our customers and the long-term potential for DV to evolve towards a more value-based pricing model, particularly for higher CPM media, such as CTV. On top of these great revenue-generating innovations, DV continues to launch self-service automation tools by Campaign Automator and Pinnacle 2.0, our upgraded client UI, which lower client overhead to employ DV solutions make it easier than ever to efficiently drive results across a client’s full portfolio of brands.

With our next differentiator scale, let me begin with social measurement, which delivered 33% year-over-year volume growth in the first quarter. Our social measurement growth in dollar terms was led by advertisers leveraging our solutions on Meta’s platform, which generates almost half of our social measurement revenue, followed by YouTube applications and then DV tools on TikTok. Existing social customers such as Mondelez and Airbnb expanded their use of DV social solutions on Meta and YouTube and activated the authentic ad on TikTok for the first time, with new logo wins also contributing to the social measurement growth. Our customers are rapidly activating the DV Authentic Ad on TikTok where we have doubled the number of customers year-over-year and grown TikTok’s first quarter revenue contribution by over 50% compared to the fourth quarter of 2022.

In fact, we generated nearly as much TikTok revenue in Q1 as we did in the full year of 2022. With TikTok supporting their badge measurement partners brand safety and suitability expansion to nearly 45 markets, we are scaling our coverage across key English, Spanish, French and Portuguese speaking markets this year with a focus on maximizing market coverage for our top advertiser customers. As a batched Meta business partner, we value Meta’s ongoing commitment to providing advertisers with transparency through brand suitability controls and verification. We are excited to be expanding our offerings over the coming months and remain in consultation with Meta for brand suitability verification and measurement solutions on the feed which will complement our viewability, and invalid traffic solutions enabling further expansion of DV’s Authentic ad coverage to an even broader array of consumer engagement.

Turning to CTV scale, we grew CTV measurement volumes by 39% in the first quarter, outpacing the 14% CTV revenue growth expected of the industry in 2023, according to IAB research. We launched viewability, verification and fraud protection coverage on Netflix ad-supported plan with DV’s verification on Netflix now available in 12 markets globally. CTV remains a strong differentiator for DV due to our comprehensive coverage, industry-leading solutions and proprietary ability to identify CTV fraud. Only DV covers all of the platforms that receives the majority of CTV ad spend and our industry-leading solutions span all aspects of CTV, from pre-bid avoidance to post-bid blocking and monitoring. Most importantly, we believe that no other company has made as comprehensive as an investment in people, infrastructure and partnerships to ensure that CTV transactions are fraud-free.

Let me wrap up on scale with a focus on our international business expansion, where we delivered 26% year-over-year measurement revenue growth in the first quarter with both the EMEA and APAC regions exhibiting double-digit growth. Since the beginning of 2021, we’ve nearly doubled our international sales, marketing and client services headcount including appointing several new country leaders to cultivate local business. With approximately 170 commercial personnel in the EMEA and APAC and a market growth plan that includes opening five new international markets, we will expand DV’s commercial footprint to 26 locations by year-end. We couldn’t be more excited about our prospects outside of North America in the coming years. A great example of the payoff of our increased international investments is the deal we recently closed with the TBS Television Network in Japan, a news site owned by 28 Japan News Network TV broadcasting companies.

TBS has adopted DV’s Publisher Suite, an analytics and automation solution that comprehensively supports ad quality control and revenue analysis for publishers and media companies globally. Our final differentiator is trust, which underpins our relationships with advertisers and platform partners and is core to the value we deliver to the digital advertising ecosystem. DV has a comprehensive suite of accreditations and certifications and has never lost an international accreditation or had one revoked. Our globally recognized TAG certifications and MRC accreditations demonstrate DV’s commitment to innovation and delivery against the highest possible industry standards. This trust extends to how we approach privacy and data management as well.

DV was recently ranked in the top 1% of over 1600 data providers scored by Neutronian in their latest transparency ratings report and has renewed its Neutronian Cookieless Certification badge, which provides marketers with verification that the certified data provider is future-proofed for the deprecation of third-party cookies. Our concerted action to uncover and publicize sophisticated global fraud schemes that attempt to siphon millions of dollars of ad spend across industry channels cements our position as a trusted partner acting in the best interests of our customers and the industry. Aggressively unearthing fraud is core to DV’s mission, and the basis upon which any advertising outcome should be measured. Last year, DV’s Fraud Lab detected and mitigated dozens of fraud schemes and variants, with new fraud schemes more than doubling over the last two years.

This year, DV uncovered BeatSting, an audio fraud scheme, and partnered with Roku to expand its Watermark technology to uncover many more fraud use cases, including sophisticated user spoofing that creates fake impressions. This was the case with SmokeScreen, a fraud scheme that DV identified that continues to generate more than 300 million ad requests and siphons over $6 million dollars monthly from unprotected advertisers and publishers. Trust isn’t only about accreditations or reports. It’s about people and relationships. Since the day I joined nearly three years ago, my drive has been to build a powerful, diverse, and stable leadership team made up of the most innovative, customer-centric minds in the space. Our transparent commitment to a clear common goal has allowed us to attract the best talent who became a consistent voice to all of our stakeholders engendering trust across the advertising ecosystem.

Driven by a common mission and belief in our long-term vision, our team sticks together, and based on our 95% gross revenue retention rate over the last three years, they are a big factor in why our clients stick with us too. To conclude, while we often talk about how scale, innovation, and trust are our three key differentiators, execution is arguably the most critical to the success of any business. DV continues to win because we execute better, period. Our ability to successfully innovate drives better product performance that helps win new clients which, in turn, provides the data fuel that powers a flywheel that ultimately grows our business. We are pleased with the strong start to the year and remain laser-focused on growing and realizing our solid pipeline of new and expansionary deals that will further drive our market share and create an even stronger long-term growth trajectory.

With that, let me hand the call over to Nicola.

Nicola Allais: Thanks, Mark, and good afternoon, everyone. We’re pleased to have delivered strong revenue growth and profitability in the first quarter. The outperformance relative to our expectations was primarily driven by stronger-than-expected measurement growth, which gives us the confidence to raise our full year 2023 revenue and adjusted EBITDA guidance. Total revenue grew 27% in the Q1 2023 to $123 million primarily driven by Advertiser revenue growth of 28%, which continues to be volume led. In the first quarter, MTMs were up 25% year-over-year, while MTFs grew 3% year-over-year. Activation revenue continues to be driven by our premium ABS programmatic solution, which is now in its fifth year since Launch. ABS delivered 56% revenue growth and comprised 56% of activation revenue compared to 48% in the prior year period.

As Mark mentioned, ABS volumes were up 55% and the ABS fixed fee was 1% higher as we rolled out bifurcated ABS pricing for display and video impressions following the implementation of a similar price bifurcation for a standard programmatic products in the first quarter of last year. The ABS price bifurcation was assumed in our original full year 2023 guidance, and most of ABS’ first quarter growth came from volume expansion by existing customers who continue to deploy this industry-leading solution across additional markets. Turning to measurement, revenue grew 22% driven by existing customer expansion on social and by the ramp of new enterprise customers that we signed last year. Social measurement growth was led by Meta and by TikTok, which almost achieved its full year 2022 revenue contribution in the first quarter alone.

International growth of 26% in the first quarter outpaced overall measurement growth and now represents 26% of total measurement revenue. Supply side revenue grew 15%, driven in particular by continued platform revenue growth from Amazon and LinkedIn. Shifting to expenses, cost of revenue increased by approximately $7 million, primarily due to higher costs from revenue sharing arrangements with programmatic partners tied to higher programmatic revenue, and also due to an increasing cloud services costs. Revenue less cost of sales of 80% in Q1 2023 is expected to remain relatively stable for the remainder of the year as we continue to invest in scaling the infrastructure needed to support our growth. First quarter research and development expenses increased due to investments in AI and machine learning engineering resources.

Sales and marketing and G&A expenses combined remained relatively stable year-over-year as our growing scale is driving leverage on these two operating expense lines. Adjusted EBITDA $36 million in Q1 2023 represented a 29% margin and was ahead of plan due to higher revenue, as well as a moderated pace of hiring, which we expect to accelerate in the second quarter. Net operating cash flow was $21 million, primarily driven by higher year-over-year net income and stronger cash collections. We ended the quarter with nearly $286 million in cash on hand and continue to have zero debt outstanding. Turning to guidance. We expect second quarter revenue in the range of $131 million to $135 million, which implies year-over-year growth of 21% of the mid-point.

The sequential growth implied by our revenue guidance reflects a tough comparison with the second quarter of 2022 when large new advertisers significantly ramped their revenue contribution, and when the standard programmatic price bifurcation was fully rolled out. We expect second quarter adjusted EBITDA in the range of $37 million to $39 million, which implies a 29% margin at the mid-point. For the second quarter, we expect stock-based compensation to range between $14 million and $16 million and weighted average diluted shares outstanding to range between 171 million and 173 million shares. For full year 2023 guidance, we expect revenue in the range of $557 million to $569 million, which implies year-over-year growth of 24% at the mid-point.

And we expect adjusted EBITDA in the range of $171 million to $179 million, which implies a 31% margin at the mid-point. We have raised full year revenue and adjusted EBITDA guidance due to a stronger first quarter performance and an expectation that the positive business trends, particularly in measurement will continue. We expect full year adjusted EBITDA margins of 31% due based on the strength in first quarter profitability while reflecting our plan to continue to invest in hiring engineering and sales talent, enhancing machine learning capabilities, and further building out the IT infrastructure to support our growth. On a sequential basis, we expect the third quarter to represent a little less than 25% of full year revenue and we expect third quarter adjusted EBITDA margins to remain consistent with the second quarter.

To close, we delivered a strong first quarter with double-digit revenue growth across all of our business lines and are focused on successfully executing against our plan for the rest of the year. And with that, we will open the line for questions. Operator, please go ahead.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Michael Graham with Canaccord Genuity. Please proceed.

Operator: Our next question is from Arjun Bhatia with William Blair. Please proceed.

Operator: Our next question is from Justin Patterson with KeyBanc Capital Markets. Please Proceed.

Operator: Our next question is from Andrew Boone with JMP Securities. Please proceed.

Operator: Our next question is from Mark Murphy with JPMorgan. Please proceed.

Operator: Our next question is from Eric Sheridan with Goldman Sachs. Please proceed.

Operator: Our next question is from Laura Martin with Needham & Company. Please proceed.

Operator: Our next question is from Raimo Lenschow with Barclays. Please proceed.

Operator: Our next question is from Yun Kim with Loop Capital Markets. Please proceed.

Operator: Our next question is from Mark Kelley with Stifel. Please proceed.

Operator: And our final question is from Youssef Squali with Truist Securities. Please proceed.

Operator: We have reached the end of our question-and-answer session. I would like to turn the conference back over to Mark for closing comments.

Mark Zagorski: Thank you all for the great questions. And I’d like to take the time to thank the DV team worldwide for their hard work and commitment to our mission and for delivering another great quarter of results and also to thank all of our stakeholders, our customers, partners and investors for their continued support. We look forward to seeing many of you at upcoming conferences and events. Have a great evening, everybody.

Operator: Thank you. This does conclude today’s conference. You may disconnect your lines at this time and thank you again for your participation.