All right, it is, 8:35 A.M., so why don't we go ahead and get started? So hello everyone, and welcome to the Raymond James TMT and Consumer Conference. I'm Andrew Marok, and I cover digital media and advertising technology here at RJ. We're thrilled to kick off the conference on a strong note by welcoming in DoubleVerify. And joining us from the company today are CEO Mark Zagorski and CFO Nicola Allais. So welcome to the conference, and thank you for joining us.
Awesome. Great, thanks for that.
Great, so I have a few questions prepared, but if anybody in the audience has anything that they'd like to pose to the team, we'll have openings for questions later in the chat. Why don't we kick it off, Mark? Before we dig in, why don't we start with a bit of background? For those who maybe aren't as familiar with the DV story, can you provide us a quick overview of the company and where DoubleVerify fits into the digital ad ecosystem?
Yeah. So DoubleVerify works with advertisers in the digital media and marketing space to ensure that their ad spend is delivered in a brand-safe, viewable, and fraud-free environment. So think of us as kind of like a transactional, ad transactional security software. We ensure that ad spend is delivered in a safe, effective manner to a real person in a real, safe digital marketing environment.
Great, kind of a question connected to that is, we get a lot of the verification providers on the penetration of the TAM. So it seems now that most major brands are aware of the need for efficiency measurement and brand safety, and are working with a media quality provider in some capacity. So where do you see some of the greenfield opportunities that maybe you have yet to scale?
Yeah, it's a great question. And I think there's probably a mistaken assumption that everybody understands brand safety, and every digital company is already, you know, doing something about it. The short answer is they're not. So when you look at, let's say, the top 800, let me just take a random number, 836 largest global advertisers, we work with a little bit over 300 of them, right? So our penetration is certainly not inclusive of everybody. And that could be working with one product in one market across one brand, right? So there's still a lot of greenfield to go after. And mainly due to the fact that this whole area of understanding context and brand safety is still relatively new.
You know, I think it's become part of the, you know, the common understanding that businesses are concerned about just as much about what their ad says, about where it is. That's a relatively recent phenomenon, right? As you saw during COVID, you saw during some of the social justice movements, ads and what they say, and ads and where they're placed, became a bigger part of what companies were worried about. So we're seeing, you know, increased focus on brand safety. But things like fraud, for example, have been around since the beginning of the digital ad world.
So, I think when we look at penetration solutions, it's not just about brand safety, it's about the expanded basket of goods, things like fraud detection, like viewability, enhanced viewability or attention, that we still have a significant amount of growing to do, not just with those 500 or so other brands that we work with, but across the companies that we work with today, selling them this broader basket of goods. So, there's a significant amount of greenfield. We give a data point every quarter that shows, you know, kind of our win ratio of greenfield wins.
I'd say, you know, probably a vast majority of the quarters since we've been IPO, I'd say all of them except for one, over two-thirds of our new closes, our new deals, were greenfield, which they weren't using a product of that type in that market for that brand. So when 66% of your deals are greenfield every quarter, you're closing a lot of new business and touching a lot of new customers.
I think you brought up an interesting point from the consciousness of Brand Safety and Suitability from the brand side. How much do you think that that's driven by maybe an increased awareness from the consumer side?
Oh
... and sensitivity to where ads are being placed against maybe controversial content?
It's 100% consumer driven. You know, at the end of the day, the ability for a consumer to react or to share an ad that shows up in the wrong place is instantaneous. And they can, you know, post it on social media, they can, you know... well, they post on social media. That's, I mean, that's the big thing. You know, when they see an ad in the wrong place, they can say: "Do you really believe that, you know, Bank of America should be here? Do you really believe that Coke or Nike should be against this type of content?" And I think, it rattles brands, right-
Mm-hmm
... even if it's a small issue. So I think Brand Safety has now become, you know, on equal footing as actual performance. And as a matter of fact, our thesis has always been that when you take garbage out of the system, so something that is not brand safe, that is not seen by a human being, that is fraudulent, what is left actually performs better. So although we talk a lot about Brand Safety and protection, right, what we're really talking about is performance.
Mm.
Because if my ad shows up in a place that's more appropriate contextually, is viewable, and is not fraudulent, it's gonna actually perform better, right? And the reason why we exist is because it's no longer an advertising world in which, you know, an advertiser calls up NBC and says, "Give me a spot on Friday night at 8:00 P.M., and I'll make sure it runs," and that's it. You know, the ability for an advertiser to reach a broad base of consumers means that they have to spend across a hugely fractionalized digital ecosystem, in which they may be buying tens of thousands of websites, and on social media platforms. This is where people are. So you're buying tens of thousands of websites, which you probably don't know much about because you can't.
or you're buying across social media, which is a bit of a free-for-all, right?
Right.
You know, there's a lot of things going on there. It's no longer buying a program, you know, on a Friday night. So that lack of transparency drives the need for solutions like ours and drives the need for advertisers to not only understand how they'll be protected, but whether or not, if they can take that garbage out, will they be perform better?
Excellent. Thank you for that color . We're gonna poke on some of those social issues, I think, later-
Sure
... in the conversation, 'cause those are really interesting. For now, we'd love to get your perspective on the state of the macro environment. So DV had a strong 3 Q across its businesses, and for the most part in the industry, 3 Q commentary was fairly positive, with 4 Q outlooks kind of tending towards the cautiously optimistic or the hopeful. Kind of from your position, how do you see advertiser confidence, and how's that flowing through into DV's business?
Yeah, as you noted, we had a strong Q3. You know, I think we've had a pretty strong year. I mean, I'm not gonna say strong Q3. You know, because of the way we started this conversation, we still are going after a good amount of greenfield opportunities.
Yeah.
So we're not just slicing a pie that is consistently challenged, you know, to grow. When we look at the macro, what we like to say is, "We've not gotten any help.
Mm.
Right? There's not been any tailwinds because advertising is booming right now and the market's great. You know, we've grown because we've had to do it on our own. We've either gone into new markets, you know, closed new clients in greenfield, or launched new products. Those three things give us these growth drivers that really go against any headwinds that we see out there. So, you know, generally speaking, we see the macro as not a positive or a negative right now. It's kind of neutral.
Yeah.
We're seeing slight bit of better confidence this year than we saw last year in Q4. Only due to the fact that I think last year, the recessionary concerns were much greater across the entire ecosystem. This year, I think people are cautiously optimistic. We may be looking at rate cuts early next year or sometime next year, and that the macro may be headed towards a soft landing. So I think net-net, you know, we are cautiously optimistic that we're heading into a better year than we saw this year for advertising.
Then kind of the theory that we've heard, and I think has kind of borne out in the results, has been that in a time of maybe a bit of macro pressure, ad spend, advertisers being more conscious of their ad budgets, that a service like MediaQuality is really highly in the priority list in advertisers' minds. Is that something that you've been hearing from your clients that, you know, they need ROI, measurement, and efficiency, and this kind of garbage collection you talked about?
Yeah
... more than ever?
Yeah. You know, we like to think about when times are tough, people worry about every dollar they're gonna spend, and advertisers are incredibly concerned. When times are good, they worry about making sure that their spend is not going in the wrong place.
Mm.
We kind of play both sides there-
Sure
... right?
Sure, sure.
Ultimately, you know, advertisers don't want to be next to content that is not safe for them, no matter how much they can spend.
Mm-hmm.
Right? And I think that's the ultimate utility of our solution, which is we like to think of ourselves a utility, a utility that will drive value in different ways over time, but you have to have it no matter what, to protect yourself.
Makes sense. Nicola, and so-
Yep
... notably, DV's strength in 3Q was driven by increased volume, but also the uptick in the media transaction fees, or MTFs. Could you please talk about the drivers behind the uptick in pricing in an environment where you've heard kind of mixed commentary on CPM trends?
Yeah. So, just a moment on the model, right?
Sure.
The model for us is media transactions measured times a measured transaction fee, MTM times MTF. The overall driver of our business is really MTMs, right? More and more impressions that we can verify, the greater our revenue growth is. That's, that's very much what we saw in Q3, right? MTMs were up 27%, MTF was up 2%.
Mm-hmm.
Now, your question is around the 2%. The 2% is, it's not as though we are raising price as we go.
Mm.
We have premium priced products, where there's a shift towards this premium priced product that has allowed the overall fee to continue to grow, even in an environment where you might think there's some pricing pressure. The important thing with our model is that if you compare that to a take rate model, we're not as impacted by swings in CPMs.
Sure.
Right. So if you look at companies that actually do report volume times fee, especially on the social media networks, you'll see that the fee, the pressure on fee has been pretty significant. CPMs have been down on Facebook, been down on YouTube, and we don't necessarily feel that as much in our model because we just charge a fixed fee per impression that we measure, and that's what you see, sort of what you saw in the Q3 and what you see in overall for our business. It's all about MTMs continuing to grow.
Great. And then, social, which was up 56%-
Yeah
... year-over-year, came up as, the fastest contributor to the 3Q growth results-
Yeah
... kind of highlighting that rising momentum within the Walled Garden relationships.
Yeah.
I guess, what are some of those key fundamental drivers behind the social success, and what are some of them that will continue to fuel the growth of the social business as we get into 2024 and beyond?
Yeah, so what, what's new in 2023 is really short-form video content.
Mm.
Right? So that's a new type of content that we're able to verify. And what's happened during the year is, first of all, the advent of TikTok, the scaling of TikTok as a platform, has created the ability for advertisers to use our service on this new type of content and new type of format... The interesting thing that's happened over the summer is that now you have alternatives to TikTok, right? You have Reels, you have Shorts, and that creates the ability for the whole category to grow. And so what you saw in Q3 is this ability for us to essentially have more and more volume to measure in that category.
If you think about what happens to the advertiser, the advertiser's decision is, we're already using DoubleVerify to verify most of our content in other vectors.
Mm-hmm.
Now, we're able to essentially open it up to short-form, and so that's what you saw in Q3. We anticipated that's gonna continue, right? TikTok is still a distant third platform for us on the social side of things, so that's gonna continue to scale. The additional really large opportunity that's gonna come online now is gonna be the Meta News Feed. So Facebook so far has allowed for invalid traffic and viewability, but not brand safety and suitability.
Right.
Once that opens up, we're currently testing it, it's bound to go in GA in the first quarter of 2024, that is going to really be the key component of our tool that advertisers are waiting for, and we anticipate that that's gonna unlock a lot of volume for us to verify.
Great. And then, for either of you, you know, you kind of led beautifully into my next question. So I guess just helping us understand how Meta contributions currently fit within the mix, and the potential impact or the potential sizing of that new opportunity for the social business?
I can take it.
Take it, yeah.
As I said, Facebook, basically, if you think about what we're able to provide to Facebook, is two of the three parts of our product so far.
Mm-hmm.
Once we open the third, which is really what the advertisers are wanting to have on Facebook, brand safety and suitability is really the key product, we think that that's gonna do two things: It's gonna increase adoption of the product, and then even within customers that are currently using it, it's probably gonna encourage them to use it on more and more of their volume. So broadly, the opportunity that we see is Facebook is already our largest provider on the social side. It's our largest platform on the social side. And about 50% of our top 100 clients use the Facebook product. So 50% of our top 100 use it without brand safety and suitability being available.
Once we turn that on, our assumption and our expectation is that the other 50% that are kind of waiting on the sideline are gonna turn it on. So that will be the most immediate impact. And we have instances where, for example, YouTube, where brand safety and suitability is available, over 90% of our clients use that product-
Mm
... of the top 100. We think that that's gonna be replicated on Facebook. You can think of basically doubling the number of clients in the top 100 that are gonna use the product. That's the most obvious one. I think even within the clients that are using currently Facebook, we anticipate them to use it on more and more brands, 'cause really what they're waiting for is the Brand Safety and Suitability. You could see... think of a doubling of the opportunity there.
Really interesting. And kind of on top of that, it seems like to some respect, the pace of social growth is driven by how the platforms choose-
Yeah
... to make inventory available to you. So I guess, can you just talk about how that process kind of happens, and what your thoughts are kind of for the pace at which you'll be able to access these new pockets of inventory-
Yeah
... with new, with expanded solution offerings?
Yeah, I think, I think we're having this conversation when most of the conversation around whether verification should be available or not has passed, right?
Mm.
It took us a long time to get where we are now, but I think it is understood that a third-party independent verifier should be available in the walled gardens. TikTok contributed a lot to that because they started saying: Yes, we want verification. Once that happened, Facebook sort of had to be able to provide a similar offering on their platform. So I think we're already there. What's the secret sauce for us is knowing the walled garden space, right? Because every time there's an integration, you really need to understand how it works specifically for each walled garden out there. And that's the part where I think years of us having worked with them makes it very easy for us to continue our coverage-
Mm
... whenever a new volume becomes available. We're kind of already at the stage where it is understood that verification should be available in the walled gardens.
Yeah, and I think, I think a great example of that is, think about when, Netflix launched with an ad-supported tier.
Sure.
Right? They were planning on kind of crushing, pushing a launch out very quickly- ... and they told people one day, like: "Yeah, in a month we're gonna start selling ads," right? The whole ad community was like, "Whoa, whoa, whoa, whoa, whoa, whoa, whoa. All right, that's great, but you need to have verification and measurement.
Right.
So if you remember, Netflix launched with a verification partner... two verification partners and a measurement partner right out of the gate, and they knew. Now, that's very different than when this company started, where we had to knock on doors and ask for platforms to let us in, and they're like, "Eh, we don't think so. You know, why would we give you our data? Why would we want someone to tell us our baby is ugly, basically?" Right, which is, which is what our job is, is to be an independent arbiter of quality, right? And, you know, it turned out that Netflix said: "Well, if we're gonna sell ads, our advertisers have told us we need verification to make it happen." That's the different dynamic that we see today.
Sure.
So, as Nicola noted-
Yeah
... when TikTok really started gaining steam, the first thing they said was, "For us to get legitimacy with advertisers, we have to have third-party verification." That's why, you know, TikTok was the first short-form video company to come.
Mm.
Then, when Shorts launched and Reels launched, they basically said: "We need the same thing.
Right. That makes a lot of sense. And, and now kind of turning to, you know, some of the potential pitfalls around social, so we've obviously seen a lot of headlines at X recently, you know, formerly Twitter, that are really kind of bringing forward the issues that brand safety providers have to grapple with in UGC or user-generated content environments. So DV is one of X's key brand safety partners. I guess, how do these headlines and these issues affect advertiser demand for brand safety solutions, maybe on X or on other platforms?
... Yeah, you know, look, there's no lack of controversy around social media platforms, and I think, you know, what's going on with X is a great example of the potential pitfalls for brands in some of these environments. Whether you're comfortable with the total free speech or not, you know, brands have a right to make a decision of whether this is something they want to do or not want to do, right? They always have. They've bought certain types of programs on television because it was content they liked, right?
Mm-hmm.
If it's late-night content, that was great for edgier brands. If it was, you know, family content, you know, good for family brands, for CPG. I think it's no different on social today, in that advertisers want to feel comfortable. They know they need to be there. That's where people are. I mean, you have billions of Facebook users, right? You have hundreds of millions of X users. They know they need to be there, and what we provide, in many of those cases, is the ability for them to feel more comfortable to be around, you know, content that could be potentially controversial-
Sure
... knowing that that's where their consumers are. Now, X is a whole different situation because most of the issues there don't have to do with the content itself, but the content coming from the owner. And that's, you know, something you can't filter out.
Right.
So, it's an interesting time, it's an interesting place for brands to be, but we know that, you know, the utility that we provide and giving them the data... I mean, that's a key thing to know about the role we play, is we're not a police officer, right? We're not saying, you know, "You should or shouldn't do anything." All we do is provide information and say, "You make the call, advertisers," and advertisers make the call. You know, for Brand Suitability, we've got, you know, literally dozens and dozens and dozens of categorizations and sensitivity levels that advertisers can turn the knob on.
Mm-hmm.
Some advertisers are more aggressive. So you look at someone like a Unilever who sells Axe body spray to teenage boys, and they sell Dove soap to moms, right? The different types of content that they're comfortable around, in any market, and we do it around the globe for them, varies wildly, right? Vice Magazine may be totally appropriate for Axe body spray, but it's not gonna be for Dove soap, right?
Sure.
That's the information that we provide, and I think, you know, in this highly fractionalized digital world, it's important for advertisers to have that information.
Well, speaking of knob turning, let's shift to activation. So Authentic Brand Suitability, or ABS, kind of remained an important revenue contributor to the segment, up 40% year-over-year, kind of building on years of ramp.
Mm-hmm.
What's driving the growth for that product specifically, and expectations on sustainability of current growth rates for ABS?
Yeah, you know, ABS is a wonderful solution for us. It's over five years old, and as you noted, it grew 40% last quarter for a five-year-old product, and not on small numbers, on big numbers. I think ABS is a great example of how our products have progressed from being protection to helping drive performance, going back to how we started this conversation. ABS is a pre-filtering solution for programmatic, so it's integrated into places like The Trade Desk and Google's DV 360. Allows advertisers to turn that knob very finely on a campaign-by-campaign basis to filter out impressions, not even bid on impressions-
Hmm
... that don't make sense for them, right? So rather than try to block something they already bought or report back to me if there is a violation, keep me from buying it in the first place.
Hmm.
That's what ABS does. When we look at the growth drivers, that 40% growth, 85% of it came from current customers, right? I think it's 85. Yeah. I'm looking at my own personal ... just to make sure I get the number right.
Yep.
It's current customer growth, and to me, that is awesome because that shows that people who are using it today know it works, and not just because it protects them, but it's helping to drive performance, right? They're taking bad stuff out of the system, and in programmatic, you can see what works really instantly.
Hmm.
So if it wasn't working, and it's a premium-priced product, it'd be charged almost 2.5 x more for that solution than we do for some of our measurement solutions. So people are paying more for it, they're using it more, and it's still growing after five years, means it works. It's driving performance. So we're excited about ABS. It continues to grow. Brands continue to launch it in new markets across new, new lines of business, and it's a solution that I think is, is unparalleled in the industry. There's no, there's no comparative solution.
Very interesting. Maybe, Nicola, switching over to the financial profile.
Mm-hmm.
We've heard quite a bit about some of the big top-line drivers and opportunities so far. I guess, how should we be thinking about margin trajectories and things like balancing the need for tech and product investment versus margin expansion?
Yeah. So, you know, the model is a very profitable model, right? We have a tech stack that allows us, once you've measured over 5 trillion transactions, all of a sudden, the cost of doing one more is really small for us, right? So the gross margin profile is very high. It's a very profitable model. Our philosophy is to invest into a margin that's a healthy margin, which is 30%-31% margin. And the reason we want to continue to invest in that is to get to the industry-leading growth rates that we have on the top line, right? So that comes first. If we continue to grow that strongly on the top line, we're gonna continue to invest.
If you think about the lag, you know, we need to invest into what's gonna be the next big thing, right? So we're investing currently in products such as Authentic Attention, where we're actually working with the industry to come up with the standard that's gonna be the standard for the industry. Those are investments that come before the revenue actually comes into play.
Hmm.
We are fortunate enough to be now in a situation where we've scaled G&A. We have investments in sales and marketing that are opportunistic in certain countries where we're not yet present. But really, all of our investments are in on R&D, and we intend to continue to do that in the short term, just because our revenue growth is industry-leading.
Great. And then kind of somewhat relatedly, on capital allocation, you've shown a willingness to be acquisitive, to complement your solutions with OpenSlate and more recently, Scibids being some pretty timely examples. How are you thinking about your appetite or capacity for further additions, and are there any capabilities or tech that particularly appeal to you right now?
Yeah, so we, our strategy around M&A is nothing that diverts us from the organic growth, right? The organic growth is so strong, the market is still untapped in many ways, so we want to continue to go there. So the M&A philosophy is: Can we find acquisitions that will accelerate our roadmap or expand our coverage-
Mm-hmm.
Right, or expand our geographic footprint? Anything that we can do that we could do ourselves, but just accelerates that, is what we're going after, and the two examples that you mentioned are exactly that. Scibids in particular is in the activation side of the business. It creates a tool to do predictive analytics, pre-bidding, which is really where we think the next big development is gonna be on activation. So don't want to distract from organic growth, but we do have cash. We have a very strong balance sheet, and so to the extent that we can find those M&A transactions, we'll look for them.
That's great.
Yeah.
I guess we would have time for one from the audience, if anybody has anything. Go ahead.
Can you talk about cash conversion a little bit? I'm looking at the EBITDA to free cash flow.
Yeah.
It's quite a bit there.
The question was on cash conversion.
Yeah. Yeah, so we do not have a strong CapEx needs, right? CapEx is basically just capitalized software costs and a little bit of hardware/software. So what you're seeing in the last nine months and is kind of where we think it's gonna be on a normalized basis.
You can pretty much,
Yes.
Or EBITDA for cash flow.
Yes.
That, that's what you said.
Yeah.
Great. I guess in the couple of minutes we have left, I always like to ask our companies before we, before we turn them loose. I know you guys have a lot on your plate. If there's one thing that each of you would highlight that investors should focus on or pay particular attention to as we get into 2024, what would that be?
I'll start so you can-
Yeah, go ahead.
-end with a bang. You know, I think I would go back to where we were discussing our model being really driven by impressions as opposed to the CPM, the take rates in the industry. I think we're finally getting to a point where people are understanding the power of our model. I think it's still... It's a kind of stable market, macro environment, but I think a lot of the variability that you'll hear from other companies is something that, you know, we're not, we're not so exposed to. And I think that that's gonna, again, show the power of our model next year.
I would say, you know, we've only just begun.
Yeah.
Like, we've only just begun penetrating global markets. We've got an incredibly broad basket of goods that not only include things like Brand Safety and Suitability and Viewability, but expanding into areas like attention measurement-
Mm-hmm
... and performance optimization. These things are gonna drive growth for us, for many, many years to come, and I think, you know, we're a relatively new IPO, but one of the few that continues to perform since the first day it's launched. So I think we've got a long road ahead of us of success.
Great. Well, that's really interesting. I'd like to thank the DoubleVerify team, Mark and Nicola, for joining us today, and hopefully, we've set the tone for a great Raymond James TMT and Consumer Conference. Thanks for attending.
Excellent.
Thank you.
Thank you.
Awesome.