PubMatic Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 8 speakers on the call.

Operator

Hello, everyone, and welcome to PubMatic's Q2 2024 Earnings Call. My name is Annabeth Farris, and I will be your Zoom operator today. Thank you for your attendance today. As a reminder, 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 Q2 ended June 30, 2024. This is Stacy Clements with The Blueshirt Group, and I'll be your operator today. Joining me on the call are Rajeev Goel, Co Founder and CEO and Steve 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

If you plan to ask a question, please ensure that you've set your Zoom name to display your full name and firm and use the raise hand function located at the bottom of your screen. A copy of our press release can be found on our website at investors. Poimatic.com. I would like to remind participants that during this call, management will make forward looking statements, including without limitation, statements regarding our future performance, market opportunity, growth strategy and financial outlook. Forward looking statements are based on our current expectations and assumptions regarding our business, the economy and future conditions.

Speaker 1

These forward looking statements are subject to inherent risks, uncertainties and changes in circumstances that are difficult to predict. You can find more information about these risks, uncertainties and other factors in our reports filed from time to time with the Securities and Exchange Commission and are available at investors. Pomattic.com, including our most recent Form 10 ks and any subsequent filings on Form 10 Q or 8 ks. 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.

Speaker 1

All information discussed today is as of August 8, 2024, and we do not intend and undertake no obligation to update any forward looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. In addition, today's discussion will include references to certain non GAAP financial measures, including adjusted EBITDA, non GAAP net income and free cash flow. These non GAAP measures are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. A reconciliation of these measures to the most directly

Speaker 2

Thank you, Stacy, and welcome, everyone. We continue to deliver strong growth in key secular areas. Revenue from omnichannel video, which includes CTV, mobile and desktop devices, grew 19% over Q2 last year. Mobile app grew even faster. Driving this was significant growth in monetized impressions.

Speaker 2

We expanded existing customers and partners such as Halion, Omnicom Media Group and Mars, and we signed new marquee customers like Roku and Disney Plus Hotstar. Looking beyond these rapid growth areas, our revenue in the quarter was impacted by some macro softness and a large DSP buyer on our platform that changed their bidding approach, as mentioned on our call in May. We now expect activity from this buyer to stabilize in the coming months. Importantly, the growth we've delivered outside of this one buyer highlights the momentum we're seeing in the rest of the business. The programmatic market is rapidly maturing as content creators and media buyers build out their ad tech stacks.

Speaker 2

And I'm confident that the solutions we offer today and the investments we are making in supply path optimization, CTV, commerce media, audience targeting and performance marketing will drive long term profitable revenue growth. It's no coincidence that content creators and buyers are investing in these same areas to scale and grow their businesses. As inventory expands and add budget shift to digital, there's a fundamental shift towards programmatic. To better illustrate this, we need only look at some of the key outcomes of the recently concluded upfronts. With the growing onslaught of streaming inventory now available, the market is maturing, bringing CTV prices down and attracting a greater share of advertisers' media budgets as they see higher ROI from this channel.

Speaker 2

We are benefiting from this lift. In the Q2, CTV growth accelerated significantly in both monetized impressions and revenue growth. Adding to the opportunity, many of the biggest names in streaming like Netflix, Disney, NBC and Roku are opening up programmatic pragmatic technology to do so. Programmatic is also reshaping ad buying across the open Internet. We have seen an accelerated pace of conversations with walled gardens and social companies as they seek access to unique ad budgets and premium inventory available via For example, POMATIC has expanded its work with Amazon Ads to include enhanced API integrations that provide streamlined access to PubMatic's SSP inventory and participation in the certified supply exchange program, which enables advertisers using the Amazon DSP to create unique deals to reach Amazon audiences on Podmatic inventory.

Speaker 2

None of these major industry shifts would be possible without the use of sell side technology. POMATIC enables content creators to have full control and transparency to bring their inventory to market. Our solutions facilitate data driven targeting across their supply, create liquidity for their inventory and ultimately drive yield in conjunction with their insertion order based direct sales. We also offer scaled access to ad budgets. In many cases, we are signing new publishers because of our strong media buyer relationships built over many years via supply path optimization.

Speaker 2

While early investments with agency holding companies continue to deliver growth in SPO, we are also seeing tremendous success with independent agencies and direct brands. Halion, the consumer health company with a portfolio of household name brands including Advil, Tums and Centrum is on a journey to optimize the quality of their media while reducing the carbon footprint of their media buying operations. To solve these challenges, they needed to get closer to the publisher and directly control their media supply chain. They selected POMATIC to create a global marketplace that meets Halion's inventory quality targets, resulting in a significant increase in the number of impressions won, while improving the environmental sustainability and effectiveness of their campaigns. Underpinning the growth in SPO activity is Activate.

Speaker 2

Omnicom Media Group in the Netherlands recently expanded its SPO relationship to include Activate. With Activate, Pimatic offers OMG curated marketplaces for scaled access to multi publisher deals as well as direct inventory access to premium inventory. The greatest testament to the strength of Activate is the impressive results clients are seeing. When Mars Pet Care was seeking to build awareness and consideration for Greenies Pet Treats, they and their agency Group M tapped Activate to create an optimized path to premium CTV supply. Key to enabling this is Activate's ability to make the entire digital advertising supply chain more efficient by reducing the overhead caused by multiple technology platforms for each ad impression.

Speaker 2

Jonathan Tuttle, Associate Director of Media for Mars Pet Nutrition North America explained that leveraging Activate to go direct to media supply was a game changer for the brand, allowing them to invest more of their budget in working media. In his own words, 1 of the primary goals of our media at Mars is to drive business efficiencies through new and innovative approaches to the way we buy and deliver our media. We were able to accomplish this in spades by leveraging POMATIC Activate. Ultimately, Mars exceeded its sales lift goal by 20% and exceeded incremental sales goals by 126%. The greenfield opportunities we see for Activate are amplified by the growing trends in programmatic advertising across streaming media.

Speaker 2

These trends mirror what we are seeing across our business with our rapidly growing CTV publisher footprint, many of which are scheduled to go live in the second half of twenty twenty four. We recently onboarded Disney plus Hotstar, India's streaming platform offering a wide range of content across Indian and international titles as a preferred SSP. This summer has been a boon of live sports content coming to streaming devices with the Olympic Games in Paris, the T20 Global Cricket Tournament, Copa America and the Euros all occurring within a few weeks span. On top of that, the active political cycle is bringing more eyeballs to streaming media. With premier publisher relationships and media buyers already on our platform, we are participating in the CTV consumption tailwinds.

Speaker 2

Additionally, I'm excited to share that we recently integrated into Roku's newly announced Roku Exchange, providing advertisers with access to their highly engaged audiences across premium live and on demand programming. Thematic brings the strength of our SPO relationships as well as unique budgets from Activate to maximize demand for Roku's streaming ad inventory. As I mentioned last quarter, we believe we are in the early stages of a new CTV and online video flywheel for growth. Adding to this momentum is an increase in mobile app, which is the vast majority of mobile ad spend. Our mobile app revenue grew over 20% for the 3rd straight quarter, nearly double 20 24's expected year over year market growth rate of 13%.

Speaker 2

POMATIC has a decade of experience providing mobile solutions, empowering app developers and providing buyers with a more efficient and controlled path to deliver ad experiences on mobile devices. Together, these have resulted in mobile app market share gains. Major apps like Duango, Newsbreak and Talkatone are seeing success through their integrations with our tech. We see mobile app as a key differentiator for POMATIC amongst our peer set. We are one of the only omni channel SSPs to have a scaled SDK footprint integrated directly into publishers apps.

Speaker 2

This provides us with increased performance along with greater control of the ad experience for the end user as we render the ad in the mobile device. Programmatic mobile app advertising is nearing an inflection point of growth. All of the major mediation layers, including AppLovin, Google AdMob and Unity are moving away from waterfall auctions to embrace unified auction technology. This is exactly what our OpenRAP software is built to enable. OpenRAP SDK showed strong growth, doubling in revenue from a year ago.

Speaker 2

All of this opens up ad opportunities for more buyers, including performance oriented brand buyers looking to drive outcomes and ROI within mobile app environments. Our existing SPO relationships provide us with direct access to advertiser and agency budgets to fill this inventory and take advantage of this growing opportunity. This is one of the reasons Roblox chose to partner with POMATIC. Together, we are implementing programmatic media buying with select buyers and expect to expand access to more buyers later this year. Targeted investments in Commerce Media are adding significant long term opportunity and contributing to growth.

Speaker 2

Our technology enables commerce companies to build their ad businesses by unlocking the value of their shopper data and ad inventory both on-site and off-site. The commerce media market is growing faster than any other form of digital advertising. Our conversations with retailers and transactional commerce companies have accelerated over the past few months as we continue to scale our commercial and engineering teams dedicated to this line of business. We have an active pipeline of over 100 commerce media companies in every region and one consistent theme has emerged. Commerce media networks are increasingly in the market for leading SSP technology like POMATIX.

Speaker 2

Leading retail media companies Instacart and Klarna, which we announced in early Q2 are expected to launch later this year. Ridesharing apps also present a huge opportunity. For example, Uber's advertising business is on pace to exceed $1,000,000,000 this year. We see this as a growing customer segment for POMATIC. And in Q2, we signed Rapido, an Indian ride hailing service for 10,000,000 people across 120 cities.

Speaker 2

Rapido selected POMATIC initially for our monetization and unified auction technology with the opportunity to expand to on-site and off-site audience monetization as they evolve their commerce media offering. I couldn't be more excited about the breadth of opportunities ahead of us in commerce media. We see this line of business as a natural extension of our omnichannel platform. As a sell side technology leader, we continue to invest and innovate unlocking new avenues for growth. As digital advertising becomes increasingly programmatic, both media buyers and content owners are choosing to build their advertising businesses on our platform, with several large exciting partnerships set to launch over the coming months.

Speaker 2

Our product portfolio supports the key secular growth drivers across the industry, supply path optimization, CTV, mobile app, commerce media and addressability. I'll now turn the call over to Steve for the financials.

Speaker 3

Thank you, Rajit, and welcome, everyone. Revenue grew 6% over Q2 last year, which was lower than expected, largely due to the changes made by 1 large DSP buyer in late May. This impact was approximately $2,000,000 primarily in desktop display. Late quarter weakness in several ad verticals represented an additional $1,000,000 shortfall. Based on the timing of the DSP changes, our software optimizations will continue through Q3.

Speaker 3

In the coming months, we expect activity from this buyer to stabilize. Note, this was the last major DSP to make this shift to exclusively first price auctions. Nearly all impressions on our platform are now transacted via this bidding approach. The majority of our business delivered strong results, which helped partially offset this impact. Excluding this DSP buyer, our business in aggregate grew nearly 10% year over year.

Speaker 3

Our omnichannel video, mobile and emerging revenue products all grew well above our expectations. This outcome highlights the value of our diverse omni channel platform and productive multi year investments in key secular growth areas. Looking at quarterly highlights, ad buyers are consolidating spend on our platform. SPO activity, which drives greater visibility and incremental margin was over 50%. Monetized impressions across all formats and channels grew 12% over last year and overall CPMs were stable year over year.

Speaker 3

Q2 was the Q4 in a row where our total monetized impressions grew in double digit percentages year over year. Emerging revenue streams comprised of new products like Activate and growing data partnerships and enterprise software integrations almost doubled year over year and contributed 2 percentage points of growth. We added 25% incremental gross impression capacity on our platform year over year, while at the same time lower the trailing 12 month cost of revenue per million impressions by 14% driven by ongoing software optimization. Our cost management and productivity improvements allowed us to keep our GAAP cost of revenue flat year over year. Gross profit was $42,100,000 an increase of 10% year over year and adjusted EBITDA was $21,000,000 or 31% margin.

Speaker 3

Overall, the positive results we're seeing in the growth areas of our business and the advertising ecosystem's accelerating shift towards programmatic platforms position us well for long term profitable growth. Breaking Q2 down by format and channel, we saw continued secular growth above market rates for omni channel video revenue, which includes CTV, mobile and desktop devices, which grew 19% over Q2 last year, driven by an increase in monetized impressions of over 50%. CTV monetized impressions nearly doubled over last year. Our mobile app business across video and display continued to perform strongly and grew over 20% year over year for the Q3 in a row. Total mobile inclusive of web, app, video and display increased 12% year over year.

Speaker 3

We expect continued growth in mobile as we ramp up our partnerships with Roblox and others. Display faced the largest year over year headwind from the combined DSP change and the Yahoo! Business challenges that emerged in Q3 last year. Despite these challenges, display increased 2% year over year. Excluding the DSP change and Yahoo!

Speaker 3

Impacts, Display revenues exceeded expectations and increased 21% year over year. For reference, the year over year decline in Yahoo! Revenues in Q2 was approximately $2,000,000 Beginning this Q3, we will have lapped the step down in the Yahoo! Business. Across the globe, all regions grew in the Q2.

Speaker 3

We also expanded our existing publisher revenues on a trailing 12 month basis with net dollar based retention at 108%. Excluding Yahoo! Net dollar based retention was 117%. Looking at growth in ad spend, 6 of our top 10 ad verticals in aggregate grew above 20% year over year, shopping, business, food and drink, personal finance, health and fitness and style and fashion. At the same time, we saw a notable slowdown in other verticals, technology and computing, automotive, travel and arts and entertainment.

Speaker 3

Overall, the top 10 verticals combined increased by 18% over Q2 last year. Our long term relationships with buyers continue to expand as activity from SPO climbed to over 50% of total activity on our platform. Underscoring the long term strategic value and stickiness of these relationships, the trailing 12 month net spend retention rate from SPO partners with at least 3 years of spending on our platform was 120%. In February, I outlined our key operating priorities to lay the foundation for delivering multi year accelerated revenue growth and incremental margin expansion. I'm happy to share that we have made significant progress on these priorities.

Speaker 3

1st, we continue to invest in supply path optimization, adding buyer focused sales team members to address the large greenfield opportunity within Espio from independent agencies and direct brands. We're also focused on creating additional value for publishers and buyers by expanding the breadth of our emerging products such as open wrap an important solution as we differentiate in mobile. We have also responded proactively to Google's changing plans to keep 3rd party cookies and are selectively reallocating resources from Google's Privacy Sandbox to other growth areas of the business. For example, we are reallocating resources to connect in our data targeting efforts to take advantage of the rise in performance media and commerce media. We are confident that the use of alternative targeting solutions will continue to increase as buyers seek higher ROI and publishers seek incremental ways to increase monetization, leveraging their valuable data assets.

Speaker 3

2nd, we remain focused on optimizing our infrastructure and making prudent investments in CapEx to keep pace with the success we've had in increasing monetize impressions, while improving our margins and unlocking dollars to fund new products. 2 thirds of the incremental capacity we added in Q2 was the direct result of software optimization as opposed to CapEx. Our team is driving tangible cost savings while optimizing by software and AI to deliver incremental efficiencies across our own and operated infrastructure. For example, our engineers are continuously deploying software revisions that improve the throughput of our ad service. Because we own and operate our own infrastructure, we are able to customize our infrastructure to process high volumes of ad impressions while minimizing our hardware and operating costs.

Speaker 3

These savings allow us to make investments to drive revenue growth while delivering strong margins. Moving down the P and L, GAAP operating expenses in Q2 were 46,100,000 dollars lower than Q1 and a 2% increase over the prior year. Note, last year's Q2 included $5,700,000 in expense related to the bankruptcy of 1 of our DSP partners. Our OpEx reflects both prudent cost management and targeted investments in technology and sales. Across these two areas combined, we have increased full time employees by 17% year over year.

Speaker 3

Q2 GAAP net income was $2,000,000 or $0.04 per diluted share. Adjusted EBITDA was $21,000,000 or 31% and included other income related to our work to build and test integrations with the Google Privacy Sandbox. This income was received in part to offset Privacy Sandbox development costs we already incurred during the 1st 6 months of 2024. We have a strong balance sheet that supports our long term capital allocation strategy. We ended the quarter with $166,000,000 in cash and marketable securities and 0 debt.

Speaker 3

Year to date through July 31, 2024, we have repurchased 2,000,000 shares of Class A common stock for $41,000,000 in cash. Since the inception of our repurchase program in February 2023, we have bought back a total of 6,000,000 shares for $100,000,000 We have $75,000,000 remaining in our repurchase program authorized through December 31, 2025. We generated $12,000,000 in net cash provided by operating activities and delivered approximately $7,000,000 in free cash flow. No over the next couple of quarters, we expect an increase in DSOs as our accounts receivable mix changes as a result of the bidding changes made by 1 of our large DSPs. We view this as a short term phenomenon that will work its way through our working capital by bit next year.

Speaker 3

Now turning to our outlook, We are adjusting our full year outlook based on our latest assessment of the DSP bidding change and recent macro trends. 1st, the timing of the DSP bidding change in late May prevented us from offsetting the impact in the quarter. This impact was approximately 2,000,000 dollars Because we operate in a real time environment, our plant software changes could not be tested at scale until the DSP made its change. Given the complexity of these changes, optimization efforts have continued into the Q3. Related to this change, we are reducing our full year revenue outlook by $5,000,000 comprised of the $2,000,000 impact in Q2, plus an estimated $3,000,000 impact in the second half of the year.

Speaker 3

We expect activity from this buyer to stabilize in the coming months. 2nd, we are also factoring in into our full year revenue guidance an estimated 5 $1,000,000 impact related to macro softness based on trends we saw in several ad verticals in Q2. $1,000,000 of this impact occurred in Q2 and we are estimating an additional $4,000,000 impact over the second half. Despite these two factors, we are encouraged by the rapid growth we're seeing in key secular areas of the business, notably omni channel video and mobile app. Emerging revenue is also building momentum growing sequentially quarter over quarter.

Speaker 3

We also see upside in Q4 from several major customers newly integrated or soon to be integrated onto our platform. In addition, political spend and recent upfront deals with growing mix of programmatic ad spend will come in greater proportions of ad budgets in the second half of the year. For Q2-three revenue, we expect $65,000,000 to $67,000,000 or approximately 4% year over year growth at the midpoint. For the full year, we expect revenue to be between $288,000,000 $292,000,000 or 9% year over year growth at the midpoint. In terms of costs, we expect GAAP cost of revenue to increase sequentially each quarter in the low single digit percentages.

Speaker 3

We also expect GAAP operating expenses to increase sequentially in the low single digit percentages for both Q3 and Q4 as we continue to invest for long term growth. With our revenue guidance and expected cost structure, which is largely fixed in the near term by design, we expect Q3 adjusted EBITDA to be between $15,000,000 $17,000,000 or approximately 24% margin at the midpoint. For the full year, we expect adjusted EBITDA to be between $87,000,000 $91,000,000 or approximately 31% margin at the midpoint. Our full year CapEx projections remain in line with our prior expectations of $16,000,000 to $18,000,000 with a bias to the higher end of the range as we take advantage of the continued strong growth in omni channel video and mobile app impressions. Most of our CapEx will be made in Q3.

Speaker 3

In terms of Q3 and Q4 free cash flow, the timing of this CapEx and earlier reference change in DSOs, our free cash flow will be somewhat low in the short term, but revert back to historical trends next year. In closing, Q2 demonstrated our ability to deliver strong growth in key sector areas of the business, while achieving robust profitability. Looking ahead, our strong financial profile and proven durable business model positions us well to manage through the current environment and take advantage of the significant opportunities ahead in programmatic advertising. With that, I'll turn the call over to Stacy for questions.

Speaker 1

Thank you, Steve. As a reminder, you can ask a question by raising your hand located on the dashboard. Our first question comes from Ian Peterson at Evercore. Please go ahead, Ian.

Speaker 4

Thank you for taking my questions. 2 if I may. First, it'd be great to get, just a little bit more clarity on the DSP headwind. Did that $2,000,000 impact to Q2 come in, in line with your expectations or below your expectations? And how should we think about that $3,000,000 headwind contribution to Q3 and Q4?

Speaker 4

Will it be spread evenly between the 2 or more so in Q3? And then my second question is, it would be great to get some more color on which verticals you are seeing softness in both Q2 and Q3 to date. Thanks.

Speaker 3

Sure.

Speaker 2

Hey, Ian. So, maybe I can just start a little bit and then I'll turn it over to Steve on some of the financial aspects of your question. So we're seeing strong growth in a number of secular areas as we talked about, but that is being overshadowed by the DSP bidding change in the near term, where that DSP converted all of its auctions to 1st price auctions, where historically that DSP used a combination of 1st and second price. And the good news is that these changes make their methodology consistent with the Sure. Good

Speaker 3

Sure. Good to connect, Ian. So with respect to the impact in the Q2, because of the timing very late, relatively speaking to what we had assumed, we just didn't have time to optimize that scale because we operate a real time altered environment. So it was slightly worse than we had expected. So that $2,000,000 is a function of sort of the timing.

Speaker 3

Now when I think about the impact in the coming months, I think it will be more weighted to the Q3 than the Q4. Because as I said, we have fully engaged on a real time basis optimizing and we see some really good progress and outcomes as a result of those efforts. Now with respect to the softness, there's a couple of verticals that we start to see softness right at the tail end of Q2. And the reason why we are looking at it closely is that they were on a very strong trajectory, Q4, Q1, and then we saw some weakness emerge, and that has continued into July. So ad vertical number 1 is the technology area.

Speaker 3

Strong growth up until let's call it about June and then on a year over year basis, basically flatlined. In terms of other areas that we saw some softness, we saw softness in automotive, travel and arts and entertainment. And all told, those are important verticals for us and do reflect what we've seen other companies comment in terms of softness they're seeing relative to specific verticals. Now having said all that, we also saw a really good robust growth in very important verticals for shopping, business, food and drink, personal finance, health and fitness, all grew above 20% in the second quarter. So we see this as a, I'll call it, an air pocket, not really a significant impact to the second half.

Speaker 3

And you can see that in the guidance that we've given. It's really just a couple $1,000,000 to reflect that. And then the last thing I'll say, ultimately, we feel really good about the core growth of our business, the omnichannel video mobile. And these are areas that

Speaker 2

we've been

Speaker 3

investing extensively. And the transition in terms of this one DSP, we obviously see as a short term phenomenon and feel that it's going to be something that will be looking at the rearview mirror early next year.

Speaker 4

Thank you.

Speaker 1

Thanks, Ian. Our next question comes from Shweta Khajuria at Wolfe. Please go ahead, Shweta. Hello. Thanks for taking my question.

Speaker 1

Okay, Rajiv or Steve, Trade Desk just reported and Magnet reported yesterday. They did not call weakness out or any softness out. So any particular reason that you're calling it out in the 3rd quarter, Guy? Thanks a ton.

Speaker 3

Sure. I'll take that. So as we always endeavor to do, we are transparent in terms of the trends that we're seeing. So I can't comment on what other companies are seeing. The reality is we are a very broad scale SSP, omnichannel.

Speaker 3

We have 20 plus ad verticals. We're a global business. So we really do see a lot of activity across the globe. And these specific ad verticals wouldn't be normally sort of called out unless we saw some trend in the near term. As I said a moment ago, we're not sensing this is a major change.

Speaker 3

But we as we always try to do is put together a prudent guidance reflecting the puts and takes. And so, you know, that's what we've seen recently. At the same time, from our perspective, we have many other areas that are growing very rapidly. And I have called out the ad verticals that are performing

Speaker 1

strongly. Thanks, Steve. And our next question comes from Matt Swanson at RBC. Please go

Speaker 3

ahead, Matt.

Speaker 5

Yes. Thank you. Maybe if I could start on some of the commentary around some of the emerging products in the cross sell into the SPO. Rajeev, I think you had one good customer example there. Could you just talk a little bit more about the SPO installed base and just I guess how much traction there is with the emerging products and kind of getting more leverage, I guess, out of those SPO relationships?

Speaker 2

Sure. Yes. Why don't we talk about I'll talk about emerging revenue streams, emerging products broadly, and then we can get into Acctivate and SPO in particular. So we've obviously been talking about these products for quite some time. Our open wrap solution, activate, connect, convert.

Speaker 2

So that's for data and for e commerce. And collectively, what we're doing is building new innovative solutions, bringing those solutions to our customers that are already on our platform, delivering value for them and also creating leverage within our business. And this is all done via cross sell and up sell into the existing customer base, in some cases on the buy side and in some cases on the publisher side of the ecosystem. And in the case of Commerce Media, bringing in a new type of customer in terms of Commerce Media Networks or transaction or retail based companies. So we're really excited about the progress there.

Speaker 2

Steve commented on the contribution to revenue growth. When we look specifically at SPO and Activate, we're seeing, I think, really good progress. So as a reminder, with Acctivate, we're creating a single layer of technology for buyers to connect with publishers really for high value transactions like CTV and online video. And it's roughly a $65,000,000,000 TAM expansion. And there's been very strong and positive feedback on our vision and capabilities.

Speaker 2

So it's resonating. The Mars Group M case study, you know, that's, I think a great example, and indicates that the product is real and it's capable. It's definitely not mature or full featured yet. So we're working on a lot of new capabilities all of the time, but it's clearly delivering, you know, on the promise or the value proposition. And now we're also scaling it up.

Speaker 2

So we're seeing a lot of good pipeline and traction in every region across multiple buyer customer types, agencies and advertisers. We're signing up agencies at a pretty good pace. Omnicom Netherlands expansion of SPO relationship to utilize Activate is a good example of this. And the product really came from listening to the ecosystem. Right?

Speaker 2

So with SPOs, we're spending more time with buyers. We heard about some of the challenges and thought about opportunities that we have to build specifically to help them create more efficiency, create more leverage in their business around some of these transaction types that had not yet moved into programmatic. So we're really excited about it. I'll turn it over to Steve if he has any comments as well.

Speaker 3

Yes, I think just to build on that perspective and excitement that we feel. I mean, 1st and foremost, this set of products has really shown great momentum over the last year, but we see growth every quarter sequentially. It can as a category contribute 2 percentage points of total company growth, all of which have the potential to grow and be much bigger parts of our business in the future. And the other facet that we've shared in the past, but it's really important to understand in terms of the impact on our bottom line is that we are repurposing leveraging our existing cost base. So the marginal profitability of these offerings is quite high.

Speaker 3

And so it gives us opportunities to reinvest for further growth and obviously add to our incremental profitability.

Speaker 5

That's great. And then maybe just a quick one on guidance for you, Steve. I know this isn't like the biggest contributor, but it's been a very odd political season from a seasonality standpoint. How are you thinking about when political revenue might come in Q3 versus the full year guide?

Speaker 3

Sure. The way that we have put together our forecast spend is really take a look at the last presidential cycle, you know, 4 years ago. You know, obviously, we have a lot of contact buyers, publishers and ecosystem. And our latest thinking is that, you know, there's going to be relatively little contribution in the Q3. And the bulk of it will be coming through in, let's call it, the last month and a half ish of the presidential cycle.

Speaker 3

So primarily 4th quarter benefit. And it's really just a function of getting in front of people close to when they're going to vote. So from our perspective, nothing's fundamentally changed in terms of our confidence in delivering a very nice uptick as a result of political. A couple of things to call out. 4 years ago, we did not have a CTV business.

Speaker 3

We then built a business that's growing very rapidly. And as we shared, the monetized impressions are growing double digit. In fact, last quarter doubled. And so that CTV business positions us very well to take advantage of political spend, which we do believe will index more on the CTV

Speaker 1

of vector.

Speaker 3

So overall, we're feeling good about political. It's still early in the cycle. But we do anticipate to get our fair share of political spend.

Speaker 5

Thank you.

Speaker 1

And our next question comes from James Heaney from Jefferies. Please go ahead, James.

Speaker 6

Great. Thank you guys for the question. Can you just talk about the trends that you're seeing on the pricing side? Is it fair to say that that's where most of the softness is showing up? And then any commentary you can provide on just pricing versus volume growth for the rest of the year?

Speaker 6

And then I had a follow-up.

Speaker 3

Sure. So from our perspective, we're actually very positive about the trends that we're seeing. Number 1, our progress for the majority of our business is all volume driven. As I just mentioned a moment ago, omnichannel video is seeing double digit growth in monetized impressions on a year over year basis. And we're delivering close to 20% revenue in the Q2.

Speaker 3

And so when I look at that part of our business through the rest of the year, I expect that we're going to continue to see very similar patterns, double digit growth in revenues and double digit growth in monetized impressions. Now in terms of where we're seeing CPM pressure is really related to sort of the display format, particularly desktop, not surprisingly. And that's sort of the what I'll call the instantiation of what we saw from the change with the DSPs bidding approach that those CPMs were impacted. But overall, our overall company CPMs were stable to up in the second quarter. And that really underscores the value and the benefit of our omni channel platform, number 1.

Speaker 3

Number 2, the benefit formats by video. So overall, our expectations are double digit growth in the fastest growing areas of our business. I anticipate display will probably be in the single digits through the balance of the year, mostly coming through pressure of CPM, but offset by monetized impression growth. The last thing I'll comment it and I shared it in the script, and that is the core display business that we have is doing quite well. So if you strip out the impact of Yahoo!

Speaker 3

And strip out the impact of the DSP, our display revenues actually grew 20%. So what that means is that we are getting the benefit of consolidation and more and more publishers are relying on us to monetize this very important format.

Speaker 6

Great. And then maybe just a follow-up. Looking at your Q4 revenue guide, it does look like pretty decent sequential growth and acceleration on a year on year basis. Could you just talk about the factors driving that, whether that's some seasonal factors or just improvements that you're expecting?

Speaker 3

Sure. So to frame it out for you and for others on the call, last year Q4, our Q4 versus Q3 grew over 30%. And so the number you were referencing in our guidance, the implication is that we would grow our Q4 36% versus the Q3. And so the buildable of that is a couple of things. First, the very strong secular growth that we're seeing in omni channel video and mobile.

Speaker 3

And that's going to continue, as I said. We also are anticipating the incremental benefit of political, a couple of $1,000,000 that will supplement that. In addition, we're going to see the incremental benefit from our emerging products, activate, open wrap, etcetera. And then Rajiv called out on the call a number of major customers that are either integrated or will be integrated that will add incremental revenues in the Q4. So overall, we feel very good about our ability to step from the Q3 guide into the Q4.

Speaker 1

Great. Thanks, James. Our next question comes from Steve Worman at Oppenheimer. Please go ahead, Steve.

Speaker 7

Hi. This is Steve asking for Jason. So just two questions from us. So one, why did the change only impact one DSP? Do you have different protocols for different DSPs?

Speaker 7

And secondly, more of a housekeeping, does your full year CapEx guide include capitalized software? Thanks.

Speaker 3

So Rajeev, do you want to take the first one and I'll take the

Speaker 2

second one? Sure. Yes. So Steve, on your first question, so this impact this is really the last DSP of any significance to make the shift from 1st and second price auctions to 1st price only. And all other DSPs have made this change over the last several years.

Speaker 2

So that's why on your first question, it really only affects this one DSP.

Speaker 3

Now with respect to the housekeeping, the CapEx is solely related to PPE, property, plant and equipment. You'll see in our financials the incremental related to software capitalization.

Speaker 7

Great. Thank you.

Speaker 1

Great. At this time, I'm going to turn the call back over to Rajeev for closing remarks.

Speaker 2

Thank you, Stacy, and thank you all for joining us today. Content creators and buyers are turning to sell side technology and choosing POMATIC to build their advertising businesses. With numerous new customers and expansion of existing customers already on the platform, we believe secular areas like omni channel video, connected TV, commerce media and mobile app will continue to drive our growth. With SVO activity climbing to over 50%, our opportunity will disproportionately grow as the market continues to shift to programmatic. We look forward to meeting with many of you over the next month at various investor conferences.

Speaker 2

Thanks and have a great afternoon everyone.

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Earnings Conference Call
PubMatic Q2 2024
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