Pleased to host a chat with Steve Pantelick, the CFO of PubMatic. Thank you so much for being here.
Glad to be here.
Appreciate you supporting the conference. All right, let's start off with some kind of industry questions.
Sure.
Big picture, what do you think the key points of differentiation are for a SSP today?
I'm going to give you from the PubMatic perspective. And so, you know, when we think about what we're focused on, it's about solving the problems for publishers, understanding what those are and what the opportunities are. What's really important to understand about PubMatic is we've morphed over the years, and we now have an integrated platform. We actually have four customer segments. We have, of course, publishers and mobile app as a core segment. You know, long term, we've had that relationship. Number two, recently we've expanded that to buyers, advertisers, whole codes. That's a, you know, very discreet customer segment for us now. Third, we have now, you know, fully developed a curation data, you know, set of customers that's in our Connect product. And then fourth, commerce media.
If you haven't been paying attention lately, you know, we are a fully integrated platform and have multiple customer sets. What we've done, you know, in terms of differentiation is really to look at each of those particular targets and what we can do as a company. First and foremost, we spent 20 years developing our capabilities for publishers and mobile app companies. It's about yield monetization. That's obviously a must do. It's also morphed into basically managing first party data. We are a trusted source to do that. Of course, associated with that is maximizing the revenue for that valuable data. Third, basically be the guide, the, you know, the concierge for helping publishers move away from the third party cookie world to the first party world.
That is something that maybe we could spend some time on, but really there's a fundamental shift in the industry towards sell side targeting. Now, with respect to buyers, we launched a product called Activate. The problem that we and this opportunity that we are solving is it really tackles the inefficiency of the buying ecosystem as well as the lack of transparency in many respects. A customer like Mars Petcare can buy inventory directly on our platform and have access to the 800 billion impressions we process every day. They'll know what inventory they're buying, and they get great economics. You know, for example, in the Mars case, they were able to do a that they shared with us a program where they got 20% sales lift on their sales goal, you know, leveraging our Activate product.
It comes down to simplicity, one platform, and transparency. Now, with the other products, you know, for example, in the case of curation and data partners, we now have integrations with 190 different data sets. What we now have become is a destination place for, you know, owners of valuable data to put their data on our platform and then advertisers, whole codes to be able to come to our platform and take advantage of that unique data. Finally, commerce media, a great long term opportunity. We have a full suite of solutions in that respect. The big picture point is we've developed the technology and we've been very innovative over many years, and we have multiple customer segments that we are, you know, taking advantage of.
Let's, I want to double click on all of that.
Great.
Let's keep it industry for a second, and then we'll go into product in a little bit. SPO reached 53% in 2024, up eight points. Just big picture, right? We talked about this at the IPO in terms of the consolidation of the industry. Like Steve, the question is really, where are we in that consolidation?
It's happening as we speak. You know, from our perspective, you know, we continue to grow. Others in the ecosystem that have scale have these buyer relationships. Ultimately what's going to happen is it's going to be driven by what buyers want. Buyers want to work with fewer and fewer scaled partners that can satisfy the range of their needs, you know, across all the formats: CTV, mobile app, et cetera. If you're not in that category of being a scaled omnichannel provider, you're going to become more and more, you know, less relevant, you know, for the buying part of the ecosystem. I would say, you know, it's a long term process. As you've seen, as you noted, you know, the share of SPO activity has grown steadily on our platform. Eight percentage points increased this past year.
You know, when we think about the future, we anticipate, you know, it could be as much as three quarters of all of our activity. When you think about what that implies for the competition, if you have a platform that has unique demand flowing through your platform and a publisher can only get that on your platform, by definition, you're going to have more and more difficulty, you know, having a viable business. It is going to be an industry with fewer bigger players. We believe we're going to be, you know, a strong beneficiary of that.
I want to ask about it's unfair, Steve, but DoubleVerify talked about weakness in terms of their business as open web moved to social, right? Like here's the bigger picture question, just talk about the advertising environment for the open web as you saw it in 2024. What do you think the future of that starts to look like? How do you guys view that?
In our view, it's very vibrant. I mean, it goes back to sort of what are the fundamentals of the open web? It's really about quality inventory. You know what the sort of the content is. Advertisers, you know, albeit there's, you know, sometimes cycles, always want their ads next to quality content. That can't be replicated in a social media world where it's just, you know, user generated content. Now, having said that, you know, from our perspective, there's many different tactics that advertisers have. From our perspective, why we think why we're so excited about our long term trajectory is that, you know, as I alluded to, you know, we bring the combination of quality content through publishers that we have relationships with. You know, we have 1,900 publisher relationships. Number two, you know, buyers have transparency.
They know where their ad's going to be. Number three, we help them, the buyers, you know, improve their ROI so that allows them through Activate and other mechanisms. There is always going to be a viable long term, you know, opportunity. Now, hard to say what DoubleVerify saw. From my perspective, you know, what we saw in the fourth quarter as anticipated was, you know, every fourth quarter has basically two peaks. There is the peak of ad spending that goes up until Halloween and then plateaus, and then there is another peak up until Thanksgiving and then a bit of a dip at the end of the year. With the presidential cycle this year, you know, there was a situation where probably some advertisers fell out. They did not want to be in the mix. Others, you know, deferred their advertising until after the election.
We had anticipated that. Maybe that is what DoubleVerify was saying, speculation. From our perspective, there was no what I call endemic challenge or weakness. One way to validate that is sort of what is happening right now in the first quarter. As I shared at our earnings call, the majority of our business is growing double digits. CPMs are robust. It is like a, I would not call it a typical first quarter, but it is not in any way a sense of, you know, in decline.
Let's talk about the headwind then for one Q, right? It was the one significant DSP that basically transitioned into a new algorithm back in May, right? Help us understand kind of the pacing of that in terms of maybe the back half of the year and then into one Q. The bigger picture question is, can you guys claw that back over time or how do we think about the recovery of that spend?
Let me start out, you know, what we're particularly excited about and I think what investors are is that the core of our business is now indexed to the secular growth areas. What I mean by that, CTV, mobile app, online video, you know, emerging revenues. In effect, this transition that I'll comment on in a minute has accelerated that, I'll call it deleveraging from the cyclical parts of the business. Why is that so important is that, you know, this is where future growth is going to come from. We are very confident that over time, you know, that portion of our business will continue to grow and take greater and greater share.
A stat that I shared, you know, back in the third quarter when it became apparent this change was imminent was to start to show our business excluding the impact from this DSP as a headwind and excluding the tailwind of political. Back in the third quarter, that core part of our business, secular growth areas, about two thirds of all of our revenues grew 17%. That same category along those same dynamics grew 16% in the fourth quarter. Thus far in the first quarter up to our earnings, I had compounded it was 15% plus. Clearly we have a lot of growth drivers in our business. Now, with respect to this DSP change, we're going to lap that in a few months. You know, we're going to obviously continue to grow through it.
In fact, in the second half of last year, we grew through that because we actually overcame a $20 million revenue impact. In the prior year, that DSP delivered $20 million more of revenue in the second half. We grew through that and grew 6% on top of that. Excluding that, as I just pointed out, we grew double digits. We will see a similar trajectory in the first half of 2025. Because of the time of the year in terms of lower ad spending in the first half of the year, our full year reported numbers are going to be slightly down year over year. In the second half of the year, you know, on a reported basis, including the comparable political spend in 2024, we are going to grow in the high single digits.
In effect, we are growing through it as a result of, you know, these secular growth areas.
Confidence that you can not see another step down from this one particular partner or alternatively, Steve, like what's the opportunity to pull that back in terms of the spend coming back to you in some manner?
Yeah, I think a really important point for investors to understand is that number one, this is a long term buyer on our platform, you know, 10 plus years. There's no fundamental issue with the relationship or, you know, you know, the intricacies of what's going on. It is all about building more opportunities with this buyer. What I shared was after that original adjustment that occurred, the activity from that buyer has been very stable. That has continued. For now, it's up to us to find pockets of opportunity with that buyer. That's exactly what we're doing. I would expect that we're going to grow in other areas. As a reminder, this buyer predominantly was in the display format.
Those pockets of opportunity are going to directly support the other secular growth areas that we have, which will be obviously a long term net positive for our company.
All right. Let's talk about one of the positives that came out of 2024, which was certainly CTV, right? Talk about the drivers of CTV strength and just the ability of PubMatic to be able to really continue that momentum into 2025.
Sure. I think for investors, point number one is we are a scaled CTV company. We did that organically. We did it over a number of years and it is working. What is it that we did to achieve this? Number one, stayed very focused on innovation and delivering the kind of technology that our publishers needed. Our strategy, our goal has always been to become a preferred partner for CTV publishers. That does not mean exclusive. By the way, nobody has exclusive relationships vis-à-vis CTV inventory. Our goal has been to build the technology that satisfies what they need. Frictionless UI, a workflow that, you know, is predictable and consistent and, you know, meets all their reporting needs. That is working well.
More and more CTV publishers are moving their direct sold, so meaning what they went out and directly sold to buyers onto our platform to then clear programmatically. That is a really good validation. Number two, a part of our strategy is to build on our SPO relationships. As consistent with all of our SPO relationships, which we have with all the major whole codes across the globe and many, you know, premier advertisers, is to have CTV as a part of those relationships. This is a way where it is mutually beneficial. The buyer of CTV understands the data integrations, the APIs, leverages everything that works for them in this world. The Activate product unlocks that. We have both the publisher push towards more CTV and the buyer push for more CTV. That is what is fueling our growth.
Over time, we continue to expect that to grow. While we never anticipate that CTV publishers will have 20 SSP partners, they will have a handful of which we certainly are going to be one of them.
Makes sense. Emerging revenue streams reach 6% of fourth quarter revenue. Just help us understand the components of that 6%. Are there particular pieces that may be bigger? Is that Connect? Like how do we build that up?
Yes. We are very excited about the emerging revenues, not the least of which is two and a half years ago, they did not exist by and large. In a short period of time, we have created really important new growth engines for this year and for years to come. What are those growth drivers? Activate is in that category. Our commerce media is in that category. OpenWrap, which is our enterprise solution for publishers that manage header bidding, and Connect. Connect is our data and curation platform where, as I referenced, the 190 data partners can come in, load their data safely, trust that it is going to be protected, and allow media buyers to come in and, you know, access and then buy the media. That part of our business, Connect, is the largest part so far. That grew 140% in the fourth quarter.
Serious growth potential down the road. That is only going to grow. Just to cycle back for a moment onto sort of the CTV component, CTV buyers know that if they want a map to a certain data set, they will be able to do it on our platform. Again, the point that I said from the outset, what has made this unique for us as a company is an integrated platform. These pieces are self-reinforcing and, you know, feed on each other.
Steve, if I dream the dream and I think about a DSP, right? Data sales can be half of that revenue stream, right? Is that the potential for Connect where we're getting to something that is doubling what is the potential taker?
You know, I don't want to put a ceiling on it because then that, you know, stops people thinking creatively. So who knows?
Talk me down, Mr. Soto.
I would say that from my perspective, it's only logical that data is going to be a bigger and bigger curation and data is going to be a bigger part of our future. I'll just illustrate the point, you know, from, I'll call it industrial logic. We've spent nearly 20 years developing publisher relationships. We built up trust. The source of a lot of this important valuable data is first party data. What I think the ecosystem is recognizing is that there is a lot more value in doing sell side targeting. For example, Dentsu is building their buying and media activation platform on our technology. They're using Activate to buy and Connect as the data platform.
In effect, what that does for them is it gives them a unique opportunity for a differentiated product, but it's also, you know, leveraging all these unique capabilities that recognize that the incremental upside is getting more value out of sell-side targeting. There's more return. There's less what I call droppage on the floor in terms of the value of that data because it's right there next to the consumer. From my perspective, the importance and just in terms of strategically as well as from a financial impact is just going to grow for our company.
Let's switch to commerce media, right? Retail media at large has been a growth driver of the internet that's been key over the last kind of like two, three years. Talk to us about that evolution for PubMatic and then paint it a little bit more strategic, right? Like I understand Connect and Activate into the core SSP, but like tie that into the vision of the platform overall in terms of commerce media.
I would say it's right in the mix of sort of being integrated with the platform. An illustration would be, you know, one of our commerce partners, Instacart. Instacart is able to take their unique data that they have and put it onto our platform where it could either be activated by another media buyer or to, you know, get, you know, people back to the Instacart ecosystem. Overall, ultimately what it's about is leveraging the unique qualities of our platform, buying data management with these big relationships that are holistic and work. For us, commerce media is an extension of a whole new customer set, but leveraging everything that we've built. What do we have to do to take advantage of that? We're very focused on the kinds of customers we're going after.
We're focused on customers who maybe aren't like, let's say, the top tier retailers who can invest significant amounts of money and create their own infrastructure. We're focused on the mid tier where there's a tremendous amount of data out there that's valuable, but a buyer doesn't want to log, whether it be at a whole co or an after, doesn't want to log into 20 different UIs. What we are focused on is how do we consolidate all that unique, you know, inventory and insights and data so buyers can do that. That's really the next phase for us where it's very focused in this commerce media world where the actual, you know, owners of the data don't want the time to spend the money or the bandwidth to worry about it, but they need a partner like us to help them succeed.
Why I'm so excited as a CFO is that the incremental cost to pull that off is really in the GTM world. It's just, you know, investing in the right sales folks to go after the opportunity because we've already built all the functionality, as you just pointed out.
Makes sense. Let's switch a little bit to costs, right? Gen AI was highlighted as just a driver of internal efficiency this last quarter. Help us understand how that manifested through the organization. Is it potent enough to change the trajectory of headcount as we think about that going forward?
You know, as a company, I'd say we, you know, from day one have a DNA of, you know, technology innovation and machine learning has always been a part of who we are because to be successful in a, you know, real time high volume environment, you have to have built ML capabilities over many years. We actually started to adopt AI generative tools in the engineering organization, you know, about two years ago. What we've seen after two cycles is that they're just getting better and better in terms of throughput, you know, reducing the amount of cycles in QA, you know, avoiding certain development tracks that, you know, maybe would hit walls that they otherwise would have had to go further down. That is, you know, fully integrated into our engineering organization.
What we started to do last year was to then spread that out to the rest of the organization. I'll give, you know, the finance legal organization that I'm responsible for what we're doing. We're utilizing it obviously in terms of things like, you know, contract OCR recognition, making sure that all the right terms are captured and then passed amongst the various systems that we manage, you know, as mundane things as, you know, submitting GST returns across the globe, very manual intensive, you know, having AI to do a lot of this for us. What it's doing, step number one, broadly speaking, is allowing us to continue to grow and add more complexity without adding people.
Now, as companies like ourselves figure out where you can spend more and more of the, like the energy for it to get the greatest impact, there could be scenarios where we move people from one area of the business to another because we have confidence that an AI centered solution is going to deal with most of that need. That is what we're looking at right now. It's never been about taking people out. It's always been about, you know, recognizing that our most valuable asset is our people and then figure out how to get more out of those people in terms of their daily life. An important distinction and what I think now sets us apart is we're already starting to turn Gen AI capabilities towards revenue generation. A perfect case in point is in the fourth quarter.
We shared this regarding a product we developed for publishers that wanted to take on political advertising, but were just concerned about can they manually vet all these different ad creatives to get confidence that they know what kind of ad was going to show up on their properties. We created a product through AI that allowed publishers to do that in effect on the fly. That definitely, you know, accelerated our incremental political spend as a result. It was not a manual process. It was just like, go figure out what these creatives mean and then the publisher can then assess, is this something that we want? In 2025 and beyond, that is where, you know, we are turning our attention. That could end up being sort of expansion of existing products or potentially a whole new products and markets.
All right, Steve, we're in overtime, but I want one more. Talk to me about the buyback, right? Like shares have certainly come down kind of post the quarter. How do we think about the cadence of the buyback?
Sure. For those of you who don't know, we launched our program beginning in 2023. Through the end of 2024, we bought back $135 million of shares. Already a considerable amount, you know, for a company, you know, with our market cap. That's equivalent to over 8 million shares. We reduced our fully weighted shares outstanding by, you know, 5%. When we went into the program, our thesis was this isn't going to be a one and done. This is going to be a part of our long-term strategy. We are profitable, as you know. We generate significant cash since we went public. We, you know, have generated $175 million in free cash flow.
We're going to keep the cadence of buying, you know, shares because it's a part of our strategy, as is the case of we're going to keep on finding, you know, organic growth opportunities. From our perspective, we are very judicious when we invest. When there's opportunities, we're going to take advantage of those opportunities, but we're not going to do it in a way where, you know, all of a sudden we just blow our whole budget and, you know, it becomes a, okay, we'll get to it, you know, in a year from now.
Perfect. All right. We'll leave it there. Thank you so much for being here. Appreciate it.