What you're forgetting is I have, oh, are we starting?
Oh yeah.
It's not Mike.
Awesome. All right. I'm Justin Patterson. I lead the consumer internet team at KeyBanc. Really excited to have Rajeev Goel and Steve Pantelick from PubMatic with us here today. Gentlemen, welcome.
Hey.
Thank you.
Yeah.
Great to be here.
Great to be here.
All right. So maybe I'll start off with just a quick trivia fact here for people who follow the ad tech industry. PubMatic actually outgrew Google Search, Pinterest, and Snapchat in the fourth quarter. So well done, gentlemen.
Yeah. Yeah. Thank you.
You know, I, I think that's a counterintuitive fact for a lot of people. Ad tech is a sector that's often misunderstood. Talk about just some of the momentum you saw exiting the year and how that's shaping your vision for the year ahead.
Sure. So, we've been in a period, let's say, last roughly 18 months, muted ad spend growth, right? So obviously, macroeconomic environment, inflation, etc., has, you know, brought down ad spend growth pretty significantly kinda since the post-pandemic era. But what we called out in our last earnings call, sorry, or two ago in November, is that we see an inflection point of growth ahead for us. And what we called out in our last earnings call just last week is that we see the ad spend environment is significantly more constructive, you know, than it had been in the last 18 months. And so as a result of that, you know, we've put a floor in terms of our growth of at least 10%. We look at Q4, we grew 14% year-over-year.
If you exclude some kinda one-time issues with one of our large customers, it's 19%. Our guidance for Q1 is at 12%. So, you know, obviously, we're expecting to outperform that 10% metric. But I think where we have really focused over the last 18 months that's driving, you know, our own market share gains is really uncovering our largest customers on both the buy side and the sell side and then focusing a lot on innovation. So having, you know, Steve and I have managed through multiple cycles at PubMatic. What we know is that ad spend growth, and particularly digital and programmatic, always comes back bigger than, you know, when you're coming out of the downturn versus going in. But the pockets of opportunity, like where that growth is, is gonna shift. So we've been investing a lot in innovation.
We did no pay cuts, no layoffs, things like that during the, the weaker period. And so we've got a great product portfolio around CTV, around commerce media, some new emerging products that are now contributing, you know, multiple percentage points to revenue growth. So we feel really good about how we're positioned. And then you layer in the, the more constructive environment, and we think, you know, there's multiple years of growth and, and market share gains ahead.
That's funny. If I rewind the clock to when we were talking last year, the focus was, yes, it's a challenging market, but we're going to invest, and we see the light at the end of the tunnel with market share. So you talked about just some of the new growth initiatives that are contributing additively to the overall growth rate. Maybe just unpack what that is for the audience and how much that added this past year.
Sure. So yeah. Maybe I'll give the high level, and then Steve can, can round it out with some of the, the financial detail. So first and foremost, we launched a new product in May of last year called Activate, which is an extension of our very successful supply path optimization strategy. SPO spend, which is where we're consolidating spend from major advertisers and agencies, is 45% of the activity on our platform at the end of last year. And we have now said that we think it could be three-quarters of the spend going forward. So Activate opens up about a $65 billion TAM where now we have products that we charge buyers for, so new and incremental revenue stream. Second is commerce media. So we launched a product called Convert in September of last year. So very early going with that.
But, obviously, going after a $10 billion, you know, very, I think, compelling, TAM opportunity with growing spend going into retail media, commerce media. The third product is OpenWrap, which is a software wrapper solution for publishers to manage their header bidding partners. We've had that product actually for a number of years, but we've now moved it from being free to being fee-based. And so we converted all of our North America customers to fee-based, and now we're doing the same in Europe. And then the fourth product is our Connect platform, which is for audience or data addressability. Obviously, given your shirt, we're gonna get into cookies, I'm sure, over the course of the panel. But this is now 100 paying customers that are leveraging our solutions for post-cookie addressability.
In terms of the contribution to revenue, in the fourth quarter alone, it was low single digit of total revenue. So this is coming from a basis call it a year, year and a half ago of zero. And what's also very exciting, you know, Rajeev gave you the framework. But as we see this ramp, we think by the end of this year, it's gonna double, in terms of their contribution to the top line.
Got it. And you did touch on SPO there, Steve or Rajeev. Steve, the question I had to have for you is, you know, as supply path optimization builds as a percentage of the business, has that really changed just your relationship with both the publisher and the advertiser? Since you do control your own infrastructure, it seems like you've got a lot more visibility coming into the business here.
Absolutely. I think a couple points to call out. First, Rajeev gave you sort of the metric of, you know, where we ended the year at 45% plus, a 10 percentage points increase in just one year. Now, what's that doing for us? It's what we have learned with our SPO relationships that they're very sticky, very low churn, and we get net spend retention. So I take a look at the same cohort of buyers that have been buying on our platform for three straight years and look at last year's net spend retention. That was 120%. So when you combine the stickiness, the low churn, and this net spend retention, as SPO grows, our visibility is gonna grow. So it's obviously very exciting for us to have that leverage point.
Now, having said all that, there's another corollary that really is beneficial to our company is as we get more relationships, you know, expand share of wallet of existing ones but also new, what we're able to do is go in and really understand the long-term needs of our buyers. And that helps with our innovation trajectory. And you can see this cycle of our product innovation growing, particularly on the buy side. And so that's sort of an offshoot of that overall focus on SPO. And then finally, from an economic perspective, we've already incurred the cost to process impressions. And then when you overlay with a new or existing or an SPO relationship that we bring on, the incremental utilization of our platform goes up. The marginal profitability is quite high because of the point that I said we built a fixed, you know, leveraged business.
So we're feeling really good about where it's going. We're putting more resources against SPO this year. Rajeev called out we're increasing our headcount by 150 people, you know, 50% increase in focus on SPO buyers alone. And we think that's gonna pay dividends later this year and beyond. And if I could, maybe I'll just share one anecdote, which we talked a little bit about on the earnings call. So the flywheel that SPO creates for us. So we announced Dish/Sling as a CTV, you know, publisher customer.
Dish came to us to work with us because our SPO buy-side customers like, you know, a Mars or an IPG or a GroupM told that publisher, "Hey, if you make your inventory available via the PubMatic platform because of the advantages that PubMatic has built for us in terms of data and technology workflow, etc., we will spend more on your inventory." So, you know, Dish came to us as a result of that. So that's a great example, I think, of the flywheel that we have with SPO where publishers come to us because of the demand, and the demand comes to us because of the technology innovation in the supply.
Got it. And I think that's a good segue into the cookie discussion. So you're investing, you sound confident, yet there's this market perception that taking away the cookie is just going to break the ad tech industry. So talk about just what you're seeing today within there, how you've really made your business future-proof, if you will, you know, for addressability and identity in this post-cookie world.
Sure. Yeah. So the latest move here that, I think is grabbing all the headlines is obviously, Google Chrome is deprecating the third-party cookie. And they're just the, let's say, the latest browser to do that. Safari, Firefox, and others have done that. We saw Apple remove, you know, the equivalent with IDFA a couple of years ago. So this is not necessarily new in the sense of, you know, this kind of shift over time. And so we have been investing quite a bit in Privacy Sandbox. We will make a seven-figure, you know, dollar investment from an engineering perspective, because we think it's obviously a scaled ad environment. But that being said, we are not dependent on what happens with Privacy Sandbox.
So we've been working for many years to bring additional signal to our platform, additional data points, so that advertisers can, you know, find relevant consumers and deliver a relevant ad to them. So a couple of data points. So 80% of the impressions on our platform now have alternative signals other than the cookie. And so that can be things like a first-party identifier, meaning the user is logged in, and you take that email address, and we can convert it into a LiveRamp ID or a Trade Desk Unified ID or, you know, some other ID. We have 29 of these IDs integrated into our platform. It can be contextual data, can be publisher first-party data. So somebody like CarGurus, they know, "Are you in market for an SUV or a sports car?" and then we announced a product with GroupM.
We talked about it in the earnings call. We'll announce it shortly, where we are building cohorts of users based on the attributes of users that each of their brands is looking for. So let's say, Coca-Cola is a client of theirs. I'm just making that up as an example. They might say, "Well, hey, we want consumers that, you know, fit this age, demographic, income profile. And we see 600 billion ad impressions, over 600 on a daily basis from, you know, hundreds of millions to billions of users. And so we will create the inventory segments around those users that they're looking for and deliver that for GroupM." So we have a whole kind of portfolio approach. The other piece is that we've been growing the portions of our business that are not at all reliant on the cookie.
So CTV, most of that consumption is logged-in users. There's no, you know, cookie, obviously, on, on the TV. Commerce media, so this again, you know, usually you're logged in, and so there's no, no reliance on the cookie. Online video. So there's, you know, whole pockets of our business, that are growing pretty rapidly where we have, you know, billions, tens of billions, hundreds of billions of ad impressions on a daily basis that are not reliant, on the cookie. So we feel pretty good that, as this transition happens, we'll be a leader within Privacy Sandbox, and we'll be a leader outside in terms of all of the other technologies and then all of the other growth opportunities.
Typically, what we see—and we saw this with GDPR, we saw this with the IDFA transition—advertisers don't stop spending because of a technological change like this. They're just gonna shift their ad spend to where they get, you know, the next highest level of ROI. And that's already an environment that, you know, we have scaled up.
I think that's a good segue into just industry structure as a conversation in there. Typically, these big events often serve as a clearing event. Oftentimes, just more of the market share goes to omnichannel players like yourself because it's just that much more difficult to be a point solution if you have signal loss. So any predictions on how you think just the market consolidates over the next few years?
Yeah. So I think your point is spot on. And, you know, you could look at Meta as a great example of that, right, where overreliance on iOS, and obviously, when Apple, you know, removed IDFA, then they took a big hit. And then it took them a couple of years, and, you know, now, obviously, they're, they're back, bigger and, and better than ever. So I think in our industry, what we're gonna see is that, many of the sell-side technology providers are not gonna have the wherewithal to be able to invest, you know, in Privacy Sandbox, right? And so that'll be one of the clearing events. Number two is omnichannel, right? So who, you know, who has scale in areas that are not affected by the cookie like CTV, like, you know, commerce media, etc.?
So we are one of the few, you know, global omnichannel platforms that are also investing in, you know, in these newer areas. And then third, I think, is through SPO, we're already on the front lines of innovating with our buy-side partners. I mean, GroupM has been a, I think, 3 or 4, maybe 4 years now, supply path optimization partner. So it's not surprising that we're doing this model cohort solution with them because we have a, you know, very close partnership. So I think you're gonna see, you know, people that are invested in SPO are also gonna be, you know, beneficiaries of this. And then put all of that on the backdrop of capital has been hard to come by, interest rates, for companies that have debt.
We have no debt, but for interest, companies that do, you know, that's obviously resetting to higher levels. So we think this whole economic cycle combined with the cookies is, is gonna be exactly what you said, which is the clearing function and, and more consolidation.
Got it. And since you mentioned omnichannel video there, Steve, a question for you. Obviously, there's a big difference between video CPMs and display CPMs. So as more of the business just naturally mixes to, you know, traditional video or CTV over time, how does that change the gross margin profile?
Sure. It's a short answer, it's very favorable. We're not just sort of letting it happen. We're actually actively innovating to drive more video on our platform. You know, in the last couple of years, you know, we've grown 10 percentage points or more. We have plans to have that above, you know, 50% in the coming quarters and years. That is very positive for our economic model because the cost to process a display impression and a video impression is roughly the same. So with the higher CPMs, we are able to create more marginal profitability. And of course, we reinvest that, drop it to the bottom line, use incremental cash to, you know, repurchase shares as part of our long-term capital allocation strategy. So there's a lot of benefits in terms of our focus and innovation on the highest value, fastest-growing formats.
Got it. And talk about just where you're seeing the logo wins right now. I mean, I feel like rewinding the clock back to the IPO, we were just talking about CTV becoming a growing piece of the business. Now you're working with hundreds of publishers at present. Where are you really seeing those winning win rates come from?
Yeah. Sure. So, just for a bit of context, you know, when we went public just over three years ago, about 2%-2.5% market share. Now that's roughly doubled, so 4%-4.5%. And obviously, we wanna continue to grow our market share. So we're seeing, you know, I think, wins in a variety of areas. We added, I think, about 70 CTV publishers over the course of last year. So from 200, low 200s to about 270. It takes our total publisher base up to 1,800. Commerce media is another area of logo wins. And we launched that product in September. So I think this year will be a big year for, you know, for announcing, customers. And that's on a global basis.
I think the U.S. is leading in commerce media, but we have a lot of opportunities in Europe. Then Asia will come in behind that. SPO is the other big area. So part of our headcount expansion this year is we're gonna grow our sales and customer success teams that are focused on buyer relationships by about 50%. So pretty significant. The Association of National Advertisers, which is the big trade industry for the top advertisers in the U.S., did a study that they published last fall, and they said only one-third of advertisers have engaged in SPO. It's a recommendation by that trade group that everybody should engage in SPO. Historically, we have been focused on the top five or six, you know, agency holdcos, IPG, GroupM, and the like.
But we are gonna be going aggressively after the independent agencies, so kind of, you know, number 10 through 50, and then directly to brands. So we've got, I think, a great stable of brands already with the likes of Mars and Diageo and others. But we just see a lot of opportunity there. So I think you're gonna see, you know, logo expansion opportunity in the head of the market, which is where we're always focused, but across all of these different growth opportunities.
Got it. And when we think about just the logos there, just more agency buying power come in, how is that changing just your go-to-market of adding more publishers in there? I mean, I think that'd be a natural flywheel of the bigger you get on that demand side, the more, more supply dollars come toward you.
Yeah. So that's exactly right. And obviously, that's that Dish and Sling kind of example from earlier. Now, one of the things we try to focus on a lot is profitability, right? And so obviously, the number 10-sized publisher is very different than the number 1,000 in terms of the volume of, you know, dollars they can generate for us. And so we are very focused on understanding where are buyers spending their ad budgets and then making sure we're, you know, focused in terms of acquiring publishers. And all that being said, one of the transitions we did over the last 12 months is we stood up a customer success team in India. So now we have roughly half of our publisher accounts that represent about 10% of our revenue. So obviously, the bottom half, they're now managed from that team in India.
And so that gives us, I think, a lot of optionality where the cost to deliver our service has come down significantly. And so now we can, you know, grow in areas like native, for instance, or commerce media and bring on smaller customers to start with as we, you know, go towards the head of the market.
You've mentioned commerce media a few times. I feel like we're all gonna be talking about it more with this Walmart Vizio deal, that's going through right now. Just when you look at a category like commerce media, what do you see as really the key steps to succeed and gain market share there over the next few years?
Yeah. So, so step number one is, just product innovation, right? So our view is that there's nobody that's bringing all the pieces of commerce media together. So if you, you know, go talk to a large retailer like a Home Depot or Target or something, something like that, they have a couple of different needs: on-site, sponsored listings, on-site display and video, and then extending the value of their data off of their own property. And so we have technology capabilities in all of those areas, or have been building in, in those areas. And so we're bringing all of that together into a into a single platform. So I think that's number one is, you know, meeting the, the retailer's needs to monetize. Second is leveraging our buy-side relationships. So typically, these retailers, they know very little about, obviously, the advertising world, right?
They've been, you know, focused for maybe 100 years on merchandising and retailing. So they don't have great relationships built in with the top advertisers and the top agencies. And so our SPO relationships, I think, can play a key role in helping them grow their ad business. And then third is all of the infrastructure and plumbing around data and privacy. So obviously, if you're a retailer and you're getting into advertising, you know, you don't wanna make a misstep where, you know, now you have some data breach or some, you know, consumer issue, and it is on the headlines of, you know, a newspaper, and then you have a, you know, a big problem in your core retail business.
Because we own and operate all of our own infrastructure, and we have been investing in, you know, privacy compliance, and we do that, you know, across Europe, US, and Asia, and across, you know, all of the 50 states and the different regulations that are coming into place in the US, I think our ability to create trusted relationships with retailers is, is very strong.
Got it. Before I open it up to the audience, just wanted to come back to Steve on financials. You're one of the few companies that gives annual guidance. So thank you for that. Always fun to see. Talk about just the assumptions that you're seeing that get to double-digit growth for 2024.
Sure. Well, first of all, I've never been more excited about the number of growth drivers we have this year. I mean, we commented on the emerging revenues, net new, new sources of growth, the momentum behind SPO, very important to our growth trajectory. You know, all the behind-the-scenes, you know, customer partner development over the course of 2023, you know, leads to, you know, very positive backdrop. So what we've said is that we expect to grow at a minimum 10%, with upsides, you know, coming from more SPO, more video, and of course, you know, some assumption around the stabilization of the macro, which we do believe that's emerging. Overall, you know, I expect, for example, Omnichannel video to grow in the double digits, in terms of revenue. So that really represents exactly what we've been investing in, focusing on.
And we expect continued expansion of our SPO activity. So overall, 2024 is a year where we believe the revenue growth is gonna accelerate. You know, the guidance that I gave for the first quarter indicates that. And you know, as the year goes on, I'll of course give updates. You know, we have obviously baseline assumptions around political spend. But you know, where we are today versus let's say the last presidential cycle, far more assets now that will be appealing for that type of ad spend. So overall, we're feeling like we're gonna deliver on that double-digit growth.
Great to hear. All right. I'll take a break from Q&A and see if the audience has any questions. All right. I'll keep firing then. So.
Cool.
Alternative identifiers. Are you thinking about this as a, a net neutral event to CPMs or, or deflationary or inflationary? What's kind of the permutations you're thinking through right now?
Yeah. So what we see very clearly in the data is when there's an alternative identifier, in particular, let's say, an email address, right, that's converted into a LiveRamp ID, Trade Desk ID, etc., CPMs go up, right? And we talked about that in our earnings call, roughly 16%, on average. And the reason is very simple, which is that when we know who the user is versus a third-party cookie - and obviously, there's some noise in that in the anonymized cookie - when we know who the user is, then the advertiser can deliver a more relevant and targeted ad to the consumer. And so the ROI on that ad is higher, and so they're willing to pay more.
And so when I kinda look at this over the long run, I think there's a huge opportunity for the open internet to take share from the walled gardens. If we think about walled gardens like a, you know, Meta Instagram, Google environment, you know, those guys have built great performance engines because we're all logged in, you know, into those environments. But what they're missing is high-quality content, right? They don't have the professional content. They have largely user-generated content. And what advertisers love is to know who the user is so they can deliver a very relevant ad. And they wanna do that in a very safe, you know, professional, editorialized content environment. And so the open internet is moving very much towards that, towards that point. And so I think that'll be a, a catalyst for share shift.
Got it. And to wrap with the big picture one, Rajeev, you've always been very forward-thinking in the industry, certainly moved fast around Header Bidding on the display side, and have had this vision that CTV will open up more over time.
Yeah.
So as you look at just the state of the CTV landscape right now, content owners needing to monetize AVOD a lot more, where do you think we are in that inning of just opening up more CTV inventory to players like yourself?
Yeah. So I think we're quite early, in that the vast majority of CTV transactions today are traditional insertion order-based, right? So that's probably over 80% of, you know, what we see in terms of how CTV is monetized. The remaining 20% that is programmatic, most of that is, I would say, kind of a primitive or, you know, first step into programmatic, which is programmatic guaranteed deals or private marketplace deals. And the ultimate expression of programmatic is, you know, open exchange buying and selling, and we're not gonna be there in CTV overnight, but I think we'll get there, you know, over the next 5 to 5 to 7 years. But what happens is that as that transition, you know, goes forward, publishers see that they can make more money.
Buyers see that they can generate more ROI and more efficiency, at the same time by using data, by using real-time bidding technologies. And so that will, in and of itself, open up a lot more supply into a platform like ours. And we're already seeing that, right? So we've seen the transition from subscription-based to AVOD, as you mentioned. And as more and more, you know, channels and, users get into AVOD, then that creates the complexity where people need auction technology to be able to manage that. And so that's a, a big tailwind for us over the next couple of years.
Got it. Great to hear. With that, we are out of time. Rajeev, Steve, thank you very much for attending.
Yeah. Thanks for having us.
Thank you.