Hello, everyone, and welcome to PubMatic First Quarter 2023 Earnings Call. My name is Catherine, and I'll be your Zoom operator today. Thank you for your attendance today. The webinar is being recorded. I will now turn the call over to Stacie Clements with the The Blueshirt Group.
Good afternoon, everyone, welcome to PubMatic's Earnings Call for the first quarter ended March 31st, 2023. This is Stacie Clements with The Blueshirt Group, I'll be your operator today. Joining me on the call are Rajeev Goel, co-founder and CEO, Steve Pantelick, CFO. Before we get started, I have a few housekeeping items. Today's prepared remarks have been recorded, after which Rajeev and Steve will host live Q&A. If you plan to ask a question, please ensure you've set your Zoom name to display your full name and firm. If you would like to ask a question, please use the Raise Hand function located at the bottom of your screen. A copy of our press release can be found on our website at investors.pubmatic.com.
I would like to remind participants that during this call, management will make forward-looking statements, including, without limitation, statements regarding our future performance, market opportunity, growth strategy, and financial outlook. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and other future conditions. These forward-looking statements are subject to inherent risks, uncertainties, and changes in circumstances that are difficult to predict. You can find more information about these risks, uncertainties, and other factors in our reports filed from time to time with the Securities and Exchange Commission, including our most recent Form 10-K and any subsequent filings on Form 10-Q or 8-K, which are on file with the Securities and Exchange Commission and are available at investors.pubmatic.com. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements.
All information discussed today is as of May 9, 2023. We do not intend and undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as may be required by law. In addition, today's discussion will include references to certain non-GAAP financial measures, including adjusted EBITDA and non-GAAP net income. These non-GAAP measures are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our press release. With that, I will now turn the call over to Rajiv.
Thank you, Stacie, good afternoon, everyone. Our focused strategy, strong execution, and deep customer relationships drove revenue in the quarter significantly above expectations. Underscoring the strength of our model and our continued focus on efficiency and infrastructure optimization, the majority of incremental revenue drops to the bottom line, driving stronger than expected adjusted EBITDA, net income, and free cash flow. Our results reinforce the value of our platform, our ability to manage through the current environment, and how we are positioned to continue to capture market share despite the economic uncertainty. We saw sequential improvement through the quarter, it's too early to say if the ad spend environment has crossed and whether the pronounced uptick we saw in March will continue. We therefore remain cautious with respect to our outlook and investment decisions.
A key element of our strategy is to leverage our business model and strong degree of profitability to make targeted investments that position us for outsized market share gains when ad spend growth re-accelerates. We believe the current environment is accelerating consolidation in our industry and will benefit companies like PubMatic that are global, scaled, and profitable. Macro pressures have driven publishers to prioritize their highest margin revenue streams, such as programmatic advertising, and increase their reliance on global omni-channel technology providers to manage a greater portion of their ad tech stacks. The pace of new publisher agreements remains strong. We signed over 65 new publishers in the first quarter. We now have nearly 1,700 publishers and app developer customers, up 14% from a year ago. We expect to grow our roster of customers and increase stickiness with them in this environment.
This is particularly true for our omnichannel video segment, which is a key growth driver. The omnichannel video market is expected to be a $215 billion market this year. A subset of omnichannel video, CTV, is expected to be a $65 billion market this year. Publishers are increasingly adopting programmatic monetization strategies in order to tap into growing ad budgets that they previously were not accessing. As a result, our CTV revenue was up over 50% year-over-year in Q1. We are accelerating the pace of new business growth in CTV. We saw a 10% increase in our CTV publisher customer base over Q4 to 237 publishers. Driving this is the growing recognition within the media and advertising industry of the advantages of programmatic CTV.
Automated transactions are more efficient and data-driven than traditional buying methods, delivering higher ROI to advertisers and revenue gains to publishers. PubMatic has been a leader in providing programmatic technology for more than a decade. We have seen this trend play out time and again across formats and channels. I believe that we will look back on this period as the turning point that structurally changed the nature of CTV advertising towards more programmatic monetization. At the same time, we are growing our existing relationships with premium streaming content providers as we provide the ability to both monetize their inventory and leverage their valuable first-party data. For instance, PubMatic helped A+E Networks grow its programmatic business by passing valuable data in the bid stream, such as content genre and channel, making it easier for advertisers to reach their targeted audiences across A+E's properties and drive campaign ROI.
We recently expanded our partnership with iQiyi, one of the largest online entertainment companies in China, who implemented our OpenWrap OTT unified bidding technology to provide global advertisers more efficient and effective access to the company's streaming inventory. The breadth of our publisher base makes us a scaled provider in the CTV market. We are working with 6 of the top 7 global smart TV providers that have ad-supported streaming services, 4 of the top 8 major addressable broadcast video on-demand streaming platforms in the U.S., and 5 of the top 8 free ad-supported TV streamers in the U.S. We also work with all of the top 5 addressable broadcast video on-demand platforms in both Australia and Japan, two of APAC's largest CTV markets. We are seeing OpenWrap, our Prebid based wrapper solution, drive increased stickiness for publishers across channels and formats.
Originally launched in 2016, over the last few years, we have diligently broadened the footprint of OpenWrap to cover all leading ad formats and platforms, including CTV, mobile app, and web, as well as video, display, and soon to be launched native, making us one of only a few scaled providers with a comprehensive pre-bid based software solution across all major formats and channels. Over the last several quarters, we have seen a surge in adoption of our wrapper solution as publishers increasingly abandon their homegrown pre-bid wrappers for alternative solutions for PubMatic's OpenWrap. OpenWrap is now a critical component of publishers' ad tech stacks and central to their operations teams. Signed OpenWrap agreements grew 27% year- over- year for Q1, as more publishers opt for the performance benefits and customer service PubMatic provides.
In the case of online car shopping site Edmunds, although they already had a header bidding solution, they were seeking an alternative that could give them more control over their yield management. After switching to OpenWrap, they not only saw an average eCPM uplift of 35%, but also identified that the trusted header bidding expertise of the PubMatic team was critical to their success. We also continue to deepen our buy-side relationships, where consolidation is most evident as agencies and advertisers lean into scaled and transparent technology providers that can help them increase operational efficiency and innovation. Supply path optimization expanded throughout Q1 and represented over 35% of activity. We've been able to leverage our profitability to deepen buy-side relationships, investing in our team and technology to offer a single integrated platform that delivers value to our customers.
As we anticipated, the macro environment has been an accelerant for SPO, as major advertisers and agencies seek to improve return on ad spend and streamline their operations. Our existing SPO buyers continue to consolidate more of their business on PubMatic. 5 of the 6 global agency holding companies grew their SPO spend with PubMatic by 20% or more sequentially from February to March. Even with the significant gains we have made in SPO, we see a long runway of growth ahead. In the past quarter alone, we have seen an over 80% increase in buyers interested in engaging in SPO with PubMatic for the first time and now have an active pipeline of several dozen buyers. Long term, we believe there are hundreds, if not thousands, of buyers that we can engage in SPO with globally.
The consolidation we've seen across our industry has resulted in the rapid evolution of the advertising supply chain. We believe the industry is at an inflection point. It's becoming increasingly difficult for publishers and buyers to stay ahead of the curve, requiring significant investment and expertise. As such, we have focused our innovation investments in two areas, both of which expand our addressable market and will create durable long-term growth: supply path optimization and commerce media. Yesterday, we announced Activate, an SPO solution that we have been working towards over the past 18 months and which leverages our recent acquisition of Martin. Activate is an end-to-end SPO solution that enables buyers to execute non-bidded direct deals on PubMatic's platform, accessing CTV and premium video inventory at scale and unlocking unique demand for our publishers. This groundbreaking solution introduces a new industry paradigm for the supply chain of the future.
PubMatic has taken an infrastructure-driven approach to solving some of the industry's biggest challenges that historically have prevented billions of dollars of insertion orders from entering the programmatic ecosystem. Our single-layer technology approach does away with data leakage, discrepancies, multiple hops in the supply chain, opacity, and high aggregate fees associated with having multiple technology providers like SSPs and DSPs. In 2023, approximately $35 billion, or almost 60% of CTV spend, is expected to be transacted via IOs. Direct IOs also account for more than $27 billion, or approximately 18% of online video spend. By providing a path to bring these direct dollars to programmatic, Activate represents a nearly $65 billion expansion of our total addressable market. With Activate, our SPO solutions become even stickier. We expect buyers who use Activate will benefit from greater control over their supply chain and increased ROI.
Publishers will benefit from increased revenue. Over the last few months, as we have engaged with prospective Activate customers, I've been blown away by the magnitude of interest in the solution, which validates our vision and roadmap, as well as PubMatic's market position as a partner of choice. We have seen strong interest among agencies, advertisers, and publishers in every major region and across verticals and buyer size, including global advertiser Mars, agency holding companies Dentsu, Havas Media Group, GroupM, and Omnicom Media Group Germany, and CTV publishers Fubo and LG. As a key launch partner for Activate, GroupM is further expanding its SPO relationship with PubMatic.
The GroupM Premium Marketplace, an initiative that provides GroupM clients with direct, transparent, and efficient access to CTV and online video inventory, is built on PubMatic technology and will now extend to Activate. With Activate, GroupM clients can buy GroupM Premium Marketplace inventory on a guaranteed basis in a more efficient and direct manner, with less cost involved in the supply chain. It is also an opportunity for them to bring clients who heavily rely on direct IOs into the programmatic ecosystem. As a result, GroupM intends to improve their clients' working media and ultimately generate better outcomes. To be clear, Activate is not a demand-side platform. Our industry already has a number of scaled DSPs. PubMatic is not offering a bidder, bid optimization, creative optimization, or a variety of other services that are core to the value proposition of a DSP.
As I mentioned, Activate is specifically designed to transition non-programmatic insertion orders for CTV and online video into non-bidded programmatic buying transactions. PubMatic already has a strong foundation in programmatic guaranteed and private marketplace deals. Activate further expands this opportunity. For PubMatic, we expect to see significant strategic and financial benefits, including Activate being a catalyst for faster CTV and online video growth over the medium term, as well as an accelerated mix shift toward more premium omnichannel video formats, resulting in higher gross and net margins. Activate also facilitates greater stickiness with buyers, which increases revenue visibility and greater stickiness with publishers, allowing them to access unique ad dollars only available via the PubMatic platform. As we bring more advertiser spend to our platform, we are also unlocking opportunities to further scale other areas of our business, such as retail or commerce media.
Commerce media expands on the retail media opportunity set to include not just retailers, but a wide variety of transaction-based businesses like transportation or food delivery providers, travel and event providers, fintech companies, and more. We continue to grow our existing customers like Kroger Precision Marketing, providing the technology and solutions to enable them to activate their retail audiences across PubMatic's CTV, video, and display inventory. We're also growing our footprint with additional commerce businesses that have high transaction volumes and valuable data. Over the past quarter, we've had several new customer wins, such as Lyft and Tripadvisor, who are using our growing suite of on-site monetization solutions to help grow their commerce media businesses. This is a tremendous growth opportunity for us with an estimated market size of more than $120 billion.
Data access and control are key areas of importance for commerce media, both areas where PubMatic already has market-leading solutions. In addition, we have the financial profile to make focused investments in technology that specifically aligns to current and future commerce media needs, such as audience extension, on-site multi-format monetization, and operational efficiencies to help commerce media companies scale their businesses further. Operating under a similar playbook as we did with SPO, making focused investments that lead to market expansion and high-growth revenue, we believe our strategy around commerce media will have similar returns. I look forward to sharing more with you in the coming quarters. Our execution over the course of this quarter reinforces the value of the PubMatic platform within the digital advertising ecosystem and our ability to continue to consolidate the market as advertisers seek alternatives to the walled gardens.
We are rapidly growing the platform with new publishers and buyers and creating greater stickiness with existing customers. Our omnichannel platform, global scale, and strong financial profile are key differentiators and enable us to rapidly expand our addressable market. We will continue to prioritize long-term growth opportunities through highly focused investment, which we believe will drive outsized market share gains and greater shareholder returns. I'll now turn the call over to Steve for the operational and financial details.
Thank you, Rajeev, and welcome everyone. Revenue in the first quarter was $55.4 million, above guidance and +2% on top of last year's growth rate of 25%. Importantly, year-over-year results improved each month through the quarter. With our focus on execution and efficiency, the majority of our revenue outperformance dropped to the bottom line. adjusted EBITDA was $8.4 million or 15.1% margin. We also continued our long track record of cash generation with $12.8 million in net cash from operating activities and $5.3 million in free cash flow. Against a backdrop of challenging macro conditions, we delivered against the core objectives we laid out last quarter, deepening our publisher and buyer relationships, driving omni-channel revenues, achieving incremental efficiencies from our own and operated infrastructure, and investing in high-value product innovation.
As I mentioned on our last call, January revenues started off slow, particularly in display and online video. We saw sequential improvements into February. Trends further improved into March across all key formats and channels. For the quarter, revenues from omnichannel video, which span across desktop, mobile, and CTV devices, represented approximately 30% of total revenues and grew 13% year-over-year. Within this category, CTV revenues increased by over 50% year-over-year. As anticipated, display revenues comprised of mobile and desktop channels continued to be soft throughout the first quarter. Showed monthly sequential improvement and came in slightly better than expected at - 7.5% versus Q1 last year. This was an improvement over Q4.
From a regional perspective, EMEA continued its strong performance throughout the quarter and grew double digits year-over-year. Americas revenues were down less than 1% compared to Q1 2022 and improved each month in the quarter. Sticky customer relationships drove healthy multi net dollar year re-retention rates. On a trailing twelve-month basis, PubMatic net dollar retention was 105%. As a result of our global go-to-market efforts and targeted investments, we continued to expand our supply path optimization relationships, which accelerated to over 35% of total activity on the platform. Similar to our publisher strategy, once we land new SPO relationships, our ad solutions team works closely with buyers on detailed growth plans across formats and geographies.
Viewed through the same retention lens as publishers, the net spend retention rate for SPO buyers with at least three years of spending was 116% on a trailing twelve-month basis. Our ad vertical diversification again proved to be a valuable asset for us in Q1. Food and drink, health and fitness, and travel in aggregate increased over 30% year-over-year. This growth helped offset declines in technology, arts and entertainment, and hobbies. The shopping and personal finance verticals ended the quarter in line with Q1 last year. In total, our top 10 ad verticals grew year-over-year. Overall, our business is in excellent shape. For an extended period of time, our strategy, execution, and global scale has enabled us to deliver positive adjusted EBITDA for 28 consecutive quarters. We have also generated cash from operations every year for 9 straight years.
Since going public in December 2020, we have generated over $90 million of free cash flow. With our long-term focus on profitability and cash flow, we take a nimble approach to managing our business. We have put in place multiple initiatives to drive productivity across our teams and lower operating costs. For example, we have realigned our global customer success team to ensure appropriate support relative to customer needs and business opportunity by market. This effort is supported by a specialized client team based in India. Over the long run, our owned and operated infrastructure allows us to achieve significant operating leverage and control, which consistently delivers efficiencies for us and great outcomes for our customers. With this control, we are proactively managing our CapEx lower in 2023 beyond what we originally planned.
Our optimization efforts are already ahead of schedule. We anticipate improved gross margins later this year and next. In Q1, we processed over 46.5 trillion impressions on our platform, an increase of 43% year-over-year. On a trailing 12-month basis, we reduced our unit cost by 60% year-over-year. In addition to our capacity optimization work that's expanding total throughput, we're also making progress in using this capacity for the highest value display and video impressions. Taking our various optimizations and positive mix trends together, we anticipate lower CapEx spend in 2024 relative to revenue growth. Our Q1 gross margin was 57% ahead of expectations. As a reminder, our cost of revenue includes depreciation for prior capacity build-out and third-party hosting costs, which are largely fixed in the near term. We anticipate improving gross margins each quarter through the calendar year.
Q1 GAAP OpEx was $42.2 million, or a 32% increase year-over-year. Included in this total were incremental costs of $2.8 million related to our Martin acquisition and $2.5 million related to our January in-person global sales conference. Excluding these incremental costs, operating expenses increased 15% year-over-year. GAAP net loss was $5.9 million, or - 11% net margin. Q1 non-GAAP net income, which adjusts for unrealized gain or loss on equity investments, stock-based compensation expense, acquisition-related and other expenses, and related adjustments for income taxes, was $0.9 million or 2% of revenue. Q1 diluted EPS was -$0.11, and non-GAAP diluted EPS was $0.02. Turning to cash, we ended the quarter with $173.2 million in cash and marketable securities and no debt.
We generated $12.8 million in cash from operations and $5.3 million in free cash flow. Our consistent cash generation enables us to invest in key areas for long-term growth and market share gains. As of April 30th, we have repurchased 1.1 million shares of our Class A common stock for $15.4 million in cash. We have approximately $60 million remaining in the repurchase program. Given our strong balance sheet, we are actively using our capital to significantly expand our addressable market, deepen our customer relationships, and drive market share gains. We believe this capital allocation strategy, coupled with our repurchase program, will drive long-term shareholder value. Now turning to our outlook. The sequential month-over-month revenue improvements we saw in the first quarter were positive signs, but we remain cautious about the next couple of quarters.
Macro conditions continue to be challenging, and advertisers remain cautious. Arguably, new sources of uncertainty have entered the picture that may impact consumer spending, such as US Fed interest rate plans, the growing perception that inflation is stickier than expected, and the effect of tightening credit conditions related to debt ceiling discussions and US banking system concerns. Our April results reflected stable, positive year-over-year trends, as well as indicators of ongoing macro challenges. On positive side, impressions for CTV, online video, and display were all higher year-over-year, ranging from double-digit to single-digit percentage increases. However, the extended macro pressure since mid-2022 has been gradually pushing CPMs down. In April, omnichannel video CPMs were down mid-single digits year-over-year. Overall, CTV revenues were higher, while online video and display revenues were down. The net effect was that our April revenues were roughly flat year-over-year.
With the step down in CPMs compared to last year, we see continued revenue pressure in Q2 and are anticipating online video and display revenues will decline in the single digits, while CTV will grow in the double digits. In light of our overall revenue mix with both positive trends and continuing headwinds, we anticipate Q2 revenue will grow sequentially from Q1 and be in the range of $58 million-$61 million. Our view on the market rate of growth for calendar year 2023 and our ability to continue to grow market share remains unchanged from last quarter. On the cost side, as we had outlined in our prior earnings call, we have been taking actions to drive incremental productivity across every aspect of our business.
For example, we are well on our way to adding approximately 20% incremental processing capacity by the end of Q2 without a corresponding step-up in CapEx. Accordingly, as compared to 2022, we expect GAAP cost of revenues to increase at a slower sequential rate each quarter in the low single digits. With capacity optimizations, continued strong execution, and seasonal revenue increases, we expect second half gross margins to return above 60%. We expect Q2 GAAP OpEx to decline by about $1 million compared to Q1, followed by sequential quarterly increases in the low single-digit percentages thereafter. Given our revenue guidance and our optimized cost structure, we expect Q2 adjusted EBITDA will grow significantly from Q1 and be between $13 million and $15 million, or approximately 23% margin at the midpoint.
We expect profitability to improve as the year progresses, driven by the full effect of our cost reductions, optimizations, and typical seasonal increases in ad spend. We anticipate Q3 and Q4 adjusted EBITDA margin levels to be above 30%. For the full year, we expect adjusted EBITDA margin to be over 30%. Turning to CapEx. As a result of capacity optimizations and operational efforts to drive higher value impressions onto our platform, we are lowering our expected investments this year to $12 million-$15 million, more than 60% lower than 2022. These initiatives and others in the pipeline will enable us to incrementally increase free cash flow over time. In summary, our strong execution in the quarter demonstrated our ability to operate successfully within this macro environment. We are on track to drive long-term growth, expand our market share, and increase shareholder value.
As a result of our durable business model, we anticipate generating free cash flow on par with 2022, delivering margin expansion for the balance of 2023 and beyond, and positioning PubMatic for revenue acceleration when ad spend stabilizes by fostering deeper customer relationships, focusing on high growth omnichannel revenues, and launching new products like Activate that incrementally expand our total addressable market. With that, I'll turn the call over to Stacie for Q&A.
Thank you, Steve. As a reminder, you can ask a question by raising your hand located on the dashboard, or if you're on your phone, please press star nine. In the interest of time, we ask that you please limit your question to one and one follow-up. With that, let's get started. First question goes to Shweta Khajuria at Evercore. Please go ahead, Shweta.
Thank you, Stacie. Rajeev, could you please provide more color on Activate so Magnite has ClearLine? How is Activate a differentiated product when you approach advertisers and agencies with that product versus industry? I believe there are other competitors as well. Then Steve, how should we think about revenue growth for the year? It looks like there was a comment on industry growth being low to mid-single digit growth rate. Is that what you're implying for the year? Thank you.
Sure. Let me take the first part, and then I'll turn it over to Steve. Hello, Shweta. Activate is an extension of our highly successful SPO strategy. Obviously, we've been very focused on innovating the digital advertising supply chain, and we take an infrastructure-driven approach. What we're doing with Activate is to address many of the technological barriers inherent in the current ecosystem that stem from having multiple technology providers like SSPs and DSPs. Our focus with Activate is to bring in premium video, so that's both online video and CTV, that today is trapped or stuck in IO-based transactions and transition that into non-bidded programmatic transactions. That's programmatic guaranteed and also fixed price PMP deals. Obviously, the roster of launch partners that we have is, I think, a great validation of that strategy.
With respect to ClearLine, you know, I think our vision is quite different. I heard Magnite CEO, Michael Barrett, describe ClearLine as being for, quote-unquote, corner cases. We view this as a paradigm shift in the industry, to be able to change how the technology is delivered and do away with many of the challenges which I spoke about earlier that are inherent in the SSP and DSP structure. Second, as I understand it, ClearLine is built on top of SpringServe, which is for connected TV transactions only, and publishers need to have the SpringServe ad server in place. Our solution, our approach, we think, is superior in that it's ad server agnostic.
There's a fairly fragmented CTV ad server market out there with FreeWheel, with Google, with Publica, with SpringServe. We are not limited to a single ad server, so we think that's a significant value proposition for buyers. Then our solution also works with online video and other formats. As you know, you know, the online video market is roughly 3x the CTV market. Steve,
Nice to reconnect. With respect to 2023 revenue growth, you know, we have talked to a lot of customers, you know, looked at our own trends, industry data, and we think that based upon the macro, the trends, that our best assessment is that overall ad spending will probably grow in the low to mid-single digits. When we step back and think about sort of what we're focused on, and how we've been growing over time, we think that we're gonna outpace market growth. If you actually take a look at the outperformance that we achieved in Q1 relative to our expectations, plus our guide for Q2, you're probably somewhere near about 4%- 4.5%, 5% year-over-year growth. We're feeling good about the trajectory.
Clearly, there's positives and some areas of concern that we're monitoring closely, but we think that we're on track to continue to, you know, achieve what we've been focused on, which is, you know, generate free cash flow on par with 2022. We think we're well positioned, you know, as Rajiv just called out, the new product area with Activate to accelerate revenues, so when ad spend stabilizes. Ultimately, I think from the long-term perspective, we're feeling really good about our margin expansion opportunities as we establish new levels of efficiency, both on the P&L, but also in terms of CapEx.
Okay. Thanks, Steve. Thanks, Rajeev.
Thank you, Shweta.
Our next question comes from Matt Swanson at RBC. Please go ahead, Matt.
Thanks, guys. I apologize in advance for the background noise. It feels like you guys are maybe incrementally more positive around CTV this year, especially that shift to programmatic. Can you just talk a little bit more about I know this has been the vision for a while, Rajiv, but what's accelerating that right now? Is it the increased supply? Is it the focus overall on ad spend optimization and ROAS, or is it maybe, you know, a slightly weaker demand environment leading to, you know, more programmatic to drive CPMs?
Yeah. I, why don't I take that, and Steve, feel free to chime in. Hello, Matt. You know, we commented earlier in the year and certainly in the prepared remarks today that the current macro environment is likely to be, and I think we're seeing this, a structural growth driver for programmatic CTV. As you know, our, you know, whole CTV strategy has been focused on, you know, skating to where the puck is going, if you will, which is towards programmatic transactions. We've seen this before. Arguably, real-time bidding itself came out of the financial crisis in, you know, 1929, 2010. We've seen how economic cycles can be a real, you know, driver of programmatic innovation and acceleration in our ecosystem.
I think compared to last year, you know, there's a lot of pressure on streaming publishers. Obviously, they've got to get to profitability faster, which means they need to find more revenue. At the same time, there's a lot more supply coming into the industry. The likes of Netflix and, you know, Disney and HBO and the like, you know, moving towards ad-supported streaming tiers, and obviously there's others as well. You have the macro pressure. I think all of that creates a premium on innovation and new solutions. The third piece is that macro pressure from an advertiser perspective, where, of course, advertisers and, you know, CFOs and CMOs are looking for more accountability of their spend.
I think all of that sets up well to be a significant tailwind for programmatic monetization. There's likely to be, as, you know, Steve has called out, some CPM pressure in the near term, if, you know, if there's less budgets, less growth rate in budgets than there was in the past, we could see some CPM pressure. I think that's mostly near-term kind of noise. We're very excited about the CTV growth, and obviously with our Activate announcement, and you saw some of the publishers involved in that, like LG and Fubo, we're getting great feedback from publishers in terms of their excitement around how this can bring them more dollars.
Yeah. What I just briefly add, Matt, I mean, one of the most important things to know about programmatic is that, of course, we have the resources to consistently invest. Of course, the Activate launch is a demonstration of that. We see this as a long-term play in terms of expanding addressable market and our ability to be a leading innovator in this space. You know, there's, you know, as in any market that's growing rapidly, there's gonna be some pauses or plateaus. This is a secular long-term positive growth area for us, and we're playing an important part through our innovation.
If I, if I could ask a quick one on Activate. I know this is probably an impossible question, but I mean, it's great to hear the enthusiasm from your customer base and also the launch partners. How early do you think you could start to monetize Activate? Like, will it show up in some level, you know, in Q2, Q3? Like, are people gonna be up and running on the platform? I'm not gonna have you try to guess to what extent. I know you won't tell me anyway.
I'll, maybe I'll take it, and then Steve, you can, you can chime in. But,
Sure.
I'm pleased to tell you that we've already sent out our first invoice to a buyer for Activate. You know, that tells you that the product is real and it's up and running, and customers are seeing benefit from it. Publishers are starting to see revenue, you know, through those transactions. Obviously, it's very early days, so it's a very small base as we get going. You know, this, the balance of the year is really gonna be about creating proof points, growing the customer base, and showing our customers the benefits, you know, that we believe are there from Activate, and then positioning it for, you know, significant scale and ramp in 2024.
Thanks, Rajiv. Our next question comes from Jason Helfstein from Oppenheimer. Please go ahead, Jason.
Hey, guys. Just Rajeev, can you talk about the changes that Google announced, as far as kind of trying to bypass or modify the waterfall and how you think it impacts you guys and just SSPs in general? Just a follow-up question. In general, how should we think about Activate take rates versus the overall take rate? Thanks.
Yeah, sure. With respect to Google, you know, the change that they made is to replace waterfall mediation with real-time bidding or programmatic auctions. You know, I think this is I mean, to me, the only surprising thing is that it's 2023, and they're doing it, you know, as opposed to 2020 or 2021. I think it's just a further example of the ecosystem, the general movement in the ecosystem towards programmatic auctions, and away from, you know, waterfall or other types of more traditional methods. We could draw, I think, a parallel towards CTV, which is also primarily in waterfall monetization, but transitioning towards auctions.
as a material impact on us one way or another. There's a possibility that it will open up more mobile app inventory for us. I think it's a little bit early to see that. But typically what we've seen is that when impressions are trapped in a waterfall type of setup, then we don't have full access to the inventory that we would like. And so when things move to real-time bidding, then it's more of a parallel access where all platforms are called in parallel. And so there's an upside scenario here where we will get access to more mobile app inventory than we're seeing today.
You know, mobile is a significant chunk of our business, and so we would look to grow the impression volumes and increase revenue as a result.
I'll take the Activate take rate question. From our perspective, it's all about, you know, meeting our customers' needs, both the buyers and the publishers. A key thrust as we've outlined in terms of, you know, what we're trying to accomplish is to make the ecosystem more efficient. We would anticipate that the economics would reflect sort of that improved efficiency. It's also about effectiveness because what we're taking out are, you know, the hops. We are improving the transparency, lower latency, and just, you know, overall, a clear line of sight from, you know, the buyer to the publisher.
Our long-term plan is to work with the customers, the publishers, and our buyers to find sort of the right economic model that will expand the opportunity. This is a net new opportunity for the programmatic space, so there's a lot of opportunity for us to take advantage of.
Thanks, Steve. Our next question comes from Miles Jakubiak at KeyBanc. Please go ahead, Myles.
Hi, there. Thanks for taking the questions. First, with supply path optimization growing and now over 35% of revenue, how is that changing your ability to access inventory from publishers? Just to follow up on the Activate product, any thoughts more broadly on how that changes your relationships with G-DSPs? Thanks.
Sure. Yeah, I can take both of those. First, with respect to SPO and access to inventory, I think that was the first part of the question, Myles. You know, what we see is that as SPO is a growing share of budgets on our platform, it becomes an additional powerful reason for publishers to work with us, right. We have increasingly advertisers and agencies, you know, proof points, case studies or conversations in the industry, where those buyers are saying, "Hey, if you wanna access," to the publisher, "If you wanna access more, of my spend, then PubMatic is the platform that you need to be connected into to receive that spend." It's certainly a key part of publisher acquisition conversations.
As we called out, you know, we're seeing acceleration in publisher development with over 65 deals signed in Q1 of this year, taking our overall portfolio to almost 1,700. We definitely see it as a key part of the flywheel. You know, we bring more publishers on board, and then that in turn can help us bring more demand on board. I think Activate, you know, further accelerates that in the sense that the dollars that are flowing on our platform through Activate, again, they're, you know, small today as we just get going, but expected to be meaningful over time. You know, those dollars are only available on the PubMatic platform.
It's another reason, particular reason why publishers will wanna work with us in order to get access to those Activate dollars. Now, as it relates to DSPs, we think this is very much a positive for DSPs. The reason is that by definition, the budgets that we are bringing into the programmatic ecosystem, these are budgets that DSPs were not able to access previously. These were IO budgets for CTV and online video that together total about $65 billion per year. By definition, DSPs are not accessing these budgets.
What we're doing similar to that, you know, Google shift that we talked about towards real-time bidding, what we are doing is transitioning these dollars into programmatic, starting with non-bidded transactions, PG and private marketplace non-bidded transactions. My expectation is that those will evolve to bidded transactions over time, that programmatic evolution, and then DSPs will very much be able to participate in those dollars. Our focus here is on growing the pie for everyone, which is to the DSP's benefit as well.
Thank you, Rajeev. Our next question comes from James Heaney at Jefferies. Please go ahead, James.
Great. Thanks for taking my questions. Rajeev, as we think about what you've done with the Martin acquisition and now the launch of Activate, should investors buy side? My second question for Steve, can you talk about why you expect to see such a pronounced Q2 slowdown after putting up the Q1 upside that you saw? Is it fair to say there's just some element of conservatism or caution? Appreciate the help. Thanks.
Sure. Yeah. On the, on the first question, you know, our investment in capabilities for the buy side, I would say that's not new. We started on this supply path optimization, you know, journey, I think roughly four years ago now, maybe a little bit longer than that. That was with the realization that we could think about and build a roadmap around how to help buyers generate more ROI on our platform, so that they shift those $dollars to our platform, and that in turn would generate more revenue for our publishers. That again is a journey that started four years ago, and so it's been a key part of our product development and roadmap. Activate is just the latest solution, you know, extending that SPO roadmap.
With respect to the Martin acquisition, you know, as we think about our roadmap, we're constantly on the lookout for acquisition opportunities that might help us accelerate that roadmap and be able to, you know, deliver capabilities or deliver functionality, you know, faster than we would be able to do on our own, you know, building organically. We did find, we did anticipate and did find that to be the case with Martin, and I would say we continue to be on the lookout for other acquisition opportunities for technology, whether it's pub side or buy side, that help us accelerate the roadmap. Steve, over to you.
Sure. Hi, James. You know, the way to think about our Q2 guide is in the following context. You know, obviously we had a positive April on a couple key fronts I shared in my prepared comments. You know, good year-over-year growth in impressions, CTV, online video, display, so really positive. What you're seeing flow through the system is, you know, with the extended macro pressure since about mid 2022 on CPMs, when you look at the year-over-year data, it's not really a great apples for apples comparison. A couple of things to bear in mind.
You know, from a trend perspective, meaning taking how we outperformed in the first quarter and looked at our guidance relative to that performance, we're right on track with what one would expect on a seasonal perspective, meaning, you know, 8%-10% sequential movement. That is in line with sort of expectations, and I'd say it's realistic based upon the data we have in front of us. Now, going back to the year-over-year comparison, you know, one thing to remember is last year, second quarter, we grew about 27%, so huge quarter last year, so we're obviously comping a tough quarter. When you take the step down in CPMs, rolling that through, that's the outcome is this year-over-year slight decline.
Big picture, the core fundamentals of the business are completely on track. Number one, we're able to continue to deliver marginal profitability. We've been driving our free cash flow. You know, in the first quarter was positive, which is a significant accomplishment at this time of the year. When you step back and think about the structural changes that we've made, we anticipate margin expansion over the course of the year. You factor in what I would describe as a pragmatic, realistic guide for Q2, plus our structural improvements in our cost structure, we're, you know, going from roughly $8 million in EBITDA in the first quarter to $13 million-$15 million in the second quarter.
We think that we're being realistic and appropriate given sort of where the macro is and the underlying trends in our business.
Okay. Our next question comes from Tim Nollen at Macquarie. Please go ahead, Tim.
There we go. Can you hear me okay?
Yes, we can, Tim.
Yep, great. Hi, Rajeev. Hi, Steve. I'd like to pick up on your comments on capacity increases along with CapEx decreases, which is a pretty unusual combination of factors. Most companies have to boost CapEx to boost their capacity. It's a great position to be in. I wonder if you could talk a little bit about, like, what are the needs for the increased capacity? I mean, not to sound naive about it, but, you know, Activate or more CTV, you know, trading, just whatever the factors are that will cause you to need more computing capacity. Maybe it's a qualitative rather than a quantitative question, if you could address that. The CapEx reductions, is this maybe like a temporary, like a one-year sort of thing?
Will you have to get back into a CapEx reinvestment cycle at some point to raise?
Sure.
-capacity?
Yep.
You know, to utilize the items.
Great. Thanks, Tim. Let me start out with the first part, just, you know, reflecting on sort of the benefit of capacity expansion. You know, we called out that we continue to add significant publishers to our base, as well as, you know, getting, you know, product upsells into our existing customer base. There's always a potential opportunity to make more incremental revenue by going deeper and broader in our industry. We're doing it very selectively. I made a comment in my prepared comments regarding sort of our focus on making sure that we're bringing on the most profitable impressions, which obviously has a benefit to the top line, but also the bottom line.
It's not really a situation where we can't take advantage of the capacity. The real question is how can we do that most effectively? After the last couple of years of significant build-out, you know, we have turned our attention this year to optimize that existing capacity. There's multiple ways technically that we are doing that. We started that process latter part of last year and continued. Where we are today is we're ahead of schedule, and we're gonna be able to incrementally add more capacity to take advantage of the deeper relationships we're establishing, the new publisher relationships, and do it without the similar CapEx investments that we've made in prior years.
When you step back and reflect on sort of what the benefit of that is, it's we believe that it's gonna improve our margins over time. As ad spend stabilizes and then reaccelerates, we're gonna be in a great position in that regard. We think the kinds of changes we're making in terms of our CapEx approach will likely allow us to deploy less CapEx in the future than we have historically. That would again, be a positive for free cash flow generation down the road. When you think about sort of the things we're doing, it's multifaceted. It's still focused on, you know, growing in our industry. This is an industry that has long-term secular tailwinds for the foreseeable future.
We are structurally modifying how we operate to become even more profitable in the future.
Is the CapEx a temporary, I don't know, one-year or two-year whatever kind of a lull now?
No. We think that we're making changes that will allow us to reduce our rate of CapEx relative to revenue growth going forward.
Great. Thank you.
Our next question comes from Dan Day at B. Riley. Please go ahead, Dan.
Hey, afternoon guys, appreciate you taking the questions. There's been some industry chatter and debate about SSPs potentially kind of transitioning away from the take rate model, maybe towards a more kind of subscription SaaS model. Maybe just if you could comment from a high level on the pros and cons of the two approaches as you see them, whether the launch of something like Activate, more of this sort of two-sided marketplace approach to the business changes the calculus as you think through that over time? Thanks.
Sure. Yeah. Dan, my view long term is that pricing in this industry should be on a subscription basis rather than on a, you know, percentage of revenue, kinda take rate basis. We work, you know, every quarter, every year to continue to innovate our pricing. I think as the industry consolidates, there's real potential to move to subscription pricing long term. I think tactically one of the challenges has been that historically, our economic buyer is the publisher. Within the publisher, it's usually a VP of sales or a chief revenue officer who has a digital ad revenue budget, but does not necessarily have an IT, you know, kind of tools and systems budget. As a result, the revenue share has been the primary, you know, model for pricing within our industry.
As we, you know, engage in more supply path optimization, as we engage with Activate, with buyers.
You know, the economic buyer is shifting. I think there are some paths long term towards subscription, and that's, you know, something that we would very much welcome. I think it would in and of itself bring further consolidation to the industry, which is likely a net positive for everybody.
Very interesting answer. Thanks, Rajeev. Just hopefully, one more quick one. The buyback tracked pretty close to free cash flow in the quarter. Is the way to think about it for the remainder of the year just that, like, the free cash flow dollars are gonna be your mark to stock buybacks until that's exhausted?
Dan, you know, the way that we've set up the repurchase program is it's a preset plan. It's a variety of parameters in place. You know, we had a plan that got authorized for two years at $75 million. We're just executing against that plan. We have a, you know, a defined plan, and then we have an open market plan. I think, you know, we're gonna be opportunistic relative to the open market opportunities, and then the plan will just operate.
Okay. Great.
Thank you, Dan.
I'll turn it over. Thanks, guys.
Thank you. We have time for one more question from Mauricio Munoz at Raymond James. Please go ahead.
Thank you for taking my question. Rajeev, just one on retail media. How does the fragmentation in the retail media ecosystem positions SSPs as consolidators? In terms of the mechanics of the space, what needs to happen to make SSPs much more critical? Thank you.
Sure, yeah. Retail media, you know, as I talked about in the prepared remarks, is a, you know, key part of what we're focused on. I think there's a couple of reasons why we see the SSP as being highly relevant in retail media. First it may be just useful to think about, you know, what are the different monetization opportunities within retail media. On-site monetization, there's both sponsored products as well as, you know, display or video ad units. Then with off-site monetization, there's audience extension and retargeting. You know, if you think about those use cases, the SSP is really core to a number of those use cases.
We talked in the earnings call earlier about, you know, what we're doing with Lyft and one other partner, where we're really focused on the audience extension piece. Helping those, sorry, on the on-site monetization piece. Helping those publishers monetize the inventory that they have on their properties, that's obviously very core and kind of bread and butter to what we do as an SSP. When we think about the breakdown of on-site versus off-site monetization, when you include sponsored listings, on-site monetization is the majority of monetization inside of commerce media. We think that's, you know, really sets up the SSP to be a critical part of the stack for any, you know, participant in commerce media.
As we also talked about, we think the opportunity is actually much bigger than purely retail, where there's a lot of, you know, businesses that have transactions, and data, like a Lyft, for instance, that are not strictly retail, or in fintech, in travel, where we can extend our capabilities. We still have work to do, I would say, to round out our portfolio of offerings to be fully relevant in all aspects of on-site and off-site monetization. We expect to bring more components to market, over the course of this year, as it is one of our two key innovation focus areas alongside supply path optimization and Activate.
Thank you. Very helpful. Thank you.
Thank you all. We're just about at the hour, and there are no more additional questions in the queue. I'm gonna turn it back over to Rajiv for closing remarks.
Thank you, Stacy. We delivered strong execution in the quarter as the industry continues to consolidate. We're building deep customer relationships, adding new publisher logos at an accelerated pace, and have a robust pipeline of buyers interested in supply path optimization. Of course, we're really excited to have launched Activate, which allows us to bring CTV and online video and search and order transactions into the programmatic ecosystem, tapping into a nearly $65 billion TAM expansion. On the operational side, we anticipate incremental margin expansion throughout the year as we continue to optimize prior investments and drive efficiency throughout our business, resulting in strong cash flow. The ecosystem is rapidly evolving, and we're poised to grow faster than the market rate of growth.
We look forward to seeing many of you at our upcoming investor events, including Oppenheimer's virtual conference on May eleventh, Evercore's conference on May thirty-first, Jefferies software conference on June first. In addition, we'll be hosting in-person meetings with RBC and B. Riley. Please reach out directly to those firms or contact Stacy or Keenan with investor relations. Thank you all for joining us today.