PubMatic, Inc. (NASDAQ:PUBM) Q1 2024 Earnings Call Transcript

PubMatic, Inc. (NASDAQ:PUBM) Q1 2024 Earnings Call Transcript May 7, 2024

PubMatic, Inc. beats earnings expectations. Reported EPS is $-0.05, expectations were $-0.12. PubMatic, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Well, hello, everyone and welcome to PubMatic’s First Quarter 2024 Earnings Call. My name is Kelsey and I will be your Zoom operator for today. We thank you all for your attendance today. And as a reminder, today’s webinar is being recorded. I will now turn the webinar over to Stacie Clements with The Blueshirt Group. Stacie, over to you.

Stacie Clements: Good afternoon, everyone, and welcome to PubMatic’s earnings call for the first quarter ended March 31st, 2024. This is Stacie Clements with The Blueshirt Group and I’ll be your operator today. Joining me on the call are Rajeev Goel, Co-Founder and CEO; and Steve Pantelick, CFO. Today’s prepared remarks have been recorded after which Rajeev and Steve will host live Q&A. [Operator Instructions] 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.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and future conditions. These forward-looking statements are subject to the 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 May 7th, 2024 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 delivered another outstanding quarter, which highlights the growing need for sell side technology for digital advertising, our strong customer relationships, and our breadth of solutions, resulting in growth across all formats and channels. Revenue and profit significantly exceeded our expectations, marking multiple quarters of accelerating revenue growth. Revenue grew 20% over Q1 last year. Excluding revenue from Yahoo’s owned and operated inventory, year-over-year revenue growth was 25%. Adjusted EBITDA margin was 23% and we generated over $16 million in free cash flow. I’m incredibly proud of the team’s hard work and focused execution, which has positioned us well for the growth opportunities that lie ahead.

See also 20 Most Car Dependent Cities in the US and 20 Best Places to Retire in South Carolina in 2024.

Q&A Session

We’ve built an integrated platform that is flexible and efficient so we can meet the needs of a growing customer base as we expand our total addressable market. We see continued momentum in the business evidenced by adoption of new solutions and growth in customer count as clients across the ecosystem choose to build their ad businesses on PubMatic technology. With these strong results continuing into April, we are raising our full year guidance. Adding to our confidence is the increasing importance of being positioned on the sell-side as the advertising ecosystem evolves. The need for deep and specialized technology to monetize ad inventory and audiences is increasing at a rapid pace. New opportunities, including changing privacy regulations, the onslaught of new ad inventory from CTV and commerce media, and the increasing need for buyers to control how their ad budgets are deployed, are best addressed on the sell-side, which sits closest to the consumer.

PubMatic is unique. Our focus on our owned and operated infrastructure and strength in organic innovation results in robust technology that efficiently connects buyers and sellers. We’ve spent 17 years building differentiated solutions and our competitive moat continues to widen even as our logo list continues to grow. These advantages attract both advertisers and publishers to PubMatic, adding scale to the platform and fueling continued growth. Let me explain. Advertisers are looking to gain scaled access to premium inventory, audiences, and data, which is primarily done through sell-side technology, whether they connect directly to us via Activate or via a demand side platform. Our owned and operated infrastructure provides an efficient, transparent, omnichannel, global, and privacy-forward solution while giving buyers granular capabilities to control how their ad budgets are deployed.

At the same time, premium publishers and data owners are using PubMatic to gain access to our scaled buyer demand, further amplified by Supply Path Optimization and Activate. Moreover, our addressable market continues to grow as we attract new entrants to the digital advertising ecosystem, like leading streaming providers, commerce media participants, and now social media companies. The most recent example of this is Roblox. When the global immersive platform was looking to enable programmatic ads for the first time, they tapped PubMatic to power this offering. Not only can PubMatic provide scaled access to premium brand advertising demand through our buyside relationships, but we also understand the needs of content providers across web and app environments.

As Roblox’s VP of global partnerships, Stephanie Latham, explained, and I quote, “Partnering with PubMatic unlocks the opportunity for more advertisers to seamlessly engage this community through preferred content formats, like video, while providing advertiser controls around brand suitability.” More broadly, as cookie deprecation nears and privacy regulations increase around the world, the future of digital advertising resides in technology like PubMatic’s that sits closest to the publisher, and therefore the consumer. We have a unique opportunity to tap into the myriad of behavioral, demographic, identity, interest-based and contextual signals that publishers have access to, all while enabling media owners to maintain control of their data and access, a critical component as they build their ad tech stacks.

As we cross the 500-person mark in product management and engineering, we continue to focus on building solutions ahead of the trends that are playing out today, namely buyer spend consolidation via SPO, growth from connected TV, and expansion of commerce media. I’d like to walk through these growing areas and how we’ve differentiated ourselves in each. Our goal is to maximize content creators’ access to programmatic advertising budgets. While we work with top DSPs on a global basis, we know that advertisers and agencies have tremendous influence over how and where their budgets are spent. With large ad budgets continuing to shift from linear to programmatic, SPO via Activate offers ad buyers a highly efficient and fully-scaled solution that directly connects buyers with premium video inventory while reducing operational friction.

Further, our approach focuses on both ad buyers’ and content creators’ interests. We deliver increased ROI that warrants higher CPMs, which elevates the value of the entire digital advertising ecosystem. I couldn’t be more pleased with the success we are seeing as we continue to expand customer engagement through new products and regions. Several of the top global agency holding companies are in the process of ramping up their adoption of Activate. We’ve also recently expanded Activate into Latin America. Our comprehensive suite of buyer solutions is what makes our SPO offering so compelling. As a result, ad buying activity from SPO continues to drive growth across the PubMatic platform. Our multi-year partnership with GroupM is just one example of how we are meeting the growing needs of buyers.

We initially engaged with GroupM for SPO in 2019. Over time, we expanded the relationship from desktop display to mobile, online video, and ultimately connected TV. We further partnered to power their premium marketplace across Europe and Asia and most recently in the U.S. In 2023, we launched a comprehensive Private Marketplace Deal Library across multiple GroupM agencies which consolidates media buying onto approved inventory packages that meet their performance and quality standards. And just this past month, we announced a first-of-its-kind solution to deliver AI generated cohort-based audience models customized for each GroupM advertiser client. What’s most interesting about this journey is that it can only be done with technology like PubMatic’s that sits on the sell-side.

At the end of the first quarter, SPO activity increased to 50%, up four percentage points from the end of Q4. Our SPO activity is creating a growing moat and flywheel to attract new publishers who want access to the unique demand only available on PubMatic. I anticipate that over the next several years, there is potential for SPO activity to be 75% of our total buyer activity. Driving this confidence are a few things. One, the nature of our land and expand strategy. Our net spend retention rate from ad buyers with at least three years of spend reached 125%, which gives us high visibility into impression and revenue growth. Two, we are adding 50% more buyer-focused salespeople this year so that we can bring the same efficiencies and high ROIs to mid-tier agencies and large advertisers as they too embark on SPO initiatives.

And three, total global digital ad spend is estimated to grow by 32% over the next four years to nearly $850 billion. We will disproportionally benefit as the industry continues to consolidate. The capital outlay needed, global scale requirements, and ongoing pace of innovation make it challenging for other platforms to compete and even harder for new entrants to emerge. At the same time, publishers are also mandated to find increased efficiencies and greater monetization. Both of these objectives can be solved by shifting from in-house software to PubMatic solutions, which allows publishers to focus on their core competencies, creating content and connecting with consumers, while leaning on trusted experts like PubMatic to power more of their tech stack.

For example, OpenWrap, our header bidding wrapper solution across CTV, mobile app, and web environments, drives increased yield for publishers and streamlines their engineering and ad operations. Publishers like Realtor.com, Internet Brands, sports app LiveScore, and NPR are increasingly realizing the benefits of OpenWrap as we have more than doubled the number of paying customers year-over-year. This same mandate, to find increased efficiencies and greater monetization, holds true for streamers. Even the biggest names in CTV are opening up their inventory and data to access a greater proportion of ad budgets in order to drive growth. In fact, as an increasing share of CTV ad budgets move to programmatic transactions, top streamers are increasingly adopting PubMatic to support direct transactions with buyers via private marketplace or programmatic guaranteed auctions.

Beyond the one-to-one direct access, our technology enables streamers to optimize yield across multiple bidders and improve impression-level data available to buyers that can drive higher yield. Our strategy to penetrate CTV budgets is multi-pronged. First, our growth in SPO and Activate provides publishers with unique demand on the PubMatic platform not available elsewhere. This creates a catalyst for growth, allowing us to rapidly expand our CTV publisher base, which increased 15% year-over-year in Q1. Further, as publishers derive value from our platform, they are increasingly choosing to move more of their direct-sold deals to PubMatic, which is a significant portion of how CTV and online video is sold today. The results of our strategy are clear.

Last quarter, we added DISH Media and Vevo to our platform, and we most recently onboarded Virgin Media, one of the UK’s premier entertainment and communications companies. Virgin Media selected PubMatic as one of only a few sell-side technology companies helping to power their free ad-supported TV or FAST offering because of our strength in SPO and private marketplaces. We believe we are at the early stages of this new CTV and online video flywheel for growth, particularly as Activate begins to ramp. Convert, our commerce media platform, also benefits from the scale of premium inventory on our platform. This supply, coupled with the richness of our data capabilities, allows us to attract retail media budgets. Programmatic retail media expands our TAM by $10 billion in the fastest growing part of the market where ad buyers use retailers’ unique data sets to deliver relevant, high performance ad campaigns.

Further, this is a nascent market today with plenty of greenfield opportunity. In addition, commerce media sites, with their trove of first-party data signals, stand to benefit the most as the third-party cookie is eliminated. As this transition unfolds and adoption of alternative signals increases, a more resilient supply chain will emerge delivering more relevant ads for consumers, better performance for advertisers, and superior monetization for content owners. We integrate directly with retailers and their data, positioning us well for growth in retail media. We are already seeing strong interest in Convert from some of the largest commerce media platforms. Just a few weeks ago we announced a partnership with Instacart, allowing buyers to leverage Instacart’s first-party retail media data to reach audiences across our expansive inventory.

Equally important, because we sit primarily on the sell-side of the ecosystem, with direct access to scaled, omnichannel inventory, we are in a unique position to deliver offsite audience targeted campaigns in a privacy-compliant way. As these large content creators embrace their advertising potential, they are also choosing PubMatic to power their onsite inventory. Klarna, the global payments company that boasts the world’s fastest growing community of shoppers, recently partnered with PubMatic to monetize the native inventory on their app. They chose PubMatic because of the scale we provide so that any advertiser, regardless of their DSP, can reach Klarna’s highly-engaged audience at the point of purchase for better campaign performance.

While still early days for Convert and our commerce media business, I’m excited about the breadth of opportunities ahead of us. Our strong agency and advertiser relationships, driven by SPO and Activate, coupled with our strong portfolio of audience solutions are gaining traction with commerce media companies. Collectively, the driving forces of innovation and growth in our industry are creating a wealth of opportunity for the Open Internet. Buyers are looking to engage their audiences alongside brand-safe, professionally curated content, which the walled gardens do not provide. I’ve had numerous conversations with key advertisers and media buyers at global ad agencies about how they are actively looking to move media buys out of walled gardens, but need the performance and ROI that they are accustomed to.

I believe that the Open Internet has the potential to deliver performance consistent with walled gardens, especially after third-party cookies are deprecated and first-party data from CTV publishers and commerce media partners continues to scale. In summary, we delivered an outstanding start to the year with continued momentum into April. We’ve added new clients and established deeper relationships with content creators and buyers, and we are investing in the highest return areas of the business like Activate for SPO, Connect for data and Convert for commerce media. As a result, we expect revenue growth to accelerate in 2024. Our competitive moat is widening, as is the need for sell-side technology. Those that are looking to build their advertising businesses need three things, technology that [Technical Difficulty] brings them into the future and ensures control of inventory, data and buyer preferences, access to premium inventory and buyer demand and an efficient, transparent path to execute direct programmatic transactions.

At PubMatic, we have global omnichannel scale, a rich, innovative product roadmap and the resources for ongoing investment. We have tremendous opportunity in front of us as we expand our addressable market and deliver real value to content creators, buyers and data partners. I will now hand it over to Steve for the financial details.

Steve Pantelick: Thank you, Rajeev. And welcome everyone. We once again exceeded guidance on the top and bottom line, led by strong execution and continued momentum in our business. Several factors drove accelerated year-over-year revenue growth of 20%. Monetized impressions increased for every format and channel in aggregate by 17%. CPMs were stable across formats and channels, and emerging revenue streams comprised of new products, data partnerships and enterprise software integrations contributed approximately two percentage points of growth in the quarter, on track to double their contribution by the end of the year. This strong outperformance also drove incremental margin expansion with adjusted EBITDA margins of 23%, once again demonstrating the strength of our business model, which is built on owned and operated infrastructure, innovation investments to deliver differentiated products and operational excellence.

Compared to Q1 last year, we doubled our adjusted EBITDA and tripled our free cash flow. Breaking Q1 down by format and channel, which includes Yahoo unless otherwise called out. Omnichannel video revenue from CTV, mobile and desktop devices grew 33% over Q1 last year, driven by an increase of monetized impressions by more than 50%. As we continue expanding our roster of new customers and growing our share of wallet with existing customers, we see a long runway of opportunity in this high value channel, we also saw continued strength in display, most of which was via the mobile channel. Display revenue grew 10% over Q1 last year, led by a double-digit percentage increase in monetized impressions. Excluding Yahoo owned and operated inventory, display revenue grew 17% year-over-year.

On a global basis, every region grew double-digit percentages in the first quarter. As mentioned in prior earnings calls, our results include the revenue headwind in our business from Yahoo. Excluding revenue from Yahoo’s own and operated inventory, revenue grew significantly by 25% over Q1 last year. We anticipate this headwind diminishing in the second half. We also added 99 publishers on a year-over-year basis, including premium CTV and transactional commerce brands. And we grew our existing publisher revenues on a trailing 12 month basis with net dollar base retention at 106%. Excluding Yahoo, dollar base retention was 114%. Looking at growth in ad spend, the top 10 ad verticals combined increased by 20% compared to Q1 last year. Within this group, the majority of ad verticals grew nearly 30% year-over-year.