Verrica Pharmaceuticals Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 12 speakers on the call.

Operator

Hello, everyone, and welcome to PubMatic's Third Quarter 2023 Earnings Call. My name is Christian, and I will be your Zoom operator today. Thank you for your attendance. This webinar is being recorded. I will now turn the call over to Stacy Clements with The Blueshirt Group.

Speaker 1

Good afternoon, everyone, and welcome to POMATIC's earnings call for the Q3 ended September 30, 2023. This is Stacy Clements with The Blue Shield Group, Joining me on the call are Rajiv Goel, Co Founder and CEO and Steve Pantelik, 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 A copy of our press release can be found on our website at investors. Poimatic.com.

Speaker 1

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 other future conditions. These forward 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 and uncertainties and other factors in our reports filed from time to time with the Securities and Exchange Commission, Including our most recent Form 10 ks and any subsequent filings on Forms 10 Q or 8 ks, which are on file with the Securities and Exchange Commission and are available at investors. Pometic Our actual results may differ materially from those contemplated by the forward looking statements.

Speaker 1

We caution you, therefore, against relying on any of these forward looking statements. All information discussed today is as of November 8, 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. And today, 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.

Speaker 1

And now, I will turn the call over to Rajiv.

Speaker 2

Thank you, Stacy, and welcome, everyone. We delivered above expectations for both revenue and adjusted EBITDA. The upside in revenue was driven by an increase in monetized impressions across all formats. And once again, our durable model led to increased profitability, Margin expansion and healthy free cash flow. This quarter, we continue to add new logos and deepen existing publisher and buyer relationships.

Speaker 2

Total activity from SPO deals grew to an all time high of 45%, aided partly by the launch of Activate. And customers and partners are seeing great results from our expanded solution suite. This quarter highlights the momentum we're building in the business and Our growth expectations for the Q4 of mid single digit year over year revenue growth. I recently spent a week with customers and prospects at Advertising Week New York and I've never been more energized about our long term growth opportunities. Our customer interactions indicate that sell side technology that sits closest to the publisher and therefore to the consumer is key to driving long term sustainable growth in the programmatic ad market.

Speaker 2

Several key trends are driving this, and we believe our buyer and publisher relationships strengthening as a result. 1st, buyers are embracing programmatic advertising to automate the purchase of high value Connected TV and video ad inventory. Cell side technology companies like POMATIC enabled us access at scale across the open Internet. 2nd, consumer privacy changes have resulted in increased global regulation and the looming deprecation of the 3rd party cookie. These trends have fueled tremendous innovation across the industry, and many new solutions are best leveraged when the technology sits closer to the consumer and publisher.

Speaker 2

At POMATIC, we are the technology platform at the point of consumer consent. And lastly, as our industry matures, There's been an ongoing imperative for greater control over the digital advertising supply chain and increased efficiency across the ecosystem. These trends are forcing publishers and buyers to reevaluate and reconstruct their supply chains to meet their evolving needs. Hovmatic is a key technology partner in this process. Our success stems from our owned and operated infrastructure that provides greater control over the supply chain and we believe is more efficient than alternatives in the market.

Speaker 2

This need is a driving force in our development of Activate. Since our inception, we have prided ourselves on our ability to anticipate market trends and build I'm extremely proud of the team and the new bar they have set for product development and speed to market. Our pace of innovation has accelerated engineering productivity has increased over the course of the year. Fueled in part by generative AI, we have and continue to accelerate software development, automate software testing and optimize code within our infrastructure. As a result, we released 2 major software products this year, ACTIVATE and CONVERT, With ongoing feature releases already in the works.

Speaker 2

We also added a record number of impressions processed with an annual year over year reduction in CapEx by 70%. Our durable financial model allows us to invest for future growth even amidst a challenging economic environment. We believe this model, alongside our innovation vision for how the ecosystem is evolving, our expanding product suite and our differentiated infrastructure, Uniquely position Podmatic to gain market share. I'd like to spend some time today talking about how our innovative solutions driving deep customer engagement in key areas of industry growth and set the stage for market share gains ahead. In May, we launched Activate seamlessly connect buyers and publishers for premium CTV and online video monetization, which represents a $65,000,000,000 TAM expansion controlled from the sell side.

Speaker 2

6 months in, we are already seeing a tremendous response from buyers and publishers with an active pipeline of more than 50 advertisers, agencies and campaigns. Most recently, we launched Activate in the Asia Pacific region with partners including Dentsu APAC, iQIYI, Caneso India, a unit of IPG, Madison Digital and Wish Media. Central to our conversations around Activate is the need to simplify the digital advertising supply chain And drive greater efficiency. This was a driving force for one of our launch partners, global confectionery and pet care company, Mars. Mars, a top 30 global advertiser, is innovating its supply chain for digital advertising with a particular focus on increasing efficiency In order to increase return on ad spend and lower its carbon footprint.

Speaker 2

Mars see supply path optimization and Activate as key drivers of their strategy, Particularly for high value growth formats such as CTV and online video. MARS exceeded their campaign objectives with their initial campaign tests in Q2 and Q3, Resulting in measurable ROI improvements. As a result, Mars is significantly expanding its use of Activate to more products and ad campaigns. I think Ron Amram, Senior Director of Global Media at Mars, explained it best when he said, and I quote, We are excited about our growing partnership with POMATIC. Mars is committed to creating efficiency and sustainability in our advertising supply chain, and Activate helps us get closer to the publisher and consumers, Which contributes to the overall growth of our business.

Speaker 2

Agency holding companies are also seeing success with Activate. One global agency expanded its SPO relationship to include the use of Activate in order to drive better campaign performance, Particularly for CTV on behalf of their client. With the structural efficiencies and real time supply optimization benefits of Activate, The agency was able to exceed the client's cost per user acquisition target by over 20%, and it has since expanded its use of Activate to more campaigns and more accounts With the incremental, though still early benefit of Activate, SPO as a share of has grown significantly to 45% in Q3 as both agencies and major brands signed strategic deals to grow their business with PubMatic. I'm particularly excited about this metric as it highlights the upside growth potential inherent in our business. 1st, Buyers continue to consolidate ad spend across a smaller number of platforms.

Speaker 2

When the ad market returns to robust growth, we believe thematic should disproportionately benefit And so should our publishers. And second, SPO activity comes from some of the largest ad buyers and agencies in the world. These are typically multi year sticky partnerships. At almost 50% of total activity on the platform, we've reached another inflection point Sizable, durable scale and growth. This increased buyer activity strengthens and expands our publisher relationships.

Speaker 2

Through our SPO offerings, premium publishers can access ad budgets from brands they have been unable to reach previously. We are particularly excited about the growth potential in CTV, where PMP and programmatic guarantee transactions are most prevalent. Local Now, an ad supported streaming service owned by The Weather Channel that delivers local geofence content, wanted a technology partner that has proven expertise in C TV, PMP and programmatic guarantee deals, alongside unique advertiser demand. With POMATIC, Local Now is able to optimize data available to buyers, curate and package our inventory and audiences and leverage our extensive SPO relationships, resulting in a more than tripling of their CTV revenue via PubMatic. The benefits that Local Now gained are not unique.

Speaker 2

We've seen significant growth in our P and P business over the past year, with nearly a third of our revenue now coming from these transaction types, Up nearly 10 percentage points year over year. Much of this growth is coming from CTV as we continue to acquire new streaming publishers at a rapid pace As they look to secure ad dollars shifting from linear TV to CTV. We're also expanding technology partnerships across the ecosystem. Just last month, we announced an expanded partnership with leading connected TV advertising platform, FreeWheel, a Comcast company creating a direct path for buyers to access a broad set of CTV inventory via Activate. We expect this expanded partnership to increase CTV revenue flowing through Activate.

Speaker 2

Our focus on the fastest growing segments of the industry led us to further expand our technology into commerce media and natural expansion given our existing customer base. We estimate that Convert grows our addressable market by $10,000,000,000 and includes monetization of both on-site and off-site media. While it remains early days with Convert, there is strong market recognition for the need for an integrated platform that addresses core use cases From sponsored listings to audience extension to deal ID generation. For large commerce businesses, they can seamlessly manage inventory and consumer in one system that brands can access and lower operating costs. Partly driven by the success of existing customers, Our pipeline of convert opportunities has jumped 40% in just the past 3 months.

Speaker 2

The expanding opportunities Convert supplement our strong existing business with retailers who leverage our products to drive monetization. For example, Zulily, the online superstore for moms, is using PubMatic to manage their on-site inventory, embracing our Open Wrap header bidding wrapper to monetization from their inventory. Other commerce sites leverage POMATIC for off-site audience extension through Connect. As privacy regulation continues to increase around the world with the consumer at the center of how their data is used to deliver relevant advertising to them, Through Connect, we have developed and scaled a portfolio of approaches to help publishers and ad buyers move beyond the limitations of anonymous targeting solutions Such as 3rd party cookies or Apple's IDFA. As the primary programmatic advertising platform at the intersection of the consumer and the publisher, We sit at the nexus of consumer consent, which we believe is a long term structural advantage.

Speaker 2

In many cases, Connect's offerings are superior to the cookie. They provide for consumer privacy and choice as well as deliver increased ROI for advertisers. As the timeline for 3rd party cookie deprecation potentially draws near, We are seeing increasing adoption of our solutions. Already, nearly 3 quarters of impressions on our platform have alternative targeting signals attached Other than the cookie, we are confident that the remaining quarter will transition as well. Regardless, there is no shortage of impressions for buyers to transact on within our platform, With hundreds of billions of daily ad impressions with alternative targeting signals available.

Speaker 2

We are now integrated with 29 alternative IDs These ideas drive increased ROI for advertisers as well as an increase in publisher revenue and CPMs. For example, Philo, the leading entertainment focused TV streaming service, implemented Trade Desk Unified ID 2.0 on our platform in Q3 So I'm almost doubling of revenue as a result of buyers' ability to deliver more relevant ads to the consumer. We have also scaled Connect to support dozens of global data providers, further extending privacy safe, targetable data available for buyers. The end result is again higher ROI for the buyer and incremental revenue for our publishers. For example, Otogen utilizes Connect to offer buyers premium multi publisher curated datasets to meet advertisers' goals across CTV, Online video, mobile and display inventory at scale.

Speaker 2

And in an industry first, buyers now have access to experience unique commerce media targeting capabilities, including data such as spending models, property data, automotive audiences and shopping preferences. Omatic is the 1st and only SSP with direct access to this data in both the United Kingdom and United States. Lastly, we are actively working with Google to test the Privacy Sandbox APIs, specifically Topics and Protected Audience, Which allow for targeting user cohorts and aim for providing relevant advertising to those users while safeguarding their privacy. As digital advertising evolves from cookies to various privacy safe approaches, we will continue to further scale Connect and provide buyers with the targetable audiences and media that they are looking The role of sell side technology and in particular, Podmatic has never been more compelling As publishers look for unbiased technology partnerships to help them drive growth and buyers seek to simplify their technology stacks to become more efficient and to navigate privacy changes. As a result, we are seeing increased interest and adoption of our technology across our product suite.

Speaker 2

The 3rd quarter marked strong and our steadfast focus on innovation, strengthening customer relationships and driving operational efficiencies. This momentum positions us well for growth opportunities ahead and sets the foundation for the Q4 and what we believe will be an inflection point for growth. I'll now hand it over to Steve for the financial details.

Speaker 3

Thank you, Rajeev, and welcome everyone. Q3 revenue was $63,700,000 and adjusted EBITDA was $18,200,000 or 29% margin, both above guidance. We exceeded our revenue expectations for the quarter by selling more video and display impressions than projected. We also continue to execute against our key operating priorities this year, which sets us up well going to 2024. We converted the majority of our revenue beat into incremental profit dollars, which highlights our ability to expand margins.

Speaker 3

Our CapEx optimization and working capital efficiency resulted in $17,200,000 of free cash flow, the highest quarterly level in nearly 2 years. Turning to the revenue details. We saw solid improvements for both video and display revenues as the quarter progressed. We drove an incremental 10% monetize impressions above expectations for the combined August September periods. And CPMs were relatively stable from July onwards.

Speaker 3

These positive factors helped us offset a challenging July And allowed us to substantially close the gap to our prior year revenues. Omnichannel video revenues came in better than expected And grew sequentially from Q2 by 7%. While down approximately minus 4% year over year due to the soft July, We saw monetized impressions accelerate sequentially through the quarter. As a percent of total revenue, omni channel video revenues increased to 33%. Display revenues were 67% of total revenue and declined less than anticipated and minus 4% year over year.

Speaker 3

Revenues improved sequentially through the quarter driven by incremental impressions sold. These display results were particularly notable As we manage through Yahoo's technology transition related to its owned and operated inventory, which is predominantly desktop display, Yahoo! Is now shut down its sell side platform. We anticipate it will take several quarters for us to ramp up Yahoo! Monetization As they migrate their inventory to a new technology stack.

Speaker 3

In Q3, our revenues excluding Yahoo! Owned and operated inventory Grew in the low single digit percentages on a year over year basis. Over the last several years, Yahoo's proportion of our total revenue has declined As we have expanded and diversified our customer base and increased our revenue mix towards faster growing video formats. In the Q3, Yahoo! Revenues represented less than 5% of total revenues.

Speaker 3

On a trailing 12 month basis, Yahoo! Revenue represented 9% of total revenue. In terms of ad vertical trends, we saw improving growth through the quarter for the majority of our top verticals. We saw double digit growth for the automotive, food and drink, travel, technology and business verticals. Shopping increased sequentially by about 10% from Q2, but remained below prior year levels.

Speaker 3

Overall, our top 10 ad verticals grew 8% year over year in aggregate. We continue to drive efficiency and optimization of our infrastructure that contribute to our strong financial results. On a year over year basis, we have increased our impression capacity by 20% through software optimizations with limited CapEx. We anticipate expanding our gross margin in the future as a result of these efforts. On a trailing 12 month basis, our cost of revenue per million of prices processed declined by 9%.

Speaker 3

Q3 GAAP operating expenses were $38,200,000 or approximately 15% year over year increase. GAAP net income was $1,800,000 or 0 point 0 $3 per diluted share. Non GAAP net income, which adjusts for unrealized loss investments, stock based compensation expense and related adjustments for income taxes was $7,600,000 or $0.14 per diluted share. Turning to cash, we ended the quarter with $171,000,000 in cash and marketable securities and no debt. We generated $23,800,000 in cash from operations and $17,200,000 of free cash flow.

Speaker 3

Our priority is to drive shareholder value. Our healthy and consistent cash generation fuels innovation for long term growth It allows for strategic capital allocation. As of October 31, we have repurchased 3,300,000 shares of our Class A common stock for $46,600,000 in cash. We have $28,400,000 remaining in the repurchase program. Turning to our outlook.

Speaker 3

Our Q4 has started out on solid footing with our October revenues growing both sequentially And year over year in the single digit percentage range driven by increasing monetized impressions. Importantly, Both omni channel video and display revenues were up year over year. In terms of ad spend by vertical, the majority of the top 10 verticals Improved sequentially through October. Nevertheless, given current macroeconomic and geopolitical conditions, We remain cautious on brand advertising spend and accordingly have broadened our Q4 outlook range. Our outlook assumes that CPMs remain stable And general market conditions do not significantly deteriorate.

Speaker 3

Q4 revenue is anticipated to be 76 $80,000,000 or approximately 5% year over year growth at the midpoint, which includes the impact from the Yahoo! Transition referenced earlier. For the full year, we expect revenue to be approximately $261,000,000 at the midpoint. In terms of Q4 costs, we expect to continue to benefit from our long term focus on efficiency and improving productivity of our infrastructure and team. We anticipate that our Q4 cost of revenue will be similar to Q3's level.

Speaker 3

We are projecting that operating expenses will increase from Q3 in the low single digit percentage range as we continue to invest in our platform and people for long term growth. Given our revenue outlook and optimized cost structure, we expect Q4 adjusted EBITDA to be in the range of $32,000,000 to $35,000,000 Or approximately 43% margin at the midpoint. For the full year, we expect adjusted EBITDA to be in the range of $71,000,000 to $74,000,000 Approximately 28% margin at the midpoint. This full year adjusted EBITDA range includes $5,700,000 bad debt expense related to the bankruptcy of an ad buyer in Q2. We anticipate our full year CapEx to be in the range Of $10,000,000 to $13,000,000 approximately 70% lower than 2022.

Speaker 3

In summary, we believe we have built a resilient and durable business. Strategic investments we made are beginning to deliver results. We also continue to make progress on the 3 operating priorities that I outlined last quarter. Number 1, Generate significant free cash flow. Through the 1st 9 months of 2023, we have delivered more than 85% of 20 22s full year level.

Speaker 3

Number 2, position ourselves for revenue acceleration as ad spend and CPM stabilize. This year, we have focused on building deeper relationships with publishers and ad buyers, increasing our supply path optimization relationships And expanding our TAM by over $75,000,000,000 with our ACTIVATE and CONVERT product launches. We've also optimized our infrastructure to increase capacity and grow monetizing prices. This focus led to our outperformance in Q3 and we believe has created an inflection point in And number 3, establish a new level of efficiency in our cost structure that will lead to margin expansion in 2024 and beyond As we continue to scale higher value formats like CTV and online video. In conclusion, We are proud of our team's ability to execute our operating plan and excited about our growth momentum as we close out the year.

Speaker 3

With that, I'll turn the call over to Stacy for Q and A.

Speaker 1

Thank you, Steve. Our first question comes from Matt Swanson at RBC. Please go ahead,

Speaker 4

Matt. Yes. Thanks, Stacy. Good afternoon, guys. Congrats on the results.

Speaker 4

I think I want to start off talking about the display business and kind of what your assumptions are into Q4 and if you've given any thoughts on 24 because I'm sure it didn't feel like a great macro obviously and it really wasn't, but you performed really well in that side compared to all my checks In terms of how much macro pressure there was in display. So maybe if you could talk a little bit about like company specific, what parts are under your control and what aren't and What you're doing to execute through a challenging macro for a major revenue line for you?

Speaker 3

Sure. Well, great to connect, Matt. So let me just start out with commenting briefly on Q3, but it certainly feels that our Q4 expectations. So in Q3, our outperformance was driven by incremental monetizing impressions on our platform. And if you just step back And think about what that implies for us as a company, what we can control.

Speaker 3

We've been working over the last several quarters and years To optimize our infrastructure and this has increased our capacity and we prioritized higher value formats. And we're seeing great progress obviously on video impressions we can get into. But we also have seen continued progress on display volume growth. And so to your point about the macro, the macro has largely affected CPMs. But because we've been staying focused on our customers and the infrastructure, we're seeing really good volume trends in display.

Speaker 3

And the other aspect to note is that we stay focused on strengthening our relationships with buyers. Rajeev mentioned that we've hit an all time high, 45% of total activity and clearly we're starting to see the early stages of Activate ramp up. We're seeing SPO help with Private marketplace deals, PG deals. But really overall, as an omnichannel platform, we're focused on optimizing the infrastructure, focusing on relationships, And that certainly had an impact benefit to display. And so my expectations going into the Q4 is that we're going to continue to see Robust volume growth in monetized impressions.

Speaker 3

And I anticipate that the Q4 potentially is going to be above year over year Growth. So that indicates sort of the fruits of our labor.

Speaker 4

That's really helpful. And then maybe kind of on the other side of the coin, you mentioned activate and convert $75,000,000,000 TAMs, but thinking about you got to start somewhere with a number that big. Where are like the most actionable places you think we'll start seeing this Sure. I'll be more so in 24. I guess kind of what part of that $75,000,000,000 seems the most achievable near term?

Speaker 2

Sir, hey Matt, this is Rajeev. I can take that. So where we're seeing, I think, the early signs of success are really around Premium ad formats, so that's Connected TV and it's online video. These are obviously high CPM formats, where from a buyer perspective, Having efficiency and control over the supply chain yields the greatest impact, right? So if we're thinking about a $10, $20, $30 CPM Versus the display CPM that might be in the low single digit CPMs.

Speaker 2

So CTV and online video and then I think particularly for non bidet transactions, These are programmatic guarantee transactions and fixed price private marketplace transactions where The buyer is looking for maximum reach of particular audiences and I think Activate is really well positioned In those areas. So that's really where we are focused. I think over time, we'll see growth as we enter a variety of different ad formats and transaction types As we get deeper into the buyers.

Speaker 4

Thank you.

Speaker 1

Our next question comes from Shweta Kajaria at Evercore. Please go ahead, Shweta.

Speaker 5

Thanks, Stacy. Can you hear me?

Speaker 2

We can, yes.

Speaker 5

Okay. I guess just one question from me to Steve on the Q4 guidance please. So You sound confident in your guidance. Just help us please lay out the puts and takes for both revenue and EBITDA. The visibility you have, it's November 8.

Speaker 5

You still have 1.5 months to go. And Any incremental contributions that you're accounting for this quarter that weren't necessarily there last quarter? Thank you.

Speaker 3

Great.

Speaker 5

Excuse me, not last quarter, Last time this year in Q4.

Speaker 3

Sure. Good to connect with you, Shweta. So let me start out with the core aspects So our outlook and that's first, we're assuming that CPMs are going to stay relatively stable and that's what we've seen since July, We also expect as is typical to this time of year, a seasonal uptick. It is a bit muted Given sort of the macro factors that exist across the world. And so but we do expect CPMs to remain relatively stable.

Speaker 3

But on the back of the earlier comments that I referenced about monetized impressions, we've seen great progress in August, September period and that continued into October. Overall, October revenues are going to be over 5% growth on a year over year basis. So that's a really big inflection point for us. That's the first time at that level this year. And that reflects the key drivers of driving both video impressions and display impressions.

Speaker 3

And then as I referenced in our prepared comments, the guidance also includes the transition that's going on with the Yatin Tech Stack. And if you were to strip that out, we actually are have a guide of about 8% year over year growth. Now the confidence that I have is predicated on recent trends and we try to take a balanced approach. But also it does reflect The continuation of many of the initiatives that we started multiple quarters ago, starting out with SPO, that continues to be a very important tailwind for us. Our strategic focus on expanding publisher relationships and our new product innovation, All of this contributes to our momentum.

Speaker 3

And taken together, the outperformance in Q3 Plus the core volume trends that we're seeing gives us a positive view. Now, of Of course, there's a lot going on in the macro. And to recognize that, we have broadened our revenue outlook For the Q4 from 76 to 80, and we think that is appropriate given sort of the macro environment.

Speaker 4

And some of the

Speaker 3

things that are incremental clearly are our new product development and we're starting to see a ramp up. And so that's something that's It's just at the early stages, but we have multiyear runway with activated convert and so we are looking forward to that contributing value.

Speaker 5

Okay. Thanks, Steve. Sorry, just Quick follow-up. Did you call out any headwinds that you may have seen from the Israel war at all? Or did you see any impact?

Speaker 5

Yes.

Speaker 3

I would say that the overall category that seems to be ultimately affected the most is news. And we had already seen a deprecation of news over the last year and a half. And news is not inside of our top 10 ad So for us, it's relatively muted.

Speaker 1

Our next question comes from Justin Patterson at KeyBanc.

Speaker 6

Great. Thank you very much and good afternoon. Perhaps a question for both of you. Just in terms of this Yahoo! Transition, appreciate that that's Headwind right now, but as this kind of transitions through to the new tech stack, should we think about this as Actually being an opportunity within the overall business again?

Speaker 6

And then just secondarily, we've seen more and more SSPs Sign up for OpenPath. What's your latest thoughts on teaming up at Trade Desk around OpenPath? Thank you.

Speaker 2

Sure. Hey, Justin, I can So just on Yahoo! I think it is a growth opportunity going forward. So As Steve commented on their migrating, they've shut down their historical SSP or tech stack And then they've transitioned to a new 3rd party tech stack. So I do think there's some upside opportunity there.

Speaker 2

So we're working closely with them. They've been great long term partner. But I think there's work to do over the next several quarters. Steve, anything you want to add to that before we turn over to open path?

Speaker 3

Yes. I concur with your description, Rajeev. I think the way we're looking at it is We've been a long term partner with Yahoo! We are confident that we can continue to be a very positive Partner in the future and it's based upon our innovation and our focus. So I fully expect that business to continue to ramp.

Speaker 2

Great. And then Justin with respect to OpenPath, so we work I think quite closely with Trade Desk. They've been a terrific long term partner for us I continue to be so. We talked about the UID2 example. So, I think we're very open to working with Trade Desk in a variety of different ways and we've got a roadmap in front of us.

Speaker 2

They've got a roadmap in front of them, I'm sure, and We'll see where we go in the future. Thank you, Paul. Thanks, Justin.

Speaker 1

Our next question comes from Jason Helfstein at Oppenheimer. Please go ahead, Jason.

Speaker 7

Hey, guys. Thanks. So just can you just clarify on CTV. So did you see pricing stabilize, I guess as we're like into October or is it basically volume has stabilized? Maybe comment Steve on how The trends you show on CTV impacted the gross margin in the quarter.

Speaker 7

And then Rajeev, just like a longer term question, with the bifurcation of IDs Making it kind of more confusing for advertisers, it seems like it makes them more aligned upon their DSPs. Just How does that kind of play into your strategy? Thanks.

Speaker 3

Sure. So with respect to CTV pricing, The statement that I made was relative stability to July. As I called out last earnings that the overall macro pressure has Macro environment has put pressure on CPMs over about the last year. But the positive news from our perspective, it's been relatively stable since the end of July. And so the benefits that we're seeing is really our monetized impression.

Speaker 3

So more impressions that we are selling across all formats, CTV being an important one. And we saw very strong growth in the Q3 on monetize impressions for both video and display as I referenced. And we expect, for example, in the Q4, video to have double digit monetized suppression growth on a year over year basis. So What you're seeing is the foundation of our business, which is volume, really is quite healthy, and we're just navigating through sort of the current environment. Now from a gross margin perspective, there are many things that we do to grow and support that, Not the least of which, of course, is the optimization we've done on infrastructure.

Speaker 3

On a year over year basis, we've are going to be I have reduced our CapEx by 70%. The majority of that goes into the cost of revenue line. So my expectation going into the future is that our gross margin will And then we'll have the incremental benefit as CTV revenues grow and online video revenues Because the marginal profitability for those formats are quite high. Overall, we reached 33% of overall revenues Coming from video in the Q3 and I anticipate some share gains in the Q4 as well.

Speaker 2

So, Christian, on your ID question, I commented on 29 IDs now integrated into our platform. So that I think speaks to the level of complexity And choice or optionality that buyers have, the key focus for us is really on interoperability. So making sure that whatever idea a particular buyer chooses, They can find the maximum amount of inventory or impressions on our platform relative to those IDs. But I think the broader trend here is really The increasing relevance for sell side technology in the ecosystem. So technology that sits close to the consumer and the publisher, which of course is where we sit, It's increasingly important because typically IDs are only one part of an advertiser's audience targeting strategy post cookie.

Speaker 2

They're also looking at 1st party data. They're looking at contextual data. They're looking at maybe modeled cohorts or segments of users. And many of those things, all of those things are better when they're done on the sell side because that's where the consent is coming from the consumer. There's no incremental hop.

Speaker 2

There's more efficiency from a carbon perspective. So there's a lot of benefits that come from moving targeting to the sell side And that seems to be in line with what privacy regulators are looking for, where they want to see less bid stream data flowing across the ecosystem. And so that's really represented in our Connect platform. And as we talked about in the prepared remarks, we're seeing increasing traction with that As the potential for the Google Chrome cookie deprecation draws near. Thank you.

Speaker 1

Our next question comes from James Heaney at Jefferies. Please go ahead, James.

Speaker 8

Great. Thanks for taking the questions. Rajiv, can you talk about the partnership that you now have with FreeWheel? Clearly, FreeWheel is one of the most important players in the CTV ad market. So just curious about how that partnership works?

Speaker 2

Sure. Yes, thanks, James. So, yes, we announced an integration advanced integration with FreeWheel, I guess, about a month or so back, Which really opens up opportunity for customers, our customers that are using Acctivate to be able to access significantly more CTV inventory, inventory that's sitting on the FreeWheel platform. And so for us, as you mentioned, James, FreeWheel is a leading ad server for CTV. Many traditional broadcasters use FreeWheel both in the U.

Speaker 2

S. And within Europe. We've had a long standing partnership with FreeWheel and so this just really expands our partnership into our latest supply valve optimization product offering of ACTIVATE. It should give us significantly more impression or inventory opportunity, which we think will make Activate more attractive to buyers. It should lead to higher revenue flowing through Activate over time.

Speaker 8

Great. And then just a follow-up. Maybe for Steve, can you explain why CTV was down 3% year on year in the quarter, you're clearly comping over 150%, but I'm just assuming that's off a small base. So anything about the decline would be helpful.

Speaker 3

Sure. You're right. We grew sequentially from the Q3 from the second quarter, which is obviously important from the momentum of the business. As I commented on earlier, what you're seeing broadly speaking, but I'll comment specifically on CTV is Over the course of the last 3 or 4 quarters, there has been gradual declines in CPMs for CTV. So when you look at a point in time, The cumulative effect of that is more significant.

Speaker 3

So, the positive news is that we've been growing our monetized impressions Significantly double digits and we anticipate that to continue into the Q4. So, overall, we feel that the business is in quite healthy shape. And for the various points that we raised regarding Our initiatives are on SPO. The progress that we commented on in our prepared comments regarding private marketplace and programmatic guarantee All support the long term vitality of our CTV business.

Speaker 1

Great. Thank you, Steve. And our next question comes from Mauricio Munoz at Raymond James. Please go ahead.

Speaker 9

Thank you. Rajeev and Steve, you previously talked about areas of investment that should Position the company to capitalize on opportunities coming out of the downturn. You have obviously unveiled and Made significant traction with ACTIVATE and COMVERT. How should we think about the investment cadence going into 2024? And then maybe as a follow-up, can you please talk about the pace and traction on some of these Ongoing initiatives, particularly as they relate to CTV and how could they position you for 2024?

Speaker 9

Thank you.

Speaker 3

So I'll take the investment. Nice to connect with you. So from our perspective, something that we've learned over many years is that We have taken the opportunity in challenging macro environments to get more traction, gain market share And we've been able to do that through investment in innovation, people and infrastructure. And so the last year and a half In exactly that environment and we've continued to invest, we've had some of the most rapid product development cycles that we've had history of our company. And the reason we can do that is because we have such a strong financial base.

Speaker 3

We have a terrific business In terms of the core fundamentals, we have strong margins, we generate significant free cash flow And we know that when we've invested in the business, we're able to generate significant upside. So we're not going to change that. And so the only decision that we need to work through is, which is what we're doing right now, is the rate of investment looking ahead into the future. And so we fully anticipate to keep our foot on the accelerator because of the significant opportunity out Rajiv called out the importance of the sell side platform. That's just getting more important.

Speaker 3

We're going to be a significant beneficiary as And so we're going to reinvest some amount of our incremental profitability back into the business And we're fully expected to continue to grow the top line and our market share over time.

Speaker 2

Yes. Mauricio, on the second part of your question, we think about what are the most exciting growth opportunities in the industry, it's really around supply path optimization, so getting closer to buyers and Capturing greater share of their ad budgets in return for a greater efficiency and greater control on their part. Omni channel video, so both connected TV as well as online video. Just as a reminder, online video is still multiples of the size of Connected TV in terms of TAM or opportunity, Commerce Media and then addressability. And so these are squarely aligned with where our investment portfolio sits over the last 18 months.

Speaker 2

That, of course, is not by accident. As Steve described, when we get into a downturn or a soft patch in terms of the macro environment, We really think about where is the industry headed when the inevitable upturn comes and then we align our Innovation or investment portfolio accordingly. So our intent is to be really well positioned with the fastest growing segments When we come out of this downturn, right, which hopefully we'll start to see in the next couple of quarters, although nobody knows for certain. And hopefully we'll also see a Firming up of the display market, which is still about 2 thirds of our business and all of that combined should push us to market share gains as Steve mentioned.

Speaker 1

Next question comes from Dan Day of B. Riley. Please go ahead, Dan.

Speaker 2

Hey, can you hear me? We can, Dan. How are you doing?

Speaker 10

Okay, great. Yes. So, Steve, I think we talked a few months ago on Activate, just how advertisers are likely to take sort of a crawl, walk, run approach with something like it, Starting with really small test budgets, getting comfortable with it, ramping over time with more significant budgets. So maybe if you can just talk about Where you are right now, are we still in the test phase with really all of them and any advertisers starting to move past that, it could be a more significant growth driver Maybe in the first half of next year.

Speaker 3

Sure. Nice to speak with you, Dan. So as we've called out when we launched Product and comment on progress over time. This is really a product that's A great product market fit for us. It leverages our platform.

Speaker 3

It leverages our publisher relationships, Our buyer relationships and so we are seeing a very robust pipeline. In our prepared comments, we mentioned that 50 opportunities that we're going after across the globe. We recently launched in APAC. And we are in the ramp up phase. Of course, it depends on the cycles for an agency or an advertiser.

Speaker 3

We share the specifics, the from a global app touch like Mars in terms of what they see in the product and their plans for the future. So, Our goal is to make sure we continue to lay the foundation, establish these relationships, get into the investment cycles of the agencies and advertisers And oftentimes that does go through a testing process and then expansion of the budgets. I don't anticipate material Benefits to the top line until the second half of twenty twenty four as we get more into the Ramp up in the investment cycle of these partners. But the way to think about it from an investor's perspective is This is a multiyear runway. So we are taking the time to make sure that we develop the product in ways that Ultimately, match the opportunity, and we're very positive about the progress we've made.

Speaker 10

Thanks. And if I could just follow-up with 1 on Convert, their product you're looking to scale here. Just how are Stations with retailers and the other commerce partners going so far, there's a couple of kind of more established specialized retail media ad tech vendors out there targeting that mid to long tail. So just talk us through how you cut through that and differentiate The easy answer that there's room for multiple solutions. They don't they're not choosing 1 or the other or is retail media a little different And they might not want to work with 10 plus SSPs like they do in the open web?

Speaker 2

Sure. Yes. Hey, Dan, I can take that one. I think there is Chase, the truth to what you're saying certainly, which is that the industry is still quite early in the commerce media evolution and opportunity. So yes, there are obviously some folks that are already playing in the space, but we see the vast majority of the opportunity really as being white space.

Speaker 2

And so we are going after opportunities where we can bring together a suite of offerings with on-site monetization, sponsored listings as well as video along with off-site monetization, so that's inventory or audience extension and use of first party data To be able to scale retailers' budgets. So with the launch of Convert, now we have a unified platform I can bring all of these use cases together and deliver that to Commerce Media participants. And we're seeing that as Commerce Media participants look to scale their business from maybe an initial set of dollars to a bigger portion of their ad business And having a comprehensive platform can be quite useful. So that's really where we're focused in terms of the opportunity set.

Speaker 1

And our next question comes from Max Michalis at Lake Street.

Speaker 7

Hey, guys. Can you hear me? Just one for me. I was wondering, just want to tie back to Comfort. Just want to know if it's kind of in line with initial You had a notice in the Q1 that you've launched the product.

Speaker 2

Yes, I would say so far it is in line with our initial expectations. As said it's still very early. The sales cycles here are not short, right? This is an enterprise software sales cycle. So I think we're looking at Several quarters for a sales cycle, but we've seen, I think, a lot of enthusiastic reaction.

Speaker 2

Obviously, we had a number of Great launch partners when we did launch and our pipeline is looking pretty healthy here. So I would say in line with expectations, Although certainly still very early going.

Speaker 7

All right. Thanks, guys.

Speaker 1

We have time for one more question. Matt Condon from JMP. Please go ahead.

Speaker 11

Hey, guys. Thanks for taking my question. Just one for me. Maybe just with Google's Privacy Sandbox API moving bidding from the Exchange into the browser. Can you just talk about how that changes the offering for SSPs and maybe just the competitive dynamic there?

Speaker 11

Thank you.

Speaker 2

Sure. Yes. So key part of Privacy Sandbox from Google is shifting the auction environment And the data used in that auction environment into the browser, right, to make that privacy safe. So that is a pretty, I think, significant shift in terms of The infrastructure required to monetize an ad impression. And so we've got a team of engineers that are working on this.

Speaker 2

As I mentioned, we're working with Google In testing those APIs, I think it's still quite early going. I think there's still a number of unknowns as we are in conversation With the Google team about how things will work and how they'll scale. So I would say it's still pretty early going in terms of validating Do these APIs work and how transactions will be processed and will be scaled up? But to your question, it is, I think, a pretty meaningful Shift in terms of infrastructure. And I think given that we own and operate our own infrastructure and have a great degree of control and flexibility, we feel like we should be in a good position to be able to build in the way that we want to build.

Speaker 11

Great. Thank you.

Speaker 1

At this time, there are no additional questions. I'm going to turn the call back over to Rajeev for closing remarks.

Speaker 2

Thank you, Stacy. I want to thank everyone for joining us today. This quarter, we delivered strong execution and marked an inflection point for revenue growth in Q4. I couldn't be more excited by the momentum we're seeing across our business and investments we've made that are accelerating our business. Sell site technology increasingly relevant to digital advertising publishers and buyers, and we are at the forefront of that opportunity.

Speaker 2

And of course, underpinning our success is our durable model, Including healthy cash flow and a strong balance sheet. We look forward to seeing many of you over the next couple of months. Have a great afternoon, everyone.

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Earnings Conference Call
Verrica Pharmaceuticals Q3 2023
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