All right, got the thumbs up from the back. So, I'm Andrew Boone, I cover internet here at, at Citizens. Steve, thank you so much for being here.
My pleasure.
Steve is the CFO of PubMatic, and we're gonna talk about PubMatic and digital advertising. Anything else you wanna speak about for the next 25 minutes?
I think that's a great place to spend our time.
All right. So let's, let's just kick it off, let's go macro first. Talk about the current backdrop for digital advertising. How has the advertising environment been today in terms of what you're seeing?
Sure. You know, when I think about where we are today, and even just compared to a year ago, it feels very different. It feels like it's much more constructive. Let's say a year ago, the general sense was cautiously negative. One could say that today we're in a cautiously optimistic environment, and you know, we're clearly not, let's say, in the mode of full recovery, but just the process that many advertisers went through a year ago, basically cutting back, you know, finding where they're gonna get returns, that feels like it's worked its way through the system now, and many advertisers and agencies are focused on, you know, where can we grow? Where can we get the highest ROI? And so that's, you know, very positive.
I'd say versus six months ago, and if you go on a scale of 1 - 10, 10 being full recovery, I would say that, let's say a year ago we were about 2-3, now we're probably in the 3-4, 3-5, so definitely on the way. And what's exciting for PubMatic is a lot of upside potential, from where we are today. And there's a couple things, you know, when you think about sort of the change in the dynamic, you know, early in the macro pressure cycle, programmatic is an area where it's relatively quick to change the program, whereas if you have longer lead time campaigns, IOs, you know, linear, it works its way through the system.
Now, the flip side is, you know, we feel that, with the, you know, more constructive ad environment, that the turning on of the programmatic pipeline is growing. And there's another factor, you know, and we have the benefit of, having been through multiple cycles, that any time you go through a significant economic challenging period in advertising, there is this sort of resetting, and invariably, the programmatic market, the opportunity is larger than when it was previously. And the real drivers of that are, I think, very logical, but nonetheless, warrant mentioning. It's function of data, it's a function of scale, and it's a function of efficiency. And so that's sort of what we are seeing right now.
All right, so let's, let's take that overlay of the background and let's talk about idiosyncratic PubMatic drivers for the next three years. What would you outline as kind of the three major drivers, and then how do you prioritize them?
So, you know, I shared this, I think, at our last earnings call, certainly inside of our company. I've never been more excited about the number of growth drivers that we have as a company, very specific to PubMatic. Of course, we have our core SSP business, but we have now developed a number of emerging revenue streams. And it's really a function of an effort over a number of years of focusing on innovation and the fastest growing areas. And so those are video, mobile, and of course, SPO. So arguably, those are the three areas that we are accelerating. But now you overlay the emerging revenue streams.
And so, when we think about, you know, how do we prioritize and focus, the good news is that, you know, we have a very strong financial platform. You know, last year, you know, we generated the most free cash flow in the company's history. We continue to invest in these growth opportunities. And so, we're gonna selectively this year invest in sales, certainly behind SPO and the emerging revenue streams. For example, we're gonna increase our sales and our customer success teams by 50% this year. And it's a function of we see very significant opportunities, not only this year, but in years to come. And so our primary focus is around innovation, which we continue to invest in, and now incremental go-to-market resources.
And so we see that paying dividends over a number of years.
Okay. You talked about SPO as one of kind of the three more bigger picture drivers. You talked about an upper limit to SPO now at 75% versus kind of 50% prior as the target. Just talk about what happened to the business, getting from kind of that, kind of 25%-30% level to 50, and then what has to happen to get to that 75% level? And then what are the benefits, right?
Sure.
What do you guys accrue as that happens?
So, to begin with, for those who are not familiar with PubMatic, Supply Path Optimization has been an area we've invested for five years. A pioneer in the space, and, you know, we invest in innovation, developing relationships, and as you said, you know, we've grown significantly in terms of the proportion of activity on our platform. In 2023 alone, we increased by 10 percentage points the share of activity, and so—what are we doing to achieve that? You know, one of the priorities we set out, beginning of last year was to really continue to go deep with our buyer and publisher relationships. And what that means is really understanding the buyer's needs, spending time with them, working on solutions, and that takes focus, and it takes people, and it takes resources.
And so what we have done and how we're gonna continue to grow that share is we're gonna expand the share of wallet. So within our existing SPO buyers, we're gonna get deeper, more agencies, more geos. And so that's obviously the top of the list. Now, one metric that I shared on the earnings call that indicates the progress we've made on that is a metric I call Net Spend Retention. So this is a measure of how much, you know, spend continues from a prior year and how much you grow that. So we look at our buyers who've been on our platform for three years at least, and that Net Spend Retention level was 120%.
So clearly, that's gonna be a continued source for greater share of overall spend. At the same time, we're adding more SPO buyers every day, and one of the ways that we're doing that is through innovation and through launching significant products like Activate. So Activate is focused on the buy side of the ecosystem, and what we've learned with that process is it came out of these relationships that we've had for many years, understanding what the buyers' needs were. And so what this does is you go into an agency, an advertiser, and you just have more mind share in terms of what the multiple ways that we can help them be successful. And so Activate has brought in new buyers, advertisers that we formerly didn't have.
For example, Mars is an SPO partner of ours as a result of Activate, and so it's through innovation. Adding new buyers, of course, will help that. And then, investment in incremental go-to-market team will certainly drive that. And ultimately, it's because we have found ways to deliver and create more ROI for the buyers, more transparency and more control, and that's why we have confidence that we're gonna continue to grow that share of overall activity coming from SPO.
And then just bring it back to the financial model, right? So bring it back to my-
So, the highlights is that that makes it so powerful for our company is we've already incurred the cost to process impressions. So when we bring a new SPO buyer onto the platform, the marginal cost are de minimis. So, the marginal profitability is significant. That's point number one. Point number two is the stickiness, this Net Spend Retention metric that I shared. So, it's really well aligned with not only growing the top line but continuing to deliver very robust, bottom line outcomes.
Let's see. Let's talk about display. Display was really certainly a surprise in my model for 4Q 2023. Are PubMatic's drivers for display different than video, or how do we think about the display of the-
Sure
... business as kind of a discrete driver?
Well, display success wasn't as a surprise to us, but what was was the magnitude of the upside. And so, first of all, you know, display for us is primarily mobile, and mobile is a fast-growing format. In the fourth quarter, mobile grew 20%. So, obviously, the backdrop, the foundation was very robust. The other component that's important to call out is that we're growing the volume, the number of monetized impressions, and so there are drivers of that that I'll get into in a minute. And then another component that really added upside for us in the fourth quarter was the seasonal CPMs were a little bit higher than originally anticipated. So what's going on?
Well, first of all, many of the things that we've been investing and focusing on, like Connect, which is our addressability platform, is bringing data onto the platform that's allowing, you know, our buyers to transact in ways that they weren't able to do previously. Underpinning that, our thesis is that, you know, we're gaining share, and we're consolidating because of our ability to innovate, and certainly SPO is contributing to that. So SPO relationships aren't necessarily, you know, specific formats or channels. It's across our platform, and that's what makes that initiative so powerful for us. So the outcome for us in the fourth quarter was really quite good. If you strip out the Yahoo component, which I commented on beginning in the third quarter, our display business, primarily mobile, grew 27% in the fourth quarter.
So I anticipate as a function of our continued consolidation and our innovation, our SPO relationships, that display will continue to perform well.
Let's flip that equation. Right, so let's go to video. Just bigger picture question, right? CTV versus just digital video, whether that be mobile or desktop, what's the difference in terms of PubMatic's go-to-market for those categories? How do you view them differently? You've historically talked about digital video and highlighting desktop and mobile, right? Is there a different emphasis that you think PubMatic places on different components of digital video?
So at the end of the day, you know, what we've learned and you know the way that we go to market is as an omnichannel platform. And this is for those who are unfamiliar. We are able to provide for publishers an outlet for their inventory and our buyers in CTV, in online video, in mobile, and display. And so that's a really important distinction for us because we don't feel like there's like just one big pocket of opportunity. And buyers want to be able to work in a number of channels, and they're going to go wherever they're going to have the you know delivery of their objectives, ROI, et cetera.
We go to market as an omnichannel platform first and foremost, but then in terms of video, we go as omnichannel video. Because as everybody's familiar with, there's this huge opportunity emerging around linear TV, and that's not just going to go to CTV, it's going to go to online video. And what may be unfamiliar to some folks is that the online video market opportunity is about three times the size of the CTV. Both are huge. For example, the CTV market opportunity is thought to be about $30 billion or so, and the online video is over $100 billion. So from our perspective, it's important to provide solutions in both regards. And so when we think about, you know, how do we drive it, you know, we go into our buyers and we have solutions.
And ultimately, they're gonna, you know, have multiple places where they're going to spend their money, and we found that it's best for their outcomes, our publishers and us, by continue to drive all. Now, having said all that, the key thing for us is, continue to invest in the fastest growing formats. And clearly, video is there, mobile is there, and now, certainly, commerce media. And we launched a product, at the latter part of, 2023, called Convert, which is our commerce media solution.
Okay. A component of video is traditionally PMPs-
Yes.
Right? Talk about the importance of shifting spend to PMPs, and then how does that relate to financials, right? The competitors kind of talked about that in the past, of the kind of what happens with the shift. How does that relate to PubMatic?
Sure. So, one-to-one PMPs, which is specifically an area that we're focusing on, has been very successful for us. In 2023, we grew our revenues from one-to-one PMPs by 50%. And, part and parcel of that is that, PMPs are typically on higher value formats, video. And so, our goal is to continue to innovate, provide solutions, programmatic solutions around PMP. Of course, it starts out with a product that works very well, and we've been focusing on getting more adoption for publishers to leverage our platform to establish these one-to-one relationships. Now, what's important to note and see how it connects back to our overall strategy, in our SPO relationships, you know, we have multiple joint objectives with our buyers.
And as they, as buyers, large agencies, large advertisers see the benefits of putting more and more dollars on our platform, they go out to their publishers that they have formerly worked with, and if they're not a PubMatic publisher, they strongly encourage them to use our platform because the buyers see the benefit, the value of leveraging the PubMatic platform. And so in that respect, it's a virtuous cycle. And so you saw the outcome that I referenced, the 50% growth. And in terms of the economics, because these are high-value formats, we're very comfortable, you know, with the economics, because at the end of the day, our focus for many years has been on being the lowest cost platform. And so our goal is to drive absolute revenue dollars, absolute gross profit dollars.
And so we're very excited, very confident in the trajectory. And last thing I'll comment on is one-to-one PMPs and PMPs in general are very sticky. So again, it gets back to this point about being able to acquire customers and then grow the business over time.
Okay. Alternative ID penetration is going to be increasingly important going into kind of this year and then next. It jumped five points from 3Q - 4Q. You guys are up to 80%. Talk about what that enables for PubMatic, and then additionally, how do we think about the importance of kind of alternative data and attaching that in a post-cookie world, and what are you hearing from your partners in terms of consumer privacy?
Sure. Well, first, you know, we've been investing in addressability solutions for a number of years. We've been planning for cookies to go away, and as everybody's familiar, it's been an up and down, you know, on, off type cycle, but we've been very consistent in investing behind it. You know, we a number of years ago launched you know an industry leading solution called Identity Hub. And our general approach to the post-cookie world has always been to create a portfolio of solutions. We do not believe that it's gonna be, you know, a one solution fits all. And so if I work from like the apex down in terms of the value of the data, the insights, et cetera, you know, it starts out with known identity.
And today, our Identity Hub has been integrated with 29 distinct IDs around the globe. And that's a pretty powerful position for us to be because there's not going to be one ID that sort of ultimately, you know, takes the day. And our view has always been to enable however publishers and buyers want to transact.... And so, you know, this a solution that's been in market for a number of years, and we continue to add new identity solutions, ID partners every day. Now, why is that important? Is, you know, when we take a look at the data, when in a, in sort of our current business, when there's a ID signal, the return for the publisher is about 16% higher in terms of the CPM.
What's going on? Well, clearly buyers are seeing more value in terms of the insights that they're getting, so they're willing to pay more, and therefore it benefits the publishers, and of course it benefits us with our revenue share model. Now, going back, you know, down the apex, we have been developing, you know, multiple other solutions. You know, of course, first-party. You know, our fundamental thesis, and I think it's becoming more and more readily apparent that data targeting is moving to the sell side, the where we operate close to publishers. So we have, you know, very robust first-party data solution. Connect is an opportunity for companies with unique data sets to monetize their data.
In the fourth quarter, we increased the number of data partners who use that by 20%. We now have over 100 data partners leveraging our platform to monetize, to track the transaction, and ultimately to close it with payment. And then, there is of course, you know, the new emerging areas around cohorts. We just announced, we commented on our earnings call, an innovation with GroupM, and their Choreograph group. And so this is model cohorts for the agencies to bring unique data sets to their advertisers, leveraging our platform. And then finally, of course, contextual solutions. So there's many different ways that we can go out and be successful in a post-cookie realm.
As you said, you know, over 80% of our impressions have alternative signals, so we are well-positioned to be able to navigate because we've been preparing for a number of years.
Translate that to the 2024 guidance, right? So, you know, the timetable that is now out there, right, is that deprecation takes place kind of in Q4. So how did you guys factor in cookie deprecation into the back half of this year's guidance?
So, you know, it leverages the comments I just made. Because we've been preparing for this for, you know, many years, you know, we feel relatively good about where we are in terms of, you know, our preparation, having alternative signals, and then just making sure that the overall ecosystem that we participate in is aware of the solutions. So one of the things that, you know, we're doing and seeing is that much more uptake in terms of the solutions that we have provided. So at the end of the day, we feel, however, you know, the cookie deprecation timeline goes, you know, we're gonna be well prepared. Now, the challenge is just the specific timing, right?
And so there's a lot of moving parts that need to come into play. And, you know, our current view is that because of these number of moving parts, that the impact in 2024 will be relatively limited. It's not that everybody's not trying to solve it, but there's multiple stakeholders, and ultimately, the alternative to the cookie has to be successful and workable. And to that regard, you know, we have been investing significant amount of resources, and will continue to invest, in Google's Privacy Sandbox. And so that, along with IAB Tech Lab, as well, that will also help us prepare. But we think that it's gonna be, you know, a let's call it late 2024 or 2025, development.
To the point of just diversifying revenues, right? Within that same kind of framework, Activate and OpenWrap added three points to growth last quarter. What are the keys for that type of contribution to continue over the next few years, and what, what are the gating factors as you think about those two products?
Sure. Well, first and foremost, from our perspective, the great thing is that these products are in market, and they're ramping. So when we take a look at what's required for each of those, slightly different, some commonality. Number one, for example, with Activate, you know, the product is working, and it's all about getting ramp and scale. And so, we're gonna increase the number of go-to-market resources behind SPO broadly, Activate specifically, to drive Activate adoption and ramp. In the case of OpenWrap, similar story, we have a very robust offering. For those who are unfamiliar with OpenWrap, it's our enterprise-grade header bidding wrapper solution. It's been in market for a number of years. We've continued to innovate, add more functionality.
What we are starting to see is there's consolidation in this space, and so we're able to charge a SaaS-like fee, and that is something that is just a function of getting it to market, demonstrating the value, and then, you know, scaling that. Similar situation with our addressability solutions around Connect. We are, as I said, we're investing in post-cookie solutions, and we're gonna continue to develop those from an engineering side, but also it's about getting out with more salespeople. And so, we're doing it across the globe in terms of incremental resources. Our plan this year is to increase our headcount by 150 people, and we think that, you know, represents a couple unique things about PubMatic and being able to do that.
Number one is our financial model. You know, last year was our 11th straight year of Adjusted EBITDA profitability, our 8th straight year of GAAP net income. Last year was our biggest year of Free Cash Flow. So we have the ability to continue to invest in both engineering and sales resources, and what we've learned is when there is opportunity for growth, that's when you do it. And we have seen cycles where, let's say, the macro appears unfavorable. We've invested because we were able to, and we saw the opportunity, and then the subsequent years proved to be very successful for us. And that's exactly what we're doing right now. We're investing for growth and market share gains, and that's how we're gonna grow these emerging revenue streams.
We're in overtime. Let's see if we have time for one quick audience question.
I have one question. So on that last topic of EBITDA profitability, back in, you know, from 2020- 2021, you had awesome revenue growth and huge incremental EBITDA.
Yeah.
Since then, the revenue growth has been there, but the incremental EBITDA has not. When will we return to that, and why haven't we seen-
Sure.
Good question.
Yeah.
You first.
Thank you for the question. So we are in a position where, you know, we see tremendous growth opportunity ahead of us, and so one of the things that, you know, we made the decision on this year is to incrementally invest to get that growth. It's not just growth that we're gonna see in 2024, but it's gonna be in 2025 and beyond. So we're making very conscious decisions around that balance between EBITDA profitability and investment. As you pointed out, you know, our EBITDA margins have been, you know, in the 40s. I feel very comfortable, based upon sort of where we are as a company, that we can continue to grow our margin over time because there's a couple structural things that are very important for investors to understand.
Number one, we have a very low-cost platform, and we get a lot of leverage because by and large, it's a fixed-cost platform, and so we selectively invest in building out that infrastructure. Number two, we're investing in the fastest-growing areas, what happens to be the highest marginal areas, video, for example. And SPO, as I mentioned earlier with Andrew, SPO is like turning on a light switch. We've already incurred the costs, and so when we get more platform spend onto our platform, the margin profitability is quite high. So today, you know, we're making that very conscious decision to get a good balance, and I'd say having approximately a 30% EBITDA margin is pretty unique in technology generally. And then, you know, our goal is to continue to drive and accelerate growth, double-digit revenue growth.
I anticipate being well-positioned to continue to expand margins in the future, but right now we're focused on more of a balance between growth and bottom line.
Great. Thanks so much for being here.
My pleasure.
I appreciate you for the conference.
Excellent. Thank you.