PubMatic Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 11 speakers on the call.

Operator

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

Speaker 1

Good afternoon, everyone, and welcome to POMATIC's earnings call for the Q1 ended March 31, 2023. This is Stacy Clements with The Glacier Group, and I'll be your operator today. 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 Q and A.

Speaker 1

A copy of our press release can be found on our website at investors. Haematic.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 other future conditions. These forward looking statements are subject to inherent risks, You can find more information about these risks, uncertainties and other factors filings on Form 10 Q or 8 ks, which are on file with the Securities and Exchange Commission and are available at investors.

Speaker 1

Climatic.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 9, 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. In addition, today's discussion will include references to certain And with that, I will now turn the call over to Rajeev.

Speaker 2

Thank you, Stacey, and good afternoon, everyone. Our focused strategy, strong execution and deep customer relationships drove revenue in the quarter significantly above expectations, Underscoring the strength of our model and our continued focus on efficiency and infrastructure optimization, the majority of incremental revenue drops to the bottom line, Driving stronger than expected adjusted EBITDA, net income and free cash flow. Our results reinforce the value of our platform, our ability to manage through the current environment And how we are positioned to continue to capture market share despite the economic uncertainty. While we saw sequential improvement through the quarter, It's too early to say if the ad spend environment has troughed and whether the pronounced uptick we saw in March will continue. We therefore remain cautious with respect to our outlook and investment A key element of our strategy is to leverage our business model and strong degree of profitability to make targeted investments that position us for outsized market share gains We believe the current environment is accelerating consolidation in our industry and will benefit companies like Pimatic That are global, scale and profitable.

Speaker 2

Macro pressures have driven publishers to prioritize their highest margin revenue streams, Such as programmatic advertising and increase their reliance on global omnichannel technology providers to manage a greater portion of their ad tech stacks. The pace of new publisher agreements remains strong. We signed over 65 new publishers in the Q1. We now have nearly 1700 publishers and Developer customers up 14% from a year ago. We expect to grow our roster of customers and increase stickiness with them in this environment.

Speaker 2

This is particularly true for our omnichannel video segment, which is a key growth driver. The omnichannel video market is expected to be a $215,000,000,000 market this year. A subset of omni channel video, CTV, is expected to be a $65,000,000,000 market this year. Publishers are increasingly adopting programmatic monetization strategies in order to tap into growing ad budgets that they previously were not accessing. As a result, our CTV revenue was up over 50% year over year in Q1.

Speaker 2

We are accelerating the pace of new business growth in CTV. We saw a 10% increase in our CTV publisher customer base over Q4 to 237 publishers. Driving this is the growing recognition within the media and advertising industry of the advantages of programmatic CTV. Automated transactions are more efficient and data driven traditional buying methods, delivering higher ROI to advertisers and revenue gains to publishers. POMATIC has been a leader in providing programmatic technology for more than a decade.

Speaker 2

We have seen this trend play out time and again across formats and channels. I believe that we will look back on this period as the Turning point that structurally changed the nature of CTV advertising towards more programmatic monetization. At the same time, we are growing our existing relationships with premium streaming content providers as we provide the ability to both monetize their inventory and leverage their valuable first For instance, Pimatic helped A and E Networks grow its programmatic business by passing valuable data in the bid stream such as content genre and channel, Making it easier for advertisers to reach their target audiences across A and E's properties and drive campaign ROI. We recently expanded our partnership with iQIYI, one of the largest online entertainment companies in China, who implemented our OpenRamp OTT Unified Bidding technology To provide global advertisers more efficient and effective access to the company's streaming inventory. The breadth of our publisher base makes us a scaled provider in CTV market.

Speaker 2

We are working with 6 of the top 7 global smart TV providers that have had supported streaming services. 4 of the top 8 major addressable broadcast video on demand streaming platforms in the U. S. And 5 of the top 8 free ad supported TV streamers in the U. S.

Speaker 2

We also work with all of the top 5 addressable broadcast video on demand platforms in both Australia and Japan, 2 of APAC's largest CTV markets. We are seeing OpenWrap, our prebid based wrapper solution, drive increased stickiness for publishers across channels and formats. Originally launched in 2016, over the last few years, we have diligently brought in the footprint of OpenRAP to cover all leading ad formats and platforms, Including CTV, mobile app and web, as well as video, display and soon to be launched native, making us one of only a few scaled providers with a comprehensive Free bit based software solution across all major formats and channels. Over the last several quarters, we have seen a surge in adoption of our wrapper solution As publishers increasingly abandon their homegrown 3 bit wrappers for alternative solutions for PoMattecs OpenRamp. OpenRamp is now a critical component of publishers' ad tech stacks And central to their operations teams.

Speaker 2

Overall, signed OpenRAP agreements grew 27% year over year for Q1 As more publishers opt for the performance benefits and customer service Omatic provides. In the case of online car shopping site, Edmunds, Although they already had a header bidding solution, they were seeking an alternative that could give them more control over their yield management. After switching to OpenRAP, they not only saw an average eCPM uplift of 35%, but also identified that the trusted header bidding expertise of the Pimatic team Was critical to their success. We also continue to deepen our buy side relationships, where consolidation is most evident as agencies and advertisers lean into scaled and Supply path optimization expanded throughout Q1 And represented over 35% of activity. We've been able to leverage our profitability to deepen buy side relationships, investing in our team and technology to offer a single integrated platform that delivers value to our customers.

Speaker 2

Plus, as we anticipated, The macro environment has been an accelerant for SPO as major advertisers and agencies seek to improve return on ad spend and streamline their operations. Our existing SPO buyers continue to consolidate more of their business on POMATIC. 5 of the 6 global agency holding companies grew their SPO spend with POMATIC By 20% or more sequentially from February to March. Even with the significant gains we have made in SPO, we see a long runway of growth ahead. In the past quarter alone, we have seen an over 80% increase in buyers interested in engaging in SPO with POMATIC for the first time And now have an active pipeline of several dozen buyers.

Speaker 2

Long term, we believe there are 100, if not 1000 of buyers that we can engage in SPO with globally. The The consolidation we've seen across our industry has resulted in the rapid evolution of the advertising supply chain, and we believe the industry is at an inflection point. It's becoming increasingly difficult for publishers and buyers to stay ahead of the curve, requiring significant investment and expertise. As such, we have focused our innovation investments in 2 areas, both of which expand our addressable market and will create durable long term growth, Supply Path Optimization and Commerce Media. Yesterday, we announced Activate, an SPO solution that we have been working Over the past 18 months and which leverages our recent acquisition of Martin.

Speaker 2

Activate is an end to end SPO solution that enables buyers Execute non bidded direct deals on Podmatics platform, accessing CTV and premium video inventory at scale and unlocking unique demand for our publishers. This groundbreaking solution introduces a new industry paradigm for the supply chain of the future. POMATIC has taken an infrastructure driven approach To solving some of the industry's biggest challenges that historically have prevented 1,000,000,000 of dollars of insertion orders from entering the programmatic ecosystem. Our single layer technology approach does away with data leakage, discrepancies, multiple hops in the supply chain, in high aggregate fees associated with having multiple technology providers like SSPs and DSPs. In 2023, Approximately $35,000,000,000 or almost 60 percent of CTV spend is expected to be transacted via IOs.

Speaker 2

Direct IOs also account for more than $27,000,000,000 or approximately 18% of online video spend. By providing a path to bring these direct dollars to programmatic, Acctivate represents a nearly $65,000,000,000 expansion of our total addressable market. With Acctivate, our SVO solutions become even stickier. We expect buyers who use Activate will benefit from greater control over their supply chain and increased ROI. Publishers will benefit from increased revenue.

Speaker 2

Over the last few months, as we have engaged with prospective Activate customers, I've been blown away by the magnitude of interest in the solution, Which validates our vision and roadmap as well as POMATIC's market position as a partner of choice. We have seen strong interest among agencies, advertisers and publishers In every major region and across verticals and by your size, including global advertiser Mars, agency holding companies Dentsu, AVAS Media Group, Group M and Omnicom Media Group Germany and CTV Publisher is Fubo and LG. As a key launch partner for ACTIVATE, GroupM is further expanding its SPO relationship with PubMatic. The GroupM premium marketplace, an initiative that provides GroupM clients with direct, Transparent and efficient access to CTV and online video inventory is built on automatic technology and will now extend to Acctivate. With Acctivate, GroupM clients can buy GroupM premium marketplace inventory on a guaranteed basis in a more efficient and direct manner with less cost involved in the supply chain.

Speaker 2

It is also an opportunity for them to bring clients who heavily rely on direct IOs into the programmatic ecosystem. As a result, GroupM intends to improve their clients' working media And ultimately generate better outcomes. To be clear, Acctivate is not a demand side platform. Our industry already has a number of scaled DSPs. Thematic is not offering a bidder, bid optimization, creative optimization or variety of other services that are core to the value proposition of the DSP.

Speaker 2

As I mentioned, ACTIVATE is specifically designed to transition non programmatic insertion orders for CTV and online video into non vid programmatic buying transactions. POMATIC already has a strong foundation in programmatic guarantee and private marketplace deals, And Activate further expands this opportunity. For Beaumatic, we expect to see significant strategic and financial benefits, Including Acctivate being a catalyst for faster CTV and online video growth over the medium term as well as an accelerated mix shift toward more premium omni channel video formats, resulting in higher gross and net margins. Acctivate also facilitates greater stickiness with buyers, Which increases revenue visibility and greater stickiness with publishers, allowing them to access unique ad dollars only available via the PubMatic platform. As we bring more advertiser spend to our platform, we are also unlocking opportunities to further scale other areas of our business, such as retail or Commerce Media.

Speaker 2

Commerce Media expands on the retail media opportunity set to include not just retailers, but a wide variety of transaction based businesses like transportation or food delivery providers, Travel and event providers, FinTech Companies and more. We continue to grow our existing customers like Kroger Precision Marketing, Providing the technology and solutions to enable them to activate their retail audiences across Pradmatics' CTV, video and display inventory. We're also growing our footprint with additional commerce businesses that have high transaction volumes and valuable data. Over the past quarter, we've had several new customer wins such as Lyft And TripAdvisor, who are using our growing suite of on-site monetization solutions to help grow their commerce media businesses. This is a tremendous growth opportunity for us with an estimated market size of more than $120,000,000,000 Data access and control are key areas of importance Commerce Media, both areas where POMATIC already has market leading solutions.

Speaker 2

In addition, we have the financial profile to make focused investments in technology That specifically aligns to current and future commerce media needs, such as audience extension, on-site multi format monetization And operational efficiencies to help commerce media companies scale their businesses further. Operating under a similar playbook as we did with SPO, Making focused investments that lead to market expansion and high growth revenue, we believe our strategy around Commerce Media will have similar returns. I look forward to sharing more with you in the coming quarters. Our execution over the course of this quarter reinforces The value of the POMATIC platform within the digital advertising ecosystem and our ability to continue to consolidate the market as advertisers seek alternatives to the walled gardens. We are rapidly growing the platform with new publishers and buyers and creating greater stickiness with existing customers.

Speaker 2

Our omni channel platform, Global scale and strong financial profile are key differentiators and enable us to rapidly expand our addressable market. We will continue to prioritize long term growth opportunities through highly focused investment, which we believe will drive outsized market share gains and greater shareholder returns. I'll now turn the call over to Steve for the operational and financial details.

Speaker 3

Thank you, Rajeev, and welcome, everyone. Revenue in the Q1 was $55,400,000 above guidance and plus 2% on top of last year's growth rate of 25%. Importantly, year over year results improved each month through the quarter. With our focus on execution And efficiency, the majority of our revenue outperformance dropped to the bottom line. Adjusted EBITDA was $8,400,000 For 15.1 percent margin.

Speaker 3

We also continued our long track record of cash generation With $12,800,000 in net cash from operating activities and $5,300,000 in free cash flow. Against the backdrop of challenging macro conditions, we delivered against the core objectives we laid out last quarter, Deepening our publisher and buyer relationships, driving omni channel revenues, achieving incremental efficiencies from our own and operated infrastructure, And investing in high value product innovation. As I mentioned on our last call, January revenue started off slow, Particularly in display and online video, but we saw sequential improvements into February. Trends further improved into March across all key formats And channels. For the quarter, revenues from omni channel video, which span across desktop, Mobile and CTV devices represented approximately 30% of total revenues and grew 13% year over year.

Speaker 3

Within this category, CTV revenues increased by over 50% year over year. As anticipated, Display revenues comprised of mobile and desktop channels continued to be soft throughout the Q1, but showed monthly sequential improvement It came in slightly better than expected at minus 7.5% versus Q1 last year. This was an improvement over Q4. From a regional perspective, EMEA continued its strong performance throughout the quarter and grew double digits year over year. Americas revenues were down less than 1% compared to Q1 'twenty two and improved each month in the quarter.

Speaker 3

Sticky customer relationships drove healthy multi net dollar year retention rates. On a trailing 12 month basis, published net dollar retention was 105%. As a result of our global go to market efforts And targeted investments, we continue to expand our supply path optimization relationships, which accelerated to over 35% of total activity on the platform. Similar to our publisher strategy, once we land new SPO relationships, our ad solutions team Works closely with buyers on detailed growth plans across formats and geographies. View through the same retention lens as publishers, The net spend retention rate for SPO buyers with at least 3 years of spending was 116% on a trailing 12 month basis.

Speaker 3

Our ad vertical diversification again proved to be a valuable asset for us in Q1. Food and drink, Health and fitness and travel in aggregate increased over 30% year over year. This growth helped offset declines in technology, Arts and entertainment and hobbies. The shopping and personal finance verticals ended the quarter in line with Q1 last year. In total, our top 10 ad verticals grew year over year.

Speaker 3

Overall, our business is in excellent shape. For an extended period of time, our strategy, execution and global scale has enabled us to deliver positive adjusted EBITDA For 28 consecutive quarters, we have also generated cash from operations every year for 9 straight years. And since going public in December 2020, we have generated over $90,000,000 of free cash flow. With our long term focus on profitability and cash flow, we take a nimble approach to managing our business. We have put in place multiple initiatives to drive productivity across our teams and lower operating costs.

Speaker 3

For example, we have realigned our global customer success team to ensure appropriate support relative to customer needs and business opportunity by market. This effort is supported by a specialized client team based in India. Over the long run, Our owned and operated infrastructure had allowed us to achieve significant operating leverage and control, which consistently delivers efficiencies for us And great outcomes for our customers. With this control, we are proactively managing our CapEx lower in 2023 Beyond what we originally planned, our optimization efforts are already ahead of schedule and we anticipate improved gross margins later this year and next. In Q1, we processed over $46,500,000,000,000 impressions on our platform, an increase of 43% year over year.

Speaker 3

On a trailing 12 month basis, we reduced our unit cost by 60% year over year. In addition to our capacity optimization work that's expanding total throughput, we're also making progress in using this capacity for the highest value display and video impressions. Taking our various optimizations and the positive mix trends together, we anticipate lower CapEx spend in 2024 Our Q1 gross margin was 57% ahead of expectations. As a reminder, our cost of revenue includes depreciation for prior year capacity build out and third party hosting costs, which are largely fixed in the near term. We anticipate improving gross margins each quarter through the calendar year.

Speaker 3

Q1 GAAP OpEx was $42,200,000 or 32% increase year over year. Included in this total were incremental costs of $2,800,000 related to our Martin acquisition And $2,500,000 related to our January in person global sales conference. Excluding these incremental costs, Operating expenses increased 15% year over year. GAAP net loss was 5,900,000 We're minus 11% net margin. Q1 non GAAP net income, which adjusts for unrealized gain or loss on equity investments, Stock based compensation expense, acquisition related and other expenses and related adjustments for income taxes Was $900,000 or 2 percent of revenue.

Speaker 3

Q1 diluted EPS was $0.11 And non GAAP diluted EPS was $0.02 Turning to cash, We ended the quarter with $173,200,000 in cash and marketable securities and no debt. We generated $12,800,000 of cash from operations and $5,300,000 of free cash flow. Our consistent cash generation enables us to invest in key areas for long term growth and market share gains. As of April 30, we have repurchased 1,100,000 shares of our Class A common stock for $15,400,000 in cash. We have approximately $60,000,000 remaining in the repurchase program.

Speaker 3

Given our strong balance sheet, We are actively using our capital to significantly expand our addressable market, deepen our customer relationships and drive market share gains. We believe this capital allocation strategy coupled with our repurchase program will drive long term shareholder value. Now turning to our outlook. The sequential month over month revenue improvement as we saw in the Q1 were positive signs, But we remain cautious about the next couple of quarters. Macro conditions continue to be challenging and advertisers remain cautious.

Speaker 3

Arguably, new sources of uncertainty have entered the picture that may impact consumer spending, such as U. S. Fed interest rate plans, The growing perception that inflation is stickier than expected and the effect of tightening credit conditions related to debt ceiling discussions Our April results reflected stable, positive year over year trends As well as indicators of ongoing macro challenges. On the positive side, impressions for CTV, Online video and display were all higher year over year ranging from double digit to single digit percentage increases. However, the extended macro pressure since mid-twenty 22 has been gradually pushing CPMs down.

Speaker 3

In April, omni channel video CPMs were down mid single digits year over year. Overall, CTV revenues were higher, while online video and display revenues were down. The net effect was that our April revenues were roughly flat year over year. With the step down in CPMs compared to last year, we see continued revenue pressure in Q2 And are anticipating online video and display revenues will decline in the single digits, while CTV will grow in the double digits. In light of our overall revenue mix with both positive trends and continuing headwinds, we anticipate Q2 revenue will grow sequentially from Q1 And be in the range of $58,000,000 to $61,000,000 Our view on the market rate of growth for calendar year 2023 And our ability to continue to grow market share remains unchanged from last quarter.

Speaker 3

On the cost side, As we had outlined in our prior earnings call, we have been taking actions to drive incremental productivity across every aspect of our business. For example, we are well on our way to adding approximately 20% incremental processing capacity by the end of Q2 Without the corresponding step up in CapEx, accordingly, as compared to 2022, We expect GAAP cost of revenues to increase at a slower sequential rate each quarter in the low single digits. With capacity optimizations, continued strong execution and seasonal revenue increases, we expect second half gross margins to return above 60%. We expect Q2 GAAP OpEx to decline by about $1,000,000 compared to Q1, Followed by sequential quarterly increases in the low single digit percentages thereafter. Given our revenue guidance And our optimized cost structure, we expect Q2 adjusted EBITDA will grow significantly from Q1 and be between $13,000,000 $15,000,000 We expect profitability to improve as the year progresses, Driven by the full effect of our cost reductions, optimizations and typical seasonal increases in ad spend.

Speaker 3

We anticipate Q3 and Q4 adjusted EBITDA margin levels to be above 30%. For the full year, We expect adjusted EBITDA margin to be over 30%. Turning to CapEx, as a result of capacity optimizations And operational efforts to drive higher value impressions onto our platform, we are lowering our expected investments this year to $12,000,000 to $15,000,000 More than 60% lower than 2022. These initiatives and others in the pipeline In summary, our strong execution in the quarter Demonstrated our ability to operate successfully within this macro environment. We are on track to drive long term growth, expand our market share and increase shareholder value.

Speaker 3

As a result of our durable business model, we anticipate Generating free cash flow on par with 2022, delivering margin expansion for the balance of 2023 and beyond, And positioning PubMatic for revenue acceleration when ad spend stabilizes by fostering deeper customer relationships, Focusing on high growth omni channel revenues and launching new products like Activate that incrementally expand our total addressable market. With that, I'll turn the call over to Stacy for Q and A.

Speaker 4

Thank you, Steve.

Speaker 1

With that, let's get started. First question goes to Shweta Khadarya at Evercore. Please go ahead, Shweta. Thank you, Stacey. Rajiv, could

Speaker 4

you please provide more color on ACTIVATE? So Magnite has clear line. How is Activate a differentiated product when you approach advertisers and agencies With that product versus industry and I believe there are other competitors as well. And then Steve, how should we think about revenue growth for the year? It looks like there was Comment on industry growth being low to mid single digit growth rate, is that what you're implying for the year?

Speaker 4

Thank you.

Speaker 2

Sure. Let me take the first part and then I'll turn it over to Steve. So hello, Shweta. So Activate is an extension of our highly successful SPO strategy. Obviously, we've been very focused on innovating the digital advertising supply chain, and we take an infrastructure driven approach.

Speaker 2

What we're doing with Activate is To address many of the technological barriers inherent in the current ecosystem that stem from having multiple technology providers like SSPs and DSPs. And so our focus with Activate is to bring in premium video, so that's both online video and CTV That today is trapped or stuck in IO based transactions and transition that into non bidded programmatic transactions. And so that's Programmatic guaranteed and also fixed price PMP deals. And obviously, the roster of launch partners that we have is, I think, a great validation I'll have that strategy. Now with respect to Clearline, I think our vision is quite different.

Speaker 2

So I heard Magnite's CEO, Michael Barrett, describe Clearline as being corner cases, we view this as a paradigm shift in the industry to be able to change how the technology is delivered And do away with many of the challenges, which I spoke about earlier that are inherent in the SSP and DSP structure. And then second, as I understand it, Clearline is built on top of SpringServe, which is for connected TV transactions only, and publishers need to have the SpringServe ad server in place. And so our solution, our approach we think is superior in that it's ad server agnostic. There's a fairly fragmented CTV Ad server market out there with FreeWheel, with Google, with Publica, with SpringServe, we are not limited to a single ad server. And so we think that's a Significant value proposition for buyers.

Speaker 2

And then our solution also works with online video and other formats. And as you know, the online video market is roughly 3x the CTV market. Steve, that's right.

Speaker 3

Nice to reconnect. So with respect to 'twenty three revenue growth, we have talked to a lot of customers, looked at our own trends, Industry data. And we think that based upon the macro, the trends that the our best assessment is that overall ad spending We'll probably grow in the low to mid single digits. But when we step back and think about sort of what we're focused on and how we've been Growing over time, we think that we're going to outpace market growth. And if you actually take a look at the outperformance that we achieved in Q1 relative to our Expectations, plus our guide for Q2, you're probably somewhere near about 4% to 4.5%, 5% year over year growth.

Speaker 3

So, We're feeling good about the trajectory. Clearly, there's positives in some areas of concern that we're monitoring closely, but we Nathan, we're on track to achieve what we've been focused on, which is generate free cash flow on par with 'twenty two. We think we're well positioned, as Rajiv just called out, the new product airing with ACTIVATE to Accelerate revenues, so when Aspen stabilizes. And ultimately, I think from the long term perspective, we feel really good about our margin Expansion opportunities as we establish new levels of efficiency, both on the P and L, but also in terms of CapEx.

Speaker 4

Okay. Thanks Steve. Thanks Rajeev.

Speaker 2

Thank you, Shweta.

Speaker 1

Our next question comes from Matt Swanson at RBC. Please go ahead, Matt.

Speaker 5

Yes. Thanks, guys. And I apologize in advance for the background noise. It feels like you guys have maybe incrementally more positive around ZTV this year, especially that shift to programmatic.

Speaker 3

Can you just talk a

Speaker 5

little bit more about what is I know this has been the vision for a while, but can you what's accelerating that right now? Is it the increased Why is it the focus overall on ad spend optimization as well as or is it maybe a slightly weaker demand environment Leading to more programmatic to drive CPMs.

Speaker 2

Yes. Why don't I take that and Steve feel free to chime in. And hello, Matt. We commented earlier in the year and certainly in the prepared remarks today that The current macro environment is likely to be, and I think we're seeing this, a structural growth driver for programmatic CTV. And as you know, our whole CTV strategy has been focused on skating to where the puck is going, if you will, which is towards programmatic transactions.

Speaker 2

And we've seen this before. So arguably, real time bidding itself came out of the financial crisis in 'twenty nine, 2010. So we've seen how economic cycles can be a real driver of programmatic innovation and acceleration in our ecosystem. So I think compared to last year, there's a lot of pressure on streaming publishers. Obviously, they've got to get to profitability faster, which means they need to find more revenue.

Speaker 2

At the same time, there's a lot more supply coming into the industry. So the likes of Netflix and Disney and HBO and the like Moving towards ad supported streaming tiers, and obviously, there's others as well. And then you have the macro pressure. I think all of that creates a premium on innovation and new solutions. And then the third piece is that macro pressure from an advertiser Where, of course, advertisers and CFOs and CMOs are looking for more accountability of their spend.

Speaker 2

So I think all of that sets up well to be a significant tailwind for programmatic monetization. There's likely to be, as Steve has called out, some CPM pressure in the near term If there's less budgets less growth rate in budgets than there was in the past, then we could see some CPM pressure, But I think that's mostly near term kind of noise. And so we're very excited about the CTV growth. And obviously, with our Activate Announcement, and you saw some of the publishers involved in that like LG and Fubo, we're getting great feedback from publishers in terms of their excitement around how this can bring them more dollars.

Speaker 3

And what I just briefly add, Matt, I mean, one of the most important things to know about Palomattic is that, of course, we have the resources And of course, the Activate launch is a demonstration of that. But we see this As a long term play in terms of expanding addressable market and our ability to be a leading innovator in this space. There's as in any market that's growing rapidly, there's going to be some pauses or plateaus. But this is a secular long term positive growth area for us, and we're played an important part through our innovation.

Speaker 5

And then if I could ask a quick one on Activate. I know this is probably an impossible question, I mean, it's great to hear the enthusiasm from your customer base and also the launch partners. How early do you think you could start to monetize Activate? Like will it show up in Some level in Q2, Q3, like are people going to be up and running on the platform? I'm not going to have you try to guess to what extent.

Speaker 5

I know you won't tell me anyway.

Speaker 2

Well, maybe I'll take it and then Steve, you can chime in. But Matt,

Speaker 6

so I'm

Speaker 2

pleased to tell you that we've already sent out our first invoice to a buyer So that tells you that the product is real and it's up and running and customers are seeing benefit from it. Publishers are starting to see Revenue through those transactions, obviously, it's very early days, so it's a very small base As we get going. But this the balance of the year is really going to be about creating proof points, growing the customer base And showing our customers the benefits that we believe are there from Activate and then positioning it for significant scale and ramp in 2024.

Speaker 1

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

Speaker 2

Hey, guys. So, Tuh, just Rajiv, can you talk about the changes that Google announced as far as kind of Trying to bypass or modify the waterfall and how you think it impacts you guys and just SSPs in general. And then just a follow-up question. In general, like how do you how should we think about Activate take rates versus the overall take rate? Thanks.

Speaker 2

Yes, Sure. So with respect to Google, the change that they made is to replace Waterfall mediation with real time bidding or programmatic options. And I think this is I mean, the only to me, the only surprising thing is that it's 2023 and they're doing it as opposed to 2020 or 2021. And so I think it's just a further example of the ecosystem, The general movement in the ecosystem towards programmatic auctions and away from waterfall or other types of more traditional Methods. And we could draw, I think, a parallel towards CTV, which is also primarily in waterfall monetization, but transitioning towards auctions.

Speaker 2

I don't think it has a material impact on us, one way or another. There's a possibility that it will open up more mobile app inventory for us. I think it's A little bit early to see that. But typically, what we've seen is that when impressions are trapped in a waterfall type of setup, Then we don't have full access to the inventory that we would like. And so when things move to real time bidding, then it's more of a parallel access What all platforms are called in parallel.

Speaker 2

And so there's an upside scenario here where we will get access to more Mobile app inventory than we're seeing today and mobile is a significant chunk of our business and so we would look to grow the impression volumes and increase Revenue as a result?

Speaker 3

And I'll take the Activate take rate question. So, from our perspective, it's all about meeting our customers' needs, both the buyers and the publishers. And the key thrust as we've outlined in terms of what we're trying to accomplish is to make the ecosystem more efficient And we would anticipate that the economics would reflect sort of that improved efficiency, but it's also about effectiveness because what we're taking out are The hops, we are improving the transparency, lower latency And just overall, a clear line of sight from the buyer to the publisher. And our A long term plan is to work with the customers, the publishers and our buyers to find sort of the right economic model That will expand the opportunity. And this is a net new opportunity for the programmatic space.

Speaker 3

So there's a lot of opportunity for us to take advantage of.

Speaker 1

Thanks, Steve. Our next question comes from Myles Jakubiak at KeyBanc. Please go ahead, Myles.

Speaker 7

Hi there. Thanks for taking the questions. First, with supply path optimization growing And now over 35% of revenue. How is that changing your ability to access inventory from publishers? And then just to follow-up on the Activate product, any thoughts more broadly on how that changes your relationships with DSPs?

Speaker 7

Thanks.

Speaker 2

Sure. Yes, I can take both of those. So first, with respect to SPO and access to inventory, I think that was the first part of the question, Miles. What we see is that as SPO is a growing share of budgets on our platform, it becomes And additional powerful reason for publishers to work with us, right? So we have increasingly advertisers and agencies, proof points, case studies or conversations in the industry Where those buyers are saying, hey, if you want to access to the publisher, if you want to access more of my spend, then PubMatic is the platform that you need to be connected into to receive that spend.

Speaker 2

So it's certainly a key part of publisher acquisition conversations. And as we called out, we're seeing acceleration in publisher development with over 65 deals signed in Q1 of this year, taking our overall portfolio It's almost 1700. So we definitely see it as a key part of the flywheel. We bring more publishers on board, and then that in turn can help us bring more demand on board. I think Acctivate further accelerates that in the sense that the dollars that are On our platform through Activate, again, they're small today as we just get going, but expected to be meaningful over time.

Speaker 2

Those dollars are only available on the PubMatic platform. So it's another reason, particular reason why publishers will want to work with us in order to get access to those Activate dollars. Now as it relates to DSPs, we think this is very much a positive for DSPs. The reason is that by definition, the budgets that we are bringing into the programmatic ecosystem, These are budgets that DSPs were not able to access previously. So these were IO these are IO budgets for CTV and online video That together total about $65,000,000,000 per year.

Speaker 2

And so by definition, DSPs are not accessing these budgets. And what we're doing similar to that Google shift that we talked about towards real time bidding, what we are doing is transitioning these dollars into programmatic, Starting with non bidded transactions, PG and Private Marketplace non bidded transactions. And then My expectation is that those will evolve to fitted transactions over time, that programmatic evolution, and then DSPs will very much be able to participate in those dollars. So our focus here is on growing the pie for everyone, which is to the DSP's benefit as well.

Speaker 1

Thank you, Majiv. Our next question comes from James Haney at Jefferies. Please go ahead, James.

Speaker 8

Great. Thanks for taking my questions. Rajeev, as we think about what you've done with the Martin acquisition and now the launch of Activate, should investors And my second question is for Steve. Can you talk about why you expect to see such pronounced Q2 slowdown after putting up the Q1 upside that you saw? Is it fair to say there's just some element of conservatism or caution?

Speaker 8

Appreciate the help. Thanks.

Speaker 3

Sure. Yes. So on the first question,

Speaker 2

our investment in capabilities for the buy side, I would say that's not new. So we started on this supply path optimization journey, I think, roughly 4 years ago now, maybe a little bit longer than that. And that was with the realization that we could think about and build a roadmap around how to help buyers generate more ROI on our platform, So that they shift those dollars to our platform, and that in turn would generate more revenue for our publishers. And so that again is a journey that started And so it's been a key part of our product development and roadmap. And Activate is just the latest solution Extending that SPO roadmap.

Speaker 2

And with respect to the Martin acquisition, as we think about our roadmap, We're constantly on the lookout for acquisition opportunities that might help us accelerate that roadmap and be able to deliver capabilities or deliver functionality Faster than we would be able to do on our own building organically. And so we did find we did anticipate and did find that to be the case With Martin, and I would say we continue to be on the lookout for other acquisition opportunities for technology, whether it's pub side or buy side That help us accelerate the roadmap. And then Steve, over to you.

Speaker 3

Sure. Hi, James. The way to think about our Q2 guidance in the following Obviously, we had a positive April on a couple of key fronts I shared in my prepared comments. Good year over year growth in impression, CTV, online video, display, so really positive. But what you're seeing flow through the system is Now with the extended macro pressure since about mid-twenty 2 on CPMs, when you look at the year over year data, It's not really a great apples for apples comparison.

Speaker 3

So, a couple of things to bear in mind. From a trend perspective, meaning Taking how we outperformed in the Q1 and looked at our guidance relative to that performance, we're right on track with what we would On a seasonal perspective, meaning 8% to 10% sequential movement. And so that is in line with sort of expectations. I'd say it's realistic based upon the data we have in front of us. Now going back to the year over year comparison, One thing to remember is last year's Q2, we grew over about 27%, So huge quarter last year.

Speaker 3

So we're obviously comping a tough quarter. And then when you take the step down in CPMs, Rolling that through, that's the outcome is this year over year slight decline. Big picture, The core fundamentals of the business are completely on track. So number 1, we're able to continue to deliver marginal profitability. We've been driving our free cash flow in the Q1 was positive, which is a significant accomplishment at this time of the year.

Speaker 3

And then when you step back and think about structural changes that we've made, we anticipate margin expansion over the course of the year. And so you factor in what I would describe as a pragmatic, realistic guide for Q2, Plus our structural improvements in our cost structure, we're going from roughly $8,000,000 in EBITDA In the Q1 to $13,000,000 to $15,000,000 in the second quarter. And so, we think that we're being realistic and

Speaker 1

Our next question comes from Tim Nollen of Macquarie. Please go ahead, Tim.

Speaker 6

There we go. Can you hear me okay?

Speaker 2

Yes, we can, Tim.

Speaker 6

Yes, great. Hi, Rajiv. Hi, Steve. I'd like to pick up on your Comments on capacity increases along with CapEx decreases, which is a pretty unusual A combination of factors. Most companies have to boost CapEx to boost their capacity.

Speaker 6

And so it's a great position to be in. I wonder if you could talk a little bit about like what are The needs for the increased capacity, I mean, not to sound naive about it, but activate or more CTV Trading, just whatever the factors are that will cause you to need more computing capacity, maybe it's a qualitative rather than a quantitative question, if you could address that. And then The CapEx reductions, is this maybe like a temporary, like a 1 year sort of thing? Or will you have to get back into a CapEx reinvestment cycle at some point To raise your capacity. Sure.

Speaker 6

Yes. Thanks.

Speaker 3

Great. Thanks, Tim. So let me start out with the first part, just Reflecting on sort of the benefit of capacity expansion, we called out that we continue to add significant publishers to our base As well as getting product upsells into our existing customer base. And so, There is always a potential opportunity to make more incremental revenue by going deeper and broader in our industry. But we're doing it very selectively.

Speaker 3

I made a comment in my prepared comments regarding sort of our focus on Making sure that we're bringing on the most profitable impressions, which obviously has a benefit to the top line, but also the bottom line. And so It's not really a situation where we can't take advantage of the capacity. The real question is, how can we do that most effectively? And so After the last couple of years of significant build out, we have turned our attention this year to optimize that existing capacity There's multiple ways technically that we're doing that. We started that process latter part of last year And where we are today is we're ahead of schedule and we're going to be able to incrementally add more capacity to take advantage of The deeper relationships we're establishing, the new publisher relationships, and do it without the similar CapEx investments that we've made in prior years.

Speaker 3

Now, when you step back and reflect on sort of what the benefit of that is, we believe that It's going to improve our margins over time. And so, as Aspen stabilizes and then reaccelerates, We're going to be in a great position in that regard. We think the kinds of changes we're making in terms of our CapEx approach Will likely allow us to deploy less CapEx in the future than we have historically. So that would again be a positive So, when you think about sort of the things we're doing, it's multifaceted. It's Still focused on growing in our industry.

Speaker 3

This is an industry that has long term secular tailwinds For the foreseeable future, and we are structurally modifying how we operate to become even more profitable in the future.

Speaker 6

And is the CapEx a temporary amount of 1 year or 2 year

Speaker 3

We think that we're making changes that will allow us to reduce our rate of CapEx relative

Speaker 1

Our next question comes from Dan Day at B. Riley. Please go ahead, Dan.

Speaker 9

Hey, afternoon, guys. Appreciate you taking the question. So, there's been some industry chatter and debate about SSPs potentially kind of transitioning away from the take rate model, maybe towards a more kind of subscription SaaS model. Maybe just if you could comment from a high level on the pros and cons of Two approaches as you see them, whether the launch of something like Activate, more of this sort of 2 sided marketplace approach to the business changes the calculus

Speaker 2

Sure. Yes, Dan, my view long term is that pricing in this industry should be on a Subscription basis rather than on a percentage of revenue kind of take rate basis. And we work every quarter, Every year to continue to innovate our pricing. And I think as the industry consolidates, there's real potential to move to subscription pricing long term. I think Tactically, one of the challenges has been that historically, our economic buyer is the publisher.

Speaker 2

And within the publisher, it's usually a VP of Sales or a Chief Revenue Officer who has a digital ad revenue budget, but does not necessarily have an IT kind of tools and systems budget. And so as a result, the revenue share has been the primary model for pricing within our industry. But as we engage in more supply path optimization, as we engage With Activate, with buyers, the economic buyer is shifting. And so I think there are some paths long term towards subscription, and that's Something that we would very much welcome. And I think it would in and of itself bring further consolidation to the industry, which is likely a net positive for everybody.

Speaker 9

Very interesting answer. Thanks, Rajeev. Just hopefully one more quick one. So the buyback tracked pretty close to free cash flow in the quarter. Is the way to think about it for the remainder of the year just like the free cash flow dollars are going to be earmarked to stock buybacks Until that's exhausted?

Speaker 3

Dan, the way that we've set up the repurchase program is it's a preset Plan, it's a variety of parameters in place. We had a plan that got authorized for 2 years at $75,000,000 So we're just executing against that plan. We have a defined plan and then we have an open market plan. So I think We're going to be opportunistic relative to the open market opportunities, and then the plan will just operate.

Speaker 9

Okay. Great.

Speaker 2

I'll turn it over. Thanks guys.

Speaker 1

Thank you. We have time for one more question from Mauricio Munoz at Raymond James. Please go ahead.

Speaker 10

Thank you for taking my question. Rajiv, just one on retail media. How does this fragmentation in the retail media ecosystem positions SSPs as consolidators? And in terms of the mechanics of this space, What needs to happen to make SSPs much more critical? Thank you.

Speaker 2

Sure. Yes. So retail media, as I talked about in the prepared remarks, is Key part of what we're focused on. And I think there's a couple of reasons why we see the SSP as being highly relevant In Retail Media. So first, it may be just useful to think about what are the different monetization opportunities within Retail Media.

Speaker 2

So on-site monetization, there's both sponsored products as well as display or video ad units. And then with off-site monetization, there's audience extension and retargeting. And if you think about those use cases, the SSP is really core To a number of those use cases, and we talked in the earnings call earlier about what we're doing with Lyft and One other partner where we're really focused on the audience extension piece. So helping those sorry, on the on-site monetization piece. So helping those publishers Monetize the inventory that they have on their properties.

Speaker 2

That's obviously very core and kind of bread and butter to what we do as an SSP. And when we think about the breakdown of on-site versus off-site monetization, when you include sponsored listings, on-site monetization is the majority of monetization Inside of Commerce Media. So we think that's really sets up the SSP to be a critical part of the stack For any participant in Commerce Media. And then as we also talked about, we think the opportunity is actually much bigger than purely retail, There's a lot of businesses that have transactions and data, like a Lyft, for instance, that are not strictly retail or in FinTech And travel, where we can extend our capabilities. So we still have work to do, I would say, to round out our portfolio of offerings to be fully relevant In all aspects of on-site and off-site monetization, but we expect to bring more components to market over the course of this year as it is one of our 2 key Innovation focus areas alongside supply path optimization.

Speaker 10

Thank you. Very helpful. Thanks.

Speaker 1

Thank you all. We're just about at the hour and there are no more additional questions in the queue. I'm going to turn it back over to Rajiv for closing remarks.

Speaker 2

Thank you, Stacy. We delivered strong execution in the quarter as the industry continues to consolidate. We're building deep customer relationships, Adding new publisher logos at an accelerated pace and have a robust pipeline of buyers interested in supply path optimization. Of course, we're really excited to have Activate, which allows us to bring CTV and online video in search and order transactions into the programmatic ecosystem, tapping into a 65 nearly 65,000,000,000 On the operational side, we anticipate incremental margin expansion throughout the year as we continue to optimize prior investments and drive efficiency throughout our business, Resulting in strong cash flow. The ecosystem is rapidly evolving, and we're poised to grow faster than the market rate of growth.

Speaker 2

Also, we look forward to seeing many of you at our upcoming investor events, including Oppenheimer's Virtual Conference on May 11, Evercore's Conference on May 31, Jefferies Software Conference on June 1. In addition, we'll be hosting in person meetings with RBC and B. Riley. Please reach out

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Earnings Conference Call
PubMatic Q1 2023
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