All right, now that we've gotten the countdown, we're at 10:55 A.M., so why don't we go ahead and get started? So hello again to everyone, and, you know, a continued welcome to the Raymond James TMT and Consumer Conference. I'm Andrew Marok, and I cover digital media and advertising technology here at RJ. And we're thrilled to welcome to the conference, PubMatic. And joining us from the company are CEO Rajeev Goel, and CFO Steve Pantelick. Guys, thanks for joining us
Thank you, Andrew. Thank you.
Great. So I have a few questions prepared, but if anyone in the audience has anything that they'd like to pose to the team, we'll have some openings for questions maybe later in the chat. So before we dig in, excuse me, why don't we start with a bit of background? Can you give us maybe the 30,000-foot view of PubMatic as a company, some of the recent happenings in the story, and where you guys fit into the digital ad ecosystem?
Sure. So PubMatic is about a 16-, 17-year-old company. We are a leading platform provider in the sell-side technology space, meaning we help premium publishers across streaming, mobile app and gaming, you know, web display, bring their ad inventory and their audiences into the programmatic ecosystem. So obviously, more and more of digital, now, roughly about two-thirds of, of advertising... Sorry, more and more of advertising is digital, about two-thirds. It will eventually be, you know, 95%-100%. And the majority of that digital advertising is transacted programmatically, meaning, you know, using automation and using data. And we have one of the leading platforms to help, you know, roughly 1,800 publishers bring that ad inventory into the market and monetize it. We do this in a global and omni-channel way.
So we operate in over 30 countries. We work with, you know, large media companies and then buyers on the other side that are global in nature, like a News Corp as a publisher, and then, let's say, a P&G or a Mars as an advertiser. And we do it across a wide variety of ad formats. And key, I think, to understanding our business model is that we own and operate all of our own infrastructure. So we're processing over half a trillion ads on a daily basis, generating petabytes of data on a daily basis. We do this in private cloud infrastructure, which allows us to generate better outcomes for our customers because we have full control of the technology stack, and also to differentiate from a P&L perspective.
I think some of the things that are really exciting right now is that we see, because of privacy regulation, technology that sits close to the consumer, so on the sell-side of the ecosystem, we think there's a lot of, upside value there because we sit, you know, at the nexus of the publisher and the consumer, where consent is derived. Second, we see that a lot of high, high value formats like CTV are moving more and more, into the programmatic ecosystem. And then third is that advertisers and agencies are looking to, generate more control, over their advertising supply chain, and because we sit, next to the consumer, we're in a prime position to be able to deliver that to them.
Great.
Let me just add,
Yeah
... briefly, just from a financial perspective-
Sure
... the strong differentiators. We're a very profitable company. Last quarter was our 30th straight quarter of Adjusted EBITDA profitability. We deliver a strong free cash flow. To Rajeev's point about, you know, owning and operating our own infrastructure, we can optimize it. That gives us the ability to, you know, manage when and how much we invest CapEx, PP&E. This year, 2023, we will have been able to reduce our year-over-year CapEx by over 70%, without sacrificing capacity growth. We've increased our capacity by over 20%. We have a very leveraged model, a high degree of marginal profitability. We do the majority, over 80% of our development organization is based in India, so we can innovate at a much lower cost per unit.
And then finally, just to build on the point that Rajeev made around where we're focused, we are investing in the fastest-growing formats, which have high marginal profitability, and we think that the opportunity to continue to expand margins over the long run are gonna be very readily available to us.
We'll definitely take a deeper look at a lot of those formats as we get through the span of the conversation here. But maybe before we get into some more of the particulars of PubMatic, it is starting to look like Google is getting serious about deprecating third-party cookies in Chrome this time. How does that impact the supply side of the digital ad ecosystem and PubMatic in particular?
Yeah. So we think, you know, this transition from cookies, anonymized, you know, targeting or tracking of individuals, to a more opted-in environment, I think, will be unequivocally a tailwind for our business and for the open internet in general. So a big part of, I think, where the walled gardens have had advantages, you know, as consumers, we log into those services, you know, Meta, Facebook, you know, YouTube, et cetera. And so the walled gardens use that login data to be able to deliver a high-performance, high-ROI ad. On the open Internet, because of third-party cookies, we have not had that same type of experience, but as, you know, Google moves towards deprecating cookies in Chrome, obviously Safari has already done that. Apple has made changes to remove the IDFA, the ID for advertising in iOS environment.
We're getting to have a higher targeting resolution on the open Internet. So CTV, for instance, which is one of the fastest-growing sectors in the ecosystem, most of that content is consumed on a logged-in basis, right? You might log into Netflix or into Paramount+ , et cetera. Retail media is another, you know, fast-growing sector that we're squarely positioned in. That ad environment is also logged in, right?
Mm-hmm.
You might be logged into, you know, Macy's.com or whatever the case is. And then as you surf the Internet, you see more and more of your experience, publishers ask you to log in, right, to register in order to continue to deliver free content. And so we have invested in a whole portfolio of solutions around post-cookie solutions. We shared in our last earnings call that roughly three-quarters of the impressions on our platform now have alternative identifiers. And what we find is that when you have, let's say, a logged-in user, maybe a mobile phone number or an email address, the CPMs are roughly 3x what they are when we have a cookie.
And so let's say on a cookied ad impression, the CPM is $1, on a logged-in user, it's closer to $3.
Mm.
With our business model and our revenue share rate, then that's just a, you know, much better business for us. The other, I think, key advantage that the open internet has relative to the walled gardens is great quality content, right? So a lot of the advertising controversy over the last five years has been when advertisers show up next to typically user-generated content that they don't want to be next to.
Mm-hmm. Mm-hmm.
But the open internet with high-quality, professionally created content doesn't have that same, you know, issue. So we think there's a lot of upside from this, you know, deprecation that, you know, should happen, let's say, in the next one-two years.
Great. And then maybe one for either of you. Taking a look at the total macro picture, I know—I think we started to hear a bit more encouraging commentary on spend trends coming out of the 3 Q cycle, kinda some cautious optimism for 4 Q. Is that something that you're seeing, and is the outlook for the supply side improving, following a bit of a tough patch in early 2023?
Yeah, I mean, from my perspective, I mean, there is, of course, reason to continue to stay, you know, prudently cautious. You know, what we shared in the last quarter, though, was many of the factors that we focused on and invested in have really started to come to fruition. We saw that with our Q3 results, you know, strong monetized impressions, up double digits. And you know, when we look ahead in terms of the outlook we share for the fourth quarter, we are feeling really good about, you know, return to robust growth. And it's a function of a couple things. Number one, in terms of our focus on customers, publishers, and buyers, that's really helping us in, you know, this environment.
They're looking for companies that will help them navigate and, you know, get high ROI on their ads, and obviously, deliver monetization. An important metric that we shared was the proportion of supply path optimization to total activity. A high water mark of 45%. That gives us, you know, confidence that whatever the macro, you know, turns out to be, is we're gonna be able to, you know, take advantage of that situation. And of course, the normal focus on operational excellence to manage through the macro. And I think, you know, qualitatively, you know, we do see a different experience or talking to our customers than we, let's say, had last year. Last year was about: where are we gonna save money?
Mm-hmm.
This year it's more about, okay, here are the things that worked, now let's go be more constructive about it and invest behind those areas. So we do think that there's a bit of a shift, but, you know, there are a lot of factors globally that are going on that we can't avoid, but we feel that the things that we're doing are allowing us to navigate and be really successful in the current environment.
Sounds great, and I'm glad you mentioned Supply Path Optimization, the big SPO. As always, a big point of discussion in the industry and something that's really been working out well for PubMatic recently. Can you give us a current lay of the land for SPO and kind of what further gains you think PubMatic can make, maybe near term and long term? And then kind of to tack onto this, maybe how the recent upheaval at Yahoo, which you called out in 3Q, could potentially be related?
Yeah, maybe I'll take SPO-
Sure
... and then you can, talk about Yahoo. So SPO has been a great, you know, secular tailwind for us. We've grown as a share of the, activity on our platform, roughly 20% a couple of years ago, to last quarter, all-time high at 45%. We expect that to cross over into the majority, in the not-too-distant future. And just for a brief definition, Supply Path Optimization is a process by which major advertisers and agencies consolidate their spend onto, a smaller number of sell-side platforms in order to get benefits around innovation, around, you know, workflow and data, around efficiency, of their ad budgets. and so it's something that we pioneered in... You know, maybe five years ago, agencies and advertisers were moving from something like 50- 75 sell-side platforms.
Wow!
Right, a crazy number when you think about it globally, right? 'Cause there's a lot of different point solutions-
Sure
... in different geos around the world or ad format-specific solutions, down to roughly 10. We're now well into kind of phase two of SPO, where advertisers and agencies are going from or have gone from 10 down to two or three. We've announced deals with the likes of GroupM and IPG and many of the other big holdcos and some advertisers as well. Our most recent step is the launch of a new product called Activate.
Hmm.
What Activate is focused on doing is inserting us into a very high-growth area, which is, we estimate, about a $65 billion TAM expansion for insertion orders for CTV and online video that historically have not moved into programmatic.
Hmm.
With Activate, which is a new technology offering, buyers can move those insertion orders into PMP, Private Marketplace, and into Programmatic Guaranteed deals on our platform. So we announced a number of launch customers. In our last quarter earnings, we talked about Mars as a customer of Activate, and they've been ramping up their usage of that offering. So it's really squarely positioned where there's a lot of growth, obviously, in CTV and online video coming into programmatic, and our ability to help the big advertisers and agencies take greater control over their digital advertising supply chain and really to consolidate spend even further.
Great.
So with respect to Yahoo, just a little bit of context for the group. We've been a monetization partner of Yahoo's for a number of years, 2016, 2017. You know, partly to the point that you were referencing, there's been an ongoing consolidation in the SSP space, and Yahoo decided to close down its own SSP, which occurred, I believe, effectively the end of October. So right now, as a monetization partner, they are ramping up a new platform, and in the third quarter, you know, they were still developing and transitioning that platform. So there was a $2 million impact to us in the third quarter.
If you back that out, we actually grew a couple percentage points in the third quarter. If you then look at our outlook and adjust for that, that direction of the Yahoo business in the near term, you know, we'll grow in the high single digits. Now, for us, it's really all about how do we continue to be sort of an important partner of theirs, and so we feel confident that in the coming quarters that that business will start to recover, you know, relative to our monetization of the business. But bigger picture, it reflects the value and importance of continuing to be able to innovate and, you know, develop, you know, cost-effective, you know, impactful solutions.
So, it's a, you know, overall dynamic in the industry, but something that, you know, a bit of a tailwind for the first half of... I mean, a headwind for the first half of 2024, but something that we feel confident that we're gonna continue to grow through.
Great. Thank you for that background. I guess, and the other major SPO kind of related topic that we always get questions about is the recent moves of buy-siders coming into the supply side and vice versa. Do you see an outcome there where everybody can kind of get along and, and have a happy medium, or is it kind of necessarily a win or lose proposition?
Yeah, I mean, I think it's more of a folks getting along. You know, if we think about some of our biggest buyers on our platform, like Yahoo, for instance, with their DSP, you know, Google, certainly, Amazon, they all have direct relationships with publishers, right?
Mm-hmm.
You know, some of the, I think Viant was here before, right? And they were talking about their, their product, and-
Mm-hmm
... obviously, Trade Desk has launched a product. I don't think those things are new, right? They, I would say, more position them similar to other big buyers on our platform. What we are focused on with Activate really is: how do we help the buyers get more control over the supply chain? And I think we do have a structural advantage here, which is that we've been investing in acquiring and integrating publisher relationships now for 16 or 17 years. So when we bring a buyer onto our platform, we have the full, you know, scale and breadth of, you know, over 500 billion impressions directly, you know, accessible via the publishers on our platform.
If you're on the opposite side, you know, if you're on the buy side and you're going in to publisher relationships, it's gonna take years to build up the scale that will be compelling to one of the advertisers on, on your platform. So I think we are operating from a bit of an advantage. Then I think longer term, structurally, back to the privacy and, you know, cookie change comments from earlier, you know, we think being on the sell side is hugely important because that's where consent is derived from the consumer.
Mm-hmm.
It's gonna be a data-rich, much more data-rich environment, than the buy side of the ecosystem.
Yeah, really interesting, and maybe kind of double-clicking on CTV, because we've heard pressures on CTV growth, maybe from a few SSPs in the space. I guess, are there any structural changes in the format making growth more difficult recently? And I guess, how does Activate play into that in terms of opening up that new TAM, which you've been speaking about? I guess, maybe what had prevented the move from iOS to P&Gs and PMPs to begin with?
Yeah, so there's obviously, TV is bought, you know, via an insertion order-like form, process, right? And so that, many of the, I think, practitioners in the industry, whether it's, you know, big media sellers or buyers, are very familiar and kind of comfortable with that IO process. Obviously, if you're coming at it from a digital perspective, then you're very comfortable with programmatic, right?
Yeah.
And so that's a bit of the, let's say, the change or the friction that's happening in the ecosystem is: who's taking over those TV budgets, and, you know, how do you kind of cross-pollinate those learnings? Now, some of the challenges that historically have prevented, I think, that IO conversion from programmatic, when you look at the programmatic ecosystem, you have more technology providers. So you have a sell-side provider, you have a buy-side provider, you have latency that's because of the hop as the impression flows from the sell side to the buy side, you have discrepancies, you have data proliferation, you have more carbon consumption. So these are some of the challenges that have, I think, prevented, you know, some of these high-priced $20, $30, $40 CPM ad formats from moving into programmatic.
A lot of those challenges are, you know, much more significant when you're dealing with those high CPMs versus a $2, $3, $4 display ad impression. So what Activate is designed to do is to bring many of the advantages of that, IO type of environment, in terms of an efficiency and transparency perspective, but bring that into the programmatic world, where we can apply automation, and we can apply data, and drive, you know, the benefits of programmatic that everybody knows is there, and it's just a kind of a, a question of: how do we unlock that?
Sure.
And so that Mars example, I think, and, you know, other launch partners are GroupM and IPG, so they're starting to see the benefits and, you know, moving money towards Activate.
Great. And then, I think you touched on retail media and commerce media earlier as kind of interesting opportunities, and it really seems like as SSPs are well positioned to maybe break down or at least reach over-
Yeah
... some of the walls that are kind of up between the fragmented retail media networks. I guess, would you agree with that, and how is PubMatic specifically looking at the growth opportunity here?
Yeah, we're really excited about commerce media. You know, we estimate it's about a $10 billion TAM expansion to our opportunity set with the launch of our Convert product. In fact, it is today, you know, when you exclude Amazon, and will continue to be in the future, larger than the CTV opportunity, so it's pretty significant. And it sits at the confluence, I think, of the shift around cookies. Again, you know, when you're in a commerce media environment, you're typically logged in, so we have identity data. It's usually very clean quality of inventory, so there's, you know, if you're shopping for fridges or shovels on Home Depot. There's nothing controversial in that content, right, for the ad to show up next to.
And it is fragmented, as you said, and so what we're applying is a technology solution that solves for a couple of use cases. One is on-site monetization of display and video. So we announced-
Mm
Zulily, for instance, as a customer, where we're driving that monetization. There's sponsored listings, so the, you know, search type of ads, and then the third piece is audience extension. So if you, you know, have a lot of data around consumers and what they might be shopping for, you can apply that data off of your own property. Your own property may be somewhat limited in terms of the ad real estate that you have, but now you can apply that across the 500 billion-plus of daily ad impressions that we have and be able to create more value, you know, on, let's say, News Corp inventory or on NBC inventory. And so those are the pieces that we've brought together with our Convert offering, and we've seen, you know, significant pipeline development.
We anticipate, you know, having that be a significant growth driver for us in 2024.
One thing I'd add to that is, which we're really excited about, is the fact that, you know, today, we're a majority brand advertising focused. This opportunity now exposes us to performance advertising.
Mm.
So another big growth vector for us in terms of opportunity, but also the value and parts of the data. And being on the sell-side, that's an essential position to be in.
Great, that's an interesting point that I think is maybe overlooked a bit. But we spoke a little, also a little bit about cookies earlier, and I wanted to talk about another product and effort that you guys have going, Connect.
Yeah.
So your offering that kind of brings down the language barrier maybe between some of the alternative identifiers in the space. Are you getting more interest here as the deadline approaches, and if so, kind of what's that feedback sounding like?
Yeah, absolutely. So what Connect does, and this is a product that we launched a couple of years ago, we've been working on it now for probably four or five years, it's a suite of targeting capabilities that move us past the cookie, right? We don't think there's gonna be, you know, a move from a cookie to one solution. It's gonna be a portfolio. And so within Connect, we have about 29 different identity solution providers, so folks like LiveRamp, Trade Desk with their Unified ID 2.0. We have contextual data, we have audience first-party data. So we talked about Experian in our last earnings call that has a lot of household targeting data, so that's an example of first-party data. And then the fourth piece is cohorts of users.
Google has their version called Privacy Sandbox, and then we have a non-Google version of that as well. These are a variety of different ways that marketers can find the audiences that they're looking for, and that, taken together, is growing at a nice rate, and we anticipate that there will be acceleration around that, you know, as we get closer to Google's deprecation of the cookie.
Mm.
I think similar to what the Viant executives talked about earlier, because of the murkiness of the timeframe, or I guess, being pushed back, right, the Google Chrome cookie deprecation, let's say, ecosystem focus on, you know, testing and deploying these new solutions has kind of waxed and waned.
Mm-hmm.
But we definitely see it on the upswing once again, and I think, you know, this time, I'm expecting that we'll see the cookie deprecation, you know, sometime in the next roughly two years.
Data, data, data. I sense a theme.
Yes, exactly. And again, I think being on the sell side of the ecosystem, where that consumer consent comes, is really important, from a structural and also from a regulatory perspective because we're able to say, "Okay, yes, we did get consent from the consumer on this ad impression to be able to use their data to, you know, serve a targeted ad.
Really interesting. And Steve, maybe one for you. Oh, I'm sorry. Go ahead.
I think, I think there are going to be some small portion in Q1, right? I think that's, like, almost for sure as this for sure mark. And I don't know, like, if you could talk about what you're preparing to do before that time period for your customers.
Sure.
For the webcast, the question was about what PubMatic is doing to prepare for the 1% of cookies that'll be deprecated in 1Q 2024.
Yeah, exactly. So Google has said they're gonna deprecate 1% in Q1, and then they plan to get to 100% cookie deprecation in Chrome by the end of the year. I think many industry observers would say the 100% by the end of 2024 is, you know, probably not realistic. I think the 1% is very much realistic. So we are working closely with Google on Google Privacy Sandbox testing, so that's a set of APIs for basically on-device targeting. So we are working closely with Google on that and, you know, expect to be deploying code, you know, now and in Q1 to be able to test the results with publishers and buyers.
Back to our last quarter announcement, three-quarters of the impressions on our platform now have alternative signals to the cookie.
Mm.
Right? And so this has been a multi-year journey for us to amass, you know, a variety of different signals. And it's not really for us to say which signal is better or worse. It's for the marketer to decide, right? Inside of a Mars, inside of a BMW, inside of a Procter & Gamble, they're all running, you know, strategies and playbooks around how are they going to, you know, find and target consumers in the future, you know, given the differing set of, of campaigns and kind of their marketing mix and portfolio. And so our focus has been on, how do we help all of those marketers find exactly the consumers that they're looking for on a very efficient basis and deliver targeted ads across our platform? And so that's where we have 29 identity partners integrated in.
We have dozens of different first-party data providers. We have probably a dozen or so contextual providers. We're working with Google on Privacy Sandbox. We're working with buyers directly on modeled cohort types of solutions. So we see it as really a portfolio approach in order to amass as much, you know, targeting signal that's consistent with privacy regulations and be able to, you know, really use this as a tailwind for growth.
Great. Steve, maybe a couple for you. I guess, how are you thinking about the need to invest behind the various tech and product initiatives that are in front of the company with further margin expansion, given investors' profitability focus? And maybe kind of adjacent to that point, digging into the incremental margin opportunity as we hopefully get into a more normalized 2024 backdrop.
Sure. So, you know, one thing that we've learned as a company is that, you know, given our financial strength, obviously not just the P&L, but the balance sheet, you know, at the end of Q3, $170 million in cash, no debt. We've learned that, for our long-term health and success, it's important to consistently invest in innovation. We did that through the pandemic. We did that through 2022, 2023. So our plan is to continue to invest into 2024. And, you know, we're very optimistic about the number of growth opportunities that are in front of us. You know, Rajeev called out Activate and Convert, so we're continuing to develop those products, and it's a multi-year ramp in terms of not just customer adoption, but also product evolution.
So that's an important area we're gonna continue to invest. But if you step back and look at the context of what we've been able to accomplish as a company, you know, 2023 was about operating priorities around free cash flow generation, staying close to the customer, both on the publisher and the buy side, and then, of course, you know, generate significant operational efficiencies. We've really, you know, hit the mark on all three of those.
Mm.
When we look ahead to 2024, we're gonna be able to leverage those operational efficiencies into 2024. We're gonna be able to, you know, leverage the learnings in terms of the reduction in CapEx. I anticipate that's gonna be, you know, a part of our 2024 game plan. We feel positive about continuing to generate robust margins of gross and, you know, bottom line. At the same time, we're gonna continue to invest. We think that as a company, we've demonstrated a very strong ability to do that, and there's nothing that I think, you know, that I see on the horizon that will prevent that.
Now, the last thing I'll comment, though, is in terms of how we've set up our company for future margin expansion, you know, with the optimization of our infrastructure, the operational efficiencies, and our focus on increasing video mix to the total, the marginal profitability of that is quite high.
Mm.
I think the tailwinds are all there for, you know, long-term margin expansion.
Very interesting. With a couple of minutes left here, I'd love to do my sign-off question, and since you have two people up here, you each get a shot at it. So, as we get into 2024, obviously a pretty interesting year in front of us, potentially. If you had to highlight one aspect of the PubMatic story that either investors should really focus on in 2024 or you feel is misunderstood about the company, what would that be?
You want to go?
I'll go first. Can I do two?
I'll let it slide this time.
Get 2.5 minutes.
I'll let it slide this time.
I got two minutes. All right, so number one, I think the strength of our financial model, I think is underappreciated. Last quarter was the thirtieth straight quarter of Adjusted EBITDA profitability. We deliver very high free cash flow margins. You know, last quarter, we hit a high-water mark over the last two years, you know, $17 million of free cash flow. So very strong financial results that have been the case for many years. So that's the underpinning. Number two is the fact that as a business, we've constantly focused on growth opportunities. And I think what I'm particularly positive and optimistic about, whether it's 2024, 2025, or 2026, is just the current number of growth opportunities we have.
Mm.
It's not just one vector. We're not. We have not put all our eggs into one basket. There's multiple vectors, and I think appreciating the fact that, you know, we have all these different ways to grow, I think is important understanding by investors.
Great.
Yeah, I think Steve nailed it on the number of growth vectors, so I won't belabor that point. I think the other one I'd highlight is, you know, that Supply Path Optimization metric at 45%. I think about that as like a coiled spring. You know, the ad spend environment obviously has been pretty muted this year. At some point in the future, right? We don't know when exactly, it's gonna inflect upwards, right? Coming out of every economic cycle, there's always, you know, bigger ad spend. And I think that really positions us for significant market share gains, you know, when those advertisers and agencies, you know, resume kind of robust advertising spend. So I'm really excited about that.
Great, definitely, one to keep on the radar. That was PubMatic with CEO Rajeev Goel and CFO Steve Pantelick. Guys, thanks for joining us.
Thank you.
Thank you all.