DoubleVerify Holdings, Inc. (NYSE:DV) Q4 2023 Earnings Call Transcript
DoubleVerify Holdings, Inc. (NYSE:DV) Q4 2023 Earnings Call Transcript February 28, 2024
DoubleVerify Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the DoubleVerify Fourth Quarter and Full-Year 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce you, Tejal Engman, Investor Relations. Thank you, Tejal. You may begin.
Tejal Engman: Good afternoon, and welcome to DoubleVerify's fourth quarter and full-year 2023 earnings conference call. With us today are Mark Zagorski, CEO; and Nicola Allais, CFO. Today's press release and this call may contain forward-looking statements that are subject to inherent risks, uncertainties, and changes, and reflect our current expectations and information currently available to us, and our actual results could differ materially. For more information, please refer to the risk factors in our recent SEC filings, including our annual report or our Form 10-K. In addition, our discussion today will include references to certain supplemental non-GAAP financial measures and should be considered in addition to, and not as a substitute for, our GAAP results.
Reconciliations to the most comparable GAAP measures are available in today's earnings press release, which is available on our investor relations website at ir.doubleverify.com. Also, during the call today, we'll be referring to the slide deck posted on our website. With that, I'll turn it over to Mark.
Mark Zagorski: Thanks, Tejal, and good afternoon, everyone. 2023 was DV's third year as a public company and one where we continue to deliver industry-leading revenue and profitability growth fueled by AI powered product innovations that drove a higher ROI for our customers and accelerated DV's global client expansion trajectory and market share gains. In 2023, we grew total revenue by 27% year-over-year to $572.5 million, and our platform measured over 7 trillion billable media transactions across a growing number of digital media properties, formats and devices. DV’s continued expansion into new global markets and media environments fueled over $120 million of incremental revenue during the year and established our scale as not only a market differentiator, but also a springboard for future revenue growth, especially internationally, where our measurement business grew over 40% last year.
Our focus on topline growth in 2023 was matched by our commitment to profitability and cash flow generation. Our business generated a 33% adjusted EBITDA margin and approximately $120 million of net cash from operating activities in 2023, an increase of 26%, even as we invested in growing our global workforce, expanding our premium solution set and integrating a new acquisition, Scibids AI. In the fourth quarter, we ended the year with a revenue growth rate of 29% and adjusted EBITDA margins of 38%. This rare and winning combination of growth and profitability allows us to continue to invest in AI and automation, which, in turn, helps drive our global scale and connectivity and fuel market-leading product innovation. These are DV’s core differentiators and the engines of our long-term growth.
Before I discuss the numerous drivers of our strong performance and market share gains in the quarter and the year in detail, let me highlight the two growth areas I am most excited about for 2024 and beyond. Social media solutions and Scibids AI. DV’s social media verification solutions continue to add unique value in challenging advertiser environments and will only become more essential during the upcoming election season. We grew our top 700 customers’ adoption of DV’s social measurement solutions by 10 percentage points in 2023 to 54%, helping propel the sector’s revenue growth to nearly 50% for the year. In addition, we grew fourth quarter social measurement revenue by 21% sequentially, and all of our new measurement wins in the fourth quarter signed up for social coverage.
As social media gains a larger share of advertiser wallets, our position as one of the few companies scaled to operate independently across this media puts DV in a unique and differentiated position. Scibids AI, which we acquired in the second half of 2023, has generated an incredible amount of excitement with current and prospective clients. We have integrated its sales functions into our commercial org and started connecting its platform to our core solutions, essentially leveraging Scibids AI to transform the entire verification category. With Scibids, DV has a unique value proposition that allows advertisers to protect their brand equity and reduce media waste while simultaneously improving core performance KPIs such as lower CPMs and higher reach.
This seamless achievement of both protection and performance is a differentiator that is helping DV win new deals. In fact, 40% of our large new logo wins since the beginning of this year are actively testing Scibids AI. With expanding Scibids coverage across key programmatic DSPs and major social media platforms, our customer adoption and scale will allow DV to unlock an entirely new, performance marketing TAM. Speaking of wins, we are pleased to have delivered a banner fourth quarter for new customer wins with strong continued win momentum year-to-date. Fourth quarter to date, we’ve won several iconic and category-leading enterprise logos, including Pepsi, Walgreens, and Haleon. We maintained an 80% plus win rate across all opportunities in 2023, with 62% of our full year and 59% of our fourth quarter wins being greenfield, which we define as wins where the advertiser wasn't using third-party tools for the business that DV won.
These great Q4 wins add to the powerful roster of new deals we closed in 2023, which included: Air France, Uber, Ulta Beauty, General Motors, Total Energie, NFL, Rolex, Sam’s Club, Pizza Hut, Revlon and Liberty Mutual. We work with approximately half of the world’s top 1000 advertisers and continue to acquire large new enterprise logos. Leading brands choose DV not based on price, but because we offer proprietary and market-leading technology, unrivaled brand equity protection and tangible ROI improvement. We also have the ability to significantly expand within the nearly 450 top advertisers that we currently do business with, as DV’s fees comprised less than half a percent of this cohort’s digital ad spend in 2023. We expect to double our share of their media spend over time as we: one, expand these valued customer relationships across geographies and media environments, and two, upsell them our broader integrated product suite of activation and measurement solutions.
As mentioned last quarter, over half of our top 700 customers use less than four of DV’s seven core products, and that does not include Scibids, creating a vast expansion opportunity within our existing customer base. In addition, we have leaned into our customer acquisition and retention plan of building higher value, more strategic customer engagements that leverage our real time data to drive superior customer outcomes and ROI. Over the last four years, DV has more than doubled the number of customers and revenue while increasing our overall MTF and expanding the bundle of solutions our customers use from us. As media performance joins media quality protection as a core part of our superior value proposition, closed loop optimization leveraging data partnerships like we have with Attain, fueled by data insights from Scibids AI and activated via proprietary solutions like ABS, will help us to further enhance our premium value position in the marketplace, elevate and differentiate the level of our customer engagements and set DV up for continued future market share growth.
Clients like Lexus have used DoubleVerify premium solutions to reduce media waste, increase safety and drive site traffic by 3.5x. DV maintains and will continue to maintain our strong pricing and margin profile based on these higher levels of strategic customer engagement, driven by the measurable ROI that our premium solutions deliver. In the fourth quarter and early this year, we achieved product and platform expansion milestones that we expect will fuel our growth in 2024 and beyond, across all major media environments: social, CTV, retail media networks and the open web. Let me discuss these in the context of our core differentiators, namely: our rapidly growing global scale and connectivity and our market defining innovation, both of which are powered by our advancements in AI and automation.
Beginning with social, we increased social measurement revenue by 62% year-over-year in the fourth quarter and by 48% for the full year, significantly outperforming our competitors as well as the growth rate of the broader social ad sector. During 2023 and the beginning of 2024, we meaningfully expanded our measurement coverage across key social platforms, widening our global scale and connectivity across this vital media environment. According to Magna Global, social media advertising made up more than 60% of digital ad spend ex-search in 2023, yet only 15% of DV’s total revenue was attributable to social measurement in 2023. As we continue to expand our product coverage across key social platforms, we expect customer adoption of DV’s solutions across social media to fuel revenue growth for years to come.
On Meta, we’re pleased to announce that following our successful beta tests in the fourth quarter, we launched DV’s brand safety and suitability measurement on Facebook and Instagram Feeds and Reels in the first quarter of 2024. This release is in general availability. For the first time, global advertisers are able to activate DV’s AI-powered classification technology to protect their brand equity and comprehensively measure media quality on Facebook and Instagram Feeds and Reels, creating greater transparency across some of the most engaging user-generated content environments in the world. To date, customers have reacted enthusiastically to this launch and impression volumes on Meta have increased by 51% in the first eight weeks of 2024 compared to the same prior year period.
On YouTube, following our launch of viewability and invalid traffic measurement across YouTube Shorts in the third quarter of 2023, we launched brand safety and suitability measurement capabilities across YouTube Shorts inventory in the fourth quarter, providing media measurement across a greater volume of ad impressions on YouTube. In addition, we continued to expand TikTok brand safety and suitability measurement across the most important markets in Latin America and Europe and further widened our TikTok APAC market coverage. We currently support brand safety and suitability across 32 markets, which cover 91% of global digital ad spend, ex-China and India. Our scale and recent product innovations across social media and short form video are powered by DV’s Universal Content Intelligence, a proprietary AI classification engine that enables us to verify video content faster, more accurately and cost effectively than any of our competitors, having a direct, positive impact on our gross margins as we scale.
By using predictive AI versus the more basic frame-by-frame process others use, we are able to lower video analysis costs and scale faster. Our solution most recently enabled the rapid rollout of new social markets and suitability categories as exemplified by this month’s launch of TikTok brand suitability in Japan, as well as our first-to-market release of suitability categories by industry verticals. This advanced capability provides DV with a strong comparative advantage in social media content analysis, where video comprised a whopping 67% of all social content in 2023, according to Magna Global, and in which we exhibited our speed to market leadership on the Meta News Feed brand safety launch earlier this year. Turning now to CTV, where ad-supported streaming continues to gain momentum, DV grew its CTV measurement volumes by 34% in the fourth quarter and by 33% for full-year 2023, significantly outperforming 2023 CTV ad spend growth of 16%, according to Magna Global estimates.
CTV comprised approximately 5% of our total impression volume in 2023, in line with its nearly 5% share of digital ad spend, ex-search. Building on DV's existing CTV solutions that allow verification at the app-level, we will soon be providing advertisers with more granular content-level transparency, down to the show level, including program genre, ratings, classifications and more. We are in advanced dialogue with three of the top 10 streaming platforms to provide brand safety and suitability measurement and content performance insights at the program level, across OTT campaigns. We believe content level transparency at scale across major CTV platforms will be a catalyst for mass adoption of brand suitability measurement on CTV, enabling DV to enhance the long term value we deliver to, and can extract from, this high CPM media environment.
And, we continue to protect our customers' CTV media investments from fraud by leveraging DV’s industry leading Fraud Lab and extensive CTV platform integrations. This week, in conjunction with Roku, we announced the discovery and mitigation of a new CTV fraud scheme we are calling Cyclone Bot due to its scale, aggression and velocity. We estimate Cyclone Bot is generating 250 million false ad requests per day across 1.5 million devices, largely eluding traditional fraud detection methodology. Roku’s proprietary watermark technology provided a crucial element in helping identify and mitigate the attacks, saving our combined customers millions in wasted ad spend. Fraud is still a challenge for CTV buyers and DV is still the leader in protecting our clients from sophisticated fraud schemes.
Turning to Retail Media, we generated approximately $23 million of retail media revenue across all three business lines in 2023, achieving 60% year-over-year growth and significantly outpacing the sector’s 15% growth rate as reported by Magna Global. Our global scale and connectivity across retail media continues to expand with DV’s measurement tags now accepted on over 75 of the key global retail media networks and sites, including 14 of the top retail media platforms and 62 major retailers. DV has a strong value proposition for both onsite, or owned and operated retail media, as well as offsite, or audience extensions. Invalid traffic is significantly higher on owned and operated retail media sites than on traditional media due to an abundance of traffic from competitive price scrapers, while overall violation rates are 129% higher on offsite retail media inventory than on owned and operated sites.
On the product innovation front, we are working with Criteo to provide an industry-leading solution that measures onsite quality metrics for retail media. Through this upcoming integration, DV will provide invalid traffic, brand suitability, and viewability measurement on Criteo’s network of retail media partners, ensuring that marketers are maximizing engagement across this critical channel. Finally, on the open web, our innovations advancing our brand suitability solutions continue to be a key market differentiator as exemplified by our most premium-priced solution, Authentic Brand Suitability. ABS grew by 48% in 2023 and contributed $182 million to our topline in the full year. In Q3 ‘23, we launched an industry-first made for advertising, or MFA, solution to provide our advertisers the ability to identify and avoid MFA content, which has exploded since the launch of easily accessible generative AI tools.
This quarter, we advanced that tool by leveraging AI-based auditing to launch a more granular, tiered Made For Advertising measurement and pre-bid avoidance solution. This second generation solution addresses MFA in a more surgical and brand-specific way, giving advertisers more control over balancing quality, performance and reach. DV continues to have the only solution in the market today that can be enabled directly by a customer in their brand safety and suitability profile for measurement and connected to pre-bid avoidance via ABS. It’s another great example of DV’s innovation leadership, and customer adoption is increasing steadily. DV’s brand suitability tools are more valuable than ever during election years when advertisers need to closely monitor challenging political content globally and in real time.
DV’s Election Task Force has been providing actionable data insights and analysis to protect brand equity and safeguard media investment since 2022, giving DV a differentiated, deep set of experience to deliver real value for our customers seeking to navigate an evolving media landscape. We’re also pleased to be expanding our industry-leading Universal Attention segments to Amazon and Viant’s DSPs. Our attention pre-bid segments are gaining early momentum, and our attention measurement business is now growing steadily, with 2023 delivering over 180% growth in impression volumes. Before I wrap up and Nicola shares details on our strong 2023 financial results and 2024 outlook, let me conclude with three key takeaways from my remarks today.
First, DV continues to significantly outgrow the digital advertising industry and is gaining market share across every digital media environment: social, CTV, retail media and the open web. Second, DV will continue to win, because of the customer value we create through our unmatched global scale and connectivity and our market-defining product innovation, both of which are powered by our proprietary AI that allows the most efficient analysis of vast amounts of data. Every day, DV analyzes 1.3 billion minutes of video, close to 275 million social posts, approximately 8 million web pages and over 22 million hours of audio content. And finally, we remain focused on growing and realizing our solid pipeline of new and expansionary deals, and becoming more engaged with our current client base that will further drive our market share and create an even stronger long-term trajectory.
The fundamental drivers that have powered our growth over the last three years remain strong and intractable. With that, let me hand the call over to Nicola.
Nicola Allais: Thank you, Mark, and good afternoon, everyone. DV delivered industry-leading fourth quarter and full-year 2023 revenue growth and profitability, demonstrating continued strong operational execution through a year challenged by geopolitical and macroeconomic uncertainty. Fourth quarter total revenue growth of 29% was driven by 32% growth in activation, 30% growth in measurement, and 5% growth in supply side. Our activation and measurement businesses which are driven by advertisers, were a combined 93% of our total fourth quarter revenue. Advertiser revenue grew 31% in the fourth quarter driven by 25% growth in volume or MTM, and 5% growth in pricing or MTF on a year-over-year basis. In addition, Scibids performed in line with our expectations.
MTF growth accelerated sequentially from 2% in the third quarter to 5% in the fourth quarter due to a continued mix shift towards premium priced solutions, followed by the impact of the ABS display and video price bifurcation, which was completed across all major DSPs in the third quarter. ABS revenue grew 45% year-over-year in the fourth quarter driven by volume growth of 34% and MTF growth of 9% year-over-year. Approximately two-thirds of the year-over-year growth in ABS came from existing ABS customers expanding their usage to more brands and to more markets, while a third of the growth came from customers who activated the solution for the first time. Fourth quarter measurement revenue grew 30% driven by social revenue growth of 62%. International measurement revenue grew 43% in the quarter with EMEA growth of 45% and APAC growth of 39% year-over-year.
International revenue comprised 29% of measurement revenue, up from 26% in the fourth quarter of 2022. Supply side revenue grew 5% largely driven by growth in new publisher customers in the fourth quarter. For full-year 2023, revenue growth of 27% was driven by activation revenue growth of 31% and measurement revenue growth of 25%. Social revenue grew 48% in 2023 and comprised 43% of our measurement revenue, up from 37% in the prior year. With spend on social platforms expected to continue to represent approximately 60% of digital ad budgets ex-Search in 2024, our social measurement revenue continues to have a long runway for growth. Supply side revenue growth of 5% was driven by increased publisher revenue. For the full-year 2023, advertiser revenue growth was primarily driven by volume growth.
We measured 7 trillion billable transactions, a 25% year over year increase in MTM, while average fee per thousand impressions increased to $0.075, a 3% year over year increase in MTF. We expect volumes to remain the primary driver of our growth as we continue to verify more digital ad impressions through product innovation, and channel and geographic expansion, and we expect MTF to remain stable. Our approach on pricing is to lead with our product offering of unique and differentiated solutions including ABS, social pre-screen and now Scibids. Our ability to continue to upsell existing clients and acquire new clients to the full suite of products has yielded an overall increase in MTF over the last four years, including a 5% increase in Q4 2023.
Moving to expenses, cost of revenue in the fourth quarter increased by 32%, primarily driven by an increase in revenue sharing arrangement costs with programmatic partners driven by activation revenue growth. We delivered 83% revenue less cost of sales in the fourth quarter, up from 82% in Q3 as we eliminated some duplicative data center costs. Total non-GAAP operating expenses, which exclude stock-based compensation and other items for comparability, grew 24%, compared to 29% revenue growth, reflecting the efficiency of our operating model as we scale. Finally, we delivered $65 million of adjusted EBITDA or 38% margin and $33 million of net income in the fourth quarter. For full-year 2023, cost of revenue increased by 37%, primarily driven by an increase in revenue sharing arrangement costs with programmatic partners driven by growth in activation revenue.
We delivered 81% revenue less cost of sales. Going forward, we continue to expect revenue less cost of sales to range between 80% to 82% as we balance data center cost savings with continued investments in cloud optimization and in scaling our infrastructure. Total non-GAAP operating expenses represented 49% of total revenue as compared to 51% in full-year 2022. Non-GAAP product development costs grew 28%, sales, marketing and customer support grew 16% and G&A grew 15% compared to prior year. We delivered full year adjusted EBITDA of $187 million, representing a 33% adjusted EBITDA margin and $71.5 million of net income as our business continues to combine high revenue growth with high profitability. We ended 2023 with 1,101 employees, up from 902 at the end of 2022.
Nearly half of our headcount growth was attributable to R&D where we continue to invest in our engineering and product resources. Moving to cash flow, we generated approximately $120 million of net cash from operating activities in 2023, which represented an operating cash flow to adjusted EBITDA ratio of 64%. Capital expenditures were approximately $17 million in 2023. Finally, we ended the year with $310 million of cash on hand, and zero long-term debt. In 2023, we achieved a net revenue retention rate of 124%, maintaining an over 120% NRR for the last five years, while our gross revenue retention remained above 95% also for the fifth year in a row. We grew the average revenue from our top 100 customers by 42% year-over-year to $3.7 million.
We also grew the number of advertisers generating more than $1 million of revenue by 19% year-over-year to 93. We grew the number of advertisers generating more than $200,000 of revenue by 18% year-over-year to 290. We have long-term relationships with our customers and remain deeply embedded in their marketing plans. Our top 75 customers have worked with us for over seven years, while our top 50 and our top 25 have been DV clients for over eight years. As Mark mentioned, we have maintained an 80% plus win rate across all opportunities and have a strong pipeline of new and expansionary deals that will continue to support our long-term growth trajectory. Now, let’s talk about 2024 and guidance. For the first quarter of 2024, we expect revenue in the range of $136 million to $140 million, a year-over-year increase of 13% at the midpoint, and adjusted EBITDA in the range of $33 million to $37 million, representing a 25% adjusted EBITDA margin at the midpoint.
Our growth rate in the first quarter reflects a slow start by brand advertisers and a slow ramp by recently signed new customers, which will catch up in the second half based on large new customers’ seasonal spend and usage patterns. We are guiding to full-year 2024 revenue in the range of $688 million to $704 million, a year-over-year increase of 22% at the midpoint, and adjusted EBITDA in the range of $205 million to $221 million, representing a 31% adjusted EBITDA margin at the midpoint. We expect the quarterly share of our full year revenue to be more second half weighted in 2024 than in prior years as we expect fast-growing, already contracted, new customer revenue to ramp in the second half of the year. We continue to expect Scibids AI to contribute between $15 million to $17 million to full-year 2024 revenue.
The midpoint of our guidance implies an approximately $124 million increase in revenue in full-year 2024, a testament to the accelerating demand for DV’s solutions by existing and new customers, across more geographies and media environments. Similar to last year, we expect the key drivers of DV’s 2024 revenue growth to be increased authentic brand suitability usage and adoption in activation, social measurement revenue growth, increased international adoption of our measurement solutions, Scibids AI, and new customer acquisition. Our guidance reflects measured contribution from new revenue opportunities in 2024 including incremental revenue from increased customer adoption on Meta, Authentic Attention and CTV activation and measurement.
We expect stock-based compensation expenses for the first quarter of 2024 in the range of $19 million to $21 million. For the full year, stock-based compensation expense is expected in the range of $91 million to $96 million. Weighted average fully diluted shares outstanding for the first quarter are expected in the range of $175 to $177 million. We anticipate capital expenditures, including capitalized software, to range between $20 million and $30 million for 2024 as we continue to invest in new product innovation to support future growth. With zero debt, a strong cash balance, we are well-positioned to drive further business expansion and long-term growth in 2024. And with that, we will open up the line for questions. Operator, please go ahead.
Operator: [Operator Instructions] And the first question comes from the line of Matt Swanson with RBC Capital Markets.
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