Direct Digital Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 7 speakers on the call.

Operator

Good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Direct Digital Holdings Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Simply Press star followed by the number one on your telephone keypad. If you would like to withdraw your questions, again, press

Speaker 1

Good afternoon, everyone, and welcome to Direct Digital Holdings Third Quarter 2023 Earnings Conference Call. My My name is Brett Malott. I'm representing Director Joel Holdings from ICR. On today's call are Director Joel Holdings' Chairman and Chief Executive Officer, Mark Walker and Chief Financial Officer, Diana Diaz. Information discussed today is qualified in its entirety with the Form 8 ks and accompanying earnings release, which has been filed today by Direct Digital Holdings and may be accessed at the SEC's website and DRCT's website.

Speaker 1

Today's call is also being webcast and a replay will be posted on the company's Investor Relations website. Immediately following the speakers' presentation, there will be a question and answer session. Please note that the statements made during the call, including financial projections or other statements that are not historical in nature may constitute forward looking statements. These statements are made on the basis of GRCT's views and assumptions regarding future events and business performance at the time they are made, and we do not undertake any obligation to update these statements. Forward looking statements are subject to risks, which could cause DRCT's actual results to differ from its historical results and forecasts, including those risks set forth in DRCT's filings with the SEC.

Speaker 1

You should refer to those for more information. This cautionary statement applies to all forward looking statements made during the call. During this call, DRC should be referring to non GAAP financial measures. These non GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliations of the non GAAP financial measures to the most directly comparable GAAP measures are available in the earnings release that GRCT filed in Form 8 ks today.

Speaker 1

I will now hand over the conference call to Mark Walker, Chief Executive Officer. Mark?

Speaker 2

Thanks, Brett. Thank you to everyone joining our Q3 2023 earnings call. Proud to report incredibly strong financial results and operational performance for this quarter. As we've discussed during recent earnings calls, we made significant investments in Direct Digital Holdings' technology stack, advertising platform and operational structure. We initially expected to see the impact of these investments in 2024.

Speaker 2

However, we're pleased to report these benefits and associated growth Our coming to fruition within 2023. Our technology partnerships and our overarching business strategy have enabled us to meet a growing number of customers' demands and further the capabilities of our technology platforms. As a result, our open marketplace CPM platform continues to benefit as middle market businesses seek our differentiated and thoughtful approach to our advertising technology and our tech enabled solutions. Furthermore, our recently announced strategic partnerships Have also helped drive our business to new highs. Our new collaboration between Amazon Publisher Services and our Colossus SSP division integrates Amazon's transparent ad marketplace.

Speaker 2

This integration has allowed Colossus SSP's roster of publishers, which include both minority owned and multicultural outlets and general market properties to tap into the benefits of Amazon's server side header bidding solutions that offer a direct auction approach. Most recently, we announced the selection of HPE GreenLake Edge to Cloud Platform to build a highly reliable, scalable and secure production environment. Our Colossus SSP division will now incorporate the HPE GreenLake platform with its on premise infrastructure and cloud services across its entire marketplace to support Direct Digital Holdings' sell side platform. Our partnership with Beeswax, A FreeWheel owned programmatic buying platform has expanded our access to as well as simplified the path for buying multicultural alongside general market Connected TV ad inventory, helping drive growth within Colossus SSP, huddle masses and Orange 142. We will continue to explore opportunities with our strategic partnerships as we continue to execute on our growth strategy.

Speaker 2

As a result of all these initiatives, DRCT saw significant growth across both the sell and buy side. In Q3 2023, our top line revenue increased to $59,500,000 an increase of $33,500,000 or 129 segment over $26,000,000 in the same period of 2022. Adjusted EBITDA for the quarter was $5,400,000 compared to $2,400,000 in the same period in 2022, an increase of 123% year over year. Our revenue this quarter was driven by strong performance by both our sell side and buy side advertising segments. Our sell side platform saw substantial growth as a result of our technology investments, increased operational efficiencies and partnership expansion.

Speaker 2

We are pleased to report increases in sell side revenue growth of 174% and buy side revenue growth of 10% over the same period of 2022. In the 3rd quarter, our sell side advertising segment processed approximately $400,000,000,000 monthly impressions, an increase of 2 20% year over year. We also saw an expansion of partners increasing their investment as well as the share of wallet with both our segments. In question. This quarter, the company's sell side advertising platform received over $34,000,000,000 monthly bid responses, an increase of 2 10% over the same period in 2022.

Speaker 2

Sell side revenue per advertiser also increased 241%. On the buy side, our businesses served approximately 228 customers and buy side revenue per customer increase 14% over the same period in 2022. Another significant milestone for the company was the announcement that we would be purchasing all of our outstanding publicly traded warrants in an effort to protect against shareholder dilution and combat warrant overhang of the stock. We are pleased to report the completion of this redemption initiative and as a result an unencumbered stock as Direct Digital Holdings turns its attention to performing for the remainder of 2023 and beyond. On that topic for the remainder of 2023, we believe our technology strategy, infrastructure and operational investments will continue to bear fruit as we make considerable progress with our server transitions as well as our overall replatforming.

Speaker 2

Historically, Q4 has been our strongest quarter and we expect to see favorable market dynamics with an increase in media spend being targeted upwards to a range of $170,000,000 to $190,000,000 By removing the aforementioned warrant overhang, executing on our replatforming strategy and continuing our operational excellence, we believe we will pave the way for growth in our stock, Valuing Direct Digital Holdings at a similar level to our peers. I will now hand things over to our CFO, Diana Diaz, who will walk through some of the financial highlights in further detail.

Speaker 3

Thank you. As Mark stated, our revenue increased to $59,500,000

Speaker 4

call. In the Q3

Speaker 3

of 2023, an increase of $33,500,000 or 129 percent over the $26,000,000 in the same period of last year. The exceptional performance of our sell side advertising segment drove the majority of the increase. Sales side advertising segment revenue grew to $51,600,000 for the 3rd quarter and contributed $32,800,000 of the increase or 174% growth over the $18,900,000 in revenue in the same period last year. As Mark stated, our sell side platform has heavily benefited this quarter from continued investments in the technology stack, operational structure and increasing publisher partner engagements. Our buy side advertising segment also saw strong performance growing 10% year over year and contributing about $700,000 to our overall revenue growth, finishing the quarter with $7,900,000 in revenue compared to $7,100,000 in the same period of last year.

Speaker 3

The increase in revenue was primarily a result of increased spend and up sell opportunities from our current customers. Growth in revenue for the sell side and buy side of our business resulted in a direct positive impact on both net income and EBITDA. Now let's talk about gross profit. Gross profit for the Q3 of 2023 call was $11,800,000 compared to $7,500,000 for the Q3 of last year, an increase of $4,300,000 Primarily as a result of our revenue mix, gross margins for the Q3 were approximately 20% call compared to 29% in the same period of last year. As we discussed last quarter, these margin results are in line with our margin expectations given the rate of accelerated growth in our sell side advertising segment and the resulting mix of our revenue profile.

Speaker 3

Call. In the Q3 of 2023, the revenue mix was approximately 87% on the sell side and 13% on the buy side compared to 73% on the sell side and 27% on the buy side call over the same period in 2022. The sell side advertising segment gross margins were 14% call for the Q3 of 2023 compared to 15% in the Q3 of last year. Sell side revenues, which grew as a percentage of our overall revenue, have a lower gross margin than our buy side segment. Call.

Speaker 3

Additionally, incremental costs associated with investments in our sell side technology stack, which were about $500,000 in the Q3 of 2023 impacted gross margin. We anticipate that around half of these costs will continue until approximately March of 2024. We then expect sell side gross margin to resort back to historical margin targets of 14% to 15% by the end of Q2 of 2024. The Buy Side Advertising segment gross margins were 60% for the Q3 of 2023 call as the mix and timing of customer campaigns can impact the results. Highside gross margin decreased in 2023 to a level that we believe is sustainable, reflecting our strategic focus on customer retention and increasing customer lifetime value.

Speaker 3

Now talk about operating expenses. Operating expenses increased to $7,300,000 in the 3rd quarter of 2023 for an increase of $1,700,000 over the $5,600,000 level of expenses in the Q3 of last year. The $1,700,000 increase in operating expenses reflects call to the call to the operator for the call. A $900,000 increase in compensation, tax and benefit expense and an $800,000 increase in general and administrative expenses. The increase in compensation tax and benefits expense was primarily driven by headcount additions, mainly in shared services to support our public company infrastructure.

Speaker 3

The increase in G and A costs call was due to expenses associated with supporting our growth and ongoing market initiatives. We expect to continue to invest in and incur additional expenses associated with our transition to operating as a public company, including increased professional fees, investment in automation and compliance costs associated with developing the requisite infrastructure required for internal controls. Call. Net income was $3,400,000 in the Q3 of 2023 compared to net income Our organic growth year over year can be measured by our sell side and buy side operating income results. The operating income of our business segments for the Q3 of 2023 was $7,800,000 compared to operating income of our business segments of $3,700,000 in the same period of last year, an increase of 108% year over year.

Speaker 3

Call. For the Q3, adjusted EBITDA was $5,400,000 compared to $2,400,000 in the Q3 of last year at the 123% increase, which was driven by the increase in gross profit, Partially offset by the increase in operating expenses that I talked about previously. And as Mark previously mentioned, we believe that currently our stock Turning to the balance sheet. We ended the Q3 with cash and cash equivalents of $5,500,000 an increase of $1,500,000 from the $4,000,000 that we had at the end of December 2022. And now I'd like to turn it over to Mark for some closing comments.

Speaker 2

Thank you, Diana, and thank you to everyone for joining. We sincerely appreciate your interest in Direct Digital Holdings and are looking forward to your questions. Operator, please open the line.

Operator

Your first question comes from the line of Darren Aftahi from ROTH MKM. Your line is open.

Speaker 5

Hey, thanks for taking my question. This is Dylan on for Darren. First, I want to extend my congratulations on the quarter and the guidance. I guess, on that note, could you sort of talk about the impact that you're seeing of those investments that were supposed to or you were sort of on track for it to happen in 2024, but are now Happening in the second half of this year, like was that your ability to get certain technology platforms up faster or was it publishers or something different that you didn't think would be on the platform until next year that are now obviously quite big in generating sizable revenue.

Speaker 2

Yes. Hey, Dylan, first off, it's good to hear from you and thanks for the question. I'd really say it's a 3 pronged approach. I mean, number 1, we talked about the technology replatforming that we've been going through. I have to give tip my hat off to Our CTO and our technology team, they were able to accelerate and streamline, our tech stack a little bit faster than what we initially That gave us the type of scale that we need as we communicated to grow to that $400,000,000,000 in impressions on a monthly basis, which gave us more capacity The second piece of it is and if you dig into the numbers a little bit, we've been able to increase And go deeper with some of our buying partners and agency groups that we work with.

Speaker 2

I mean, that is starting to yield fruit and come to fruition. So We've seen a doubling of the amount of investments that some of our buying groups that we have relationships with, increase. We had the increase in capacity With the level of impressions that we've been able to deliver and really some of the benefits that you've seen where we are today and what we are anticipating from now till the end of the year It's really all three of those components coming together in the culmination of that operational execution that our team has been able to execute against.

Speaker 5

Great. Thank you. As a second question, just given where 3Q came in in terms of revenue mix. And I know you're talking about getting back to the 14% to 15% sell side gross margins by 2Q of next year. But is there anything that Would get in the way of that happening in terms of the revenue within sell side skewing more towards larger publishers that could Potentially inhibit that sort of gross profit number.

Speaker 2

No. Where we are right now, we're anticipating specifically on the sell side business, Living in that 14%, 15% range, and we're pretty confident that that's going to hold for us through the 2024 year.

Speaker 4

Got

Speaker 5

it. Last one for me. Could you just sort of touch on Where you see yourself in terms of competition like now that 3Q and 4Q are implying just much bigger numbers. Do you think that invites some of your peers to sort of begin to explore the middle market and sort of other niche markets you play in more.

Speaker 2

Yes. Well, what we think is the processes that we've been able to set up We lend ourselves to have a competitive advantage towards the middle market. I mean, I think if you look at our revenue per employee, it's significantly higher than many of our competitors. The processes we put in place, the way that we structured our organization and the way that we are able to operate, we think that gives us the actual competitive advantage against many of our publicly traded competitors that are out there in the marketplace and some of the privately held ones that are held by other PE firms. So We feel pretty good and pretty confident about our position in the marketplace.

Speaker 2

And we're anticipating growth from now Q4 as well as in 2024.

Speaker 5

Great. Thank you. That's it for me. I'll pass it on and congrats on the results. Thank you.

Operator

Your next question comes from the line of Dan Kurnos from The Benchmark Company. Your line is open.

Speaker 2

Hey, Dan.

Speaker 4

Thank you. Good. How are you doing, Mark? Good. I would be too if I put up $60,000,000 of revenue in Q3.

Speaker 4

I a couple of questions well, a few questions. 1, I mean, appreciate the color on incremental impression growth through tech capacity. That's helpful. You've obviously had some notable partner wins. Is there any way to just kind of parse out sort of underlying organic?

Speaker 4

And Not really a fair question, because technically all of it's organic, but just between increase is there a way to sort of bucket between increased spend per customer, which Danny is some good metrics on. I'm talking about the sell side by the way, versus new partner wins versus just expansion of inventory or impressions with the existing partner base.

Speaker 2

Yes. I would say it's actually a combination of all three. I mean, the amount of impressions that we grew, we went from $300,000,000 in Q2, dollars 400,000,000 in Q3, I think that's one benefit, right? 2nd benefit that you see, if you look at our revenue per advertiser. That actually went up roughly about 200% to 2 60% year over year.

Speaker 2

And so I think that you can actually put those two pieces together, and really kind of figure out that our growth is actually coming from both sides. It's a strategy that we've implemented from day 1, increase the level of impressions, work diligently on the buying community and the agency groups that have decided to partner with us and go in deep with them by building on our relationships And honoring our commitments and operating in just. So that's really the everybody asked about the secret sauce for our growth. That is the secret sauce. Continue to grow on the impressions, continue investing in the buying communities, and then they come and actually spend through your platform.

Speaker 4

Well, now you've given the recipe, Mark. They can all figure it out. No, I'm just kidding. I do This is so let me just add a little bit of a follow on to that because I'm trying to get a sense of this market has been really tough For small platforms to get trials and expanded spends. And obviously, you have a unique angle In the inventory that you bring to the marketplace.

Speaker 4

But I'm just trying to get a sense of if that spend per advertiser number, and I know campaigns can be small, so you can have larger growth rates off of smaller numbers. But still to get to your number here, I'm just trying to get a sense of like, is it been like they've now passed with you for 12 months and they are really willing to put more dollars to work with you just because the results have been fantastic, which By the way, it was a narrative we saw last year too. It just was on a smaller base. Or is there some other dynamic at play in the marketplace just given the way that Inventory has evolved both in the digital space and video space here, that Equates to something that is beneficial just how you run the way that you run your strategy. So the dynamics of the marketplace are incrementally beneficial to the platform that you've developed.

Speaker 2

Yes. I would actually say it's really operational excellence. I mean, the teams that we've We put in place. 1, they come with a significant amount of experience, sitting on multiple points of the value chain. So I think we have an interesting perspective that we bring to the market when we work with the different buying communities that are out in the marketplace.

Speaker 2

I think that's number 1. I think number 2, The fact that we've been in business for 4 years, even though we were operating quietly behind the scenes, it really allowed us to get our processes and Instructure in order to where we can make money off of smaller campaigns and that has been actually a benefit for us. Now that you've seen us out in the marketplace, we're starting to mature. We've been able to upgrade our platform. I I think you're going to start seeing on the go forward, continued growth out of our platform and the way that we've structured the business.

Speaker 4

The crazy part to me, Mark, is this not I mean, we're not even having a self serve conversation right now, which is what everybody else is falling over and you're Putting up way better numbers than most of the peer groups. So kudos to you on that. I'll ask just in Q4, Thank you for Q4 being up sequentially from Q3. There's the Trade Desk is now talking about some cautiousness in Q4 that stabilized In it was a little rough in October, stabilized in November. And I'm just the momentum you're seeing seems Like it's continuing, especially if your guidance history is evident here too, but, just kind of curious what you're seeing in conversations Right now relative to the broader macro?

Speaker 2

Yes. For the broader macro, and I think you've seen it in our revision upwards that we've been able to build and the platform that we've been able to establish and the growth that we actually have on our roadmap. So, we're still bullish on our business even though some of our peers might be, having some other difficulties, but we're really confident in the model We've been able to build here at Direct Digital.

Speaker 4

And just last for me, Mark, and I'm sorry it's a few, but just on flow through. EBITDA was really healthy in the quarter. You guys are obviously making some further investments that you're trying to balance. How should we be thinking about growth versus profitability both in Q4 and going

Speaker 2

forward. I'm going to turn that over to Diana, to give you some viewpoint on Q4.

Speaker 3

So I think we've talked about the gross profit margins, that where we think those will end up for both the buy side and the sell side, And that our operating expenses will be at or maybe slightly higher than what they were in the 3rd quarter. Public company side, but we're about at the right level. We won't be going down.

Speaker 4

Okay. That's super helpful. I guess that this trend continues with the stock prices, you guys will be at 3 times EBITDA. Okay. Super helpful.

Speaker 4

Thank you, Mark.

Speaker 2

Yes, absolutely. Thank you.

Operator

Your next question comes from the line of Michael Kupinski from Noble. Your line is open.

Speaker 6

Thank you. I want to offer my congratulations. All I got to say is, wow, what a great quarter. I was wondering if you can just follow a little bit on what Dan was saying, but in a different way, Just to talk a little bit about the state of the marketplace. You mentioned beneficial market dynamics in the quarter.

Speaker 6

And I was just wondering what do you see as the key drivers of that? And then I just have a couple of quick follow ups.

Speaker 2

Yes. I think it's the mix of 2 things. 1, I think it's the mix of the publishers that we actually are working with. We're still seeing in the marketplace strong demand for the multicultural publishers That we've added into our inventory. There is definitely more and more continued demand trying to reach the African American, Hispanic American, Asian American LGBTQ community along with the general market.

Speaker 2

That's number 1. Number 2, really the operational efficiency of our platform has been an added benefit, and the people and the process that we've actually put in place, into the buying community. Really combination of all 3 have yielded pretty much successfully for us the fruit that we saw in Q3 and we're expecting to see the same in Q4.

Speaker 6

And in terms of the multicultural space, the advertisers looking at the initiatives targeting that particular multicultural market. What is the percent? Can you is there a way for you to kind of identify what is percent of advertisers taking out that versus maybe just the more general advertising space.

Speaker 2

Yes. What I would say is, I'll give you leave you with 2 stats. One stat is 40% of the U. S. Population It's made up of those groups that I actually outlined.

Speaker 2

That's number 1. And then the second stat where we said roughly about 10% to 20% depending on the month Our inventory is directly geared to those audiences, through those publications, which are authentic. So we do think that there's Still a significant amount of growth opportunity there, with the overall advertising buying community to reach those audiences, and we're the beneficiaries of that upside. So we're going to continue to make more investments and adding those type of publications into our ecosystem. And ultimately, At some point in the future, the goal really would be for 40% of all marketing spend to be geared towards those communities, But we're not near that point yet, but that's really the point that we're working towards.

Speaker 2

And I think we're actually enjoying the benefits Of that differential that's actually in the marketplace versus the publishers and the impressions that are actually available.

Speaker 6

Got you. Hosting these types of numbers, I mean, it's very likely you're going to start to see new entrants in this niche marketplace. And I was just wondering, are you starting to see additional competition kind of move in? Or is it still A pretty good open field for you.

Speaker 2

Yes. I mean, I think all of our competitors, we view, a lot of the publicly traded Those competitors and there are some private entities that are out there. They've been out in the marketplace for some time now. And so we're adept and equipped To actually to maintain and be a competitive option for the buyers to actually work through. And I think that's some of the benefit that you're seeing And they're gravitating towards us.

Speaker 6

Perfect. That's all I have. Congratulations.

Speaker 2

Thank you.

Operator

Call. There are no further questions at this time. Mr. Mark Walker, I turn the call back over to you.

Speaker 2

All right. If there's no further questions, thank you for everyone that have decided to come and listen, and we're looking forward to speaking to you back in Q4. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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