AdTheorent Holding Company, Inc. (NASDAQ:ADTH) Q4 2022 Earnings Call Transcript

AdTheorent Holding Company, Inc. (NASDAQ:ADTH) Q4 2022 Earnings Call Transcript March 3, 2023

Operator: Ladies and gentlemen, thank you for standing by, and welcome to AdTheorent’s Fourth Quarter and Fiscal Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised, that this conference is being recorded. I would now like to turn the conference over to your first speaker, David DiStefano, Investor Relations. David, please go ahead.

David DiStefano: Good afternoon, and welcome to AdTheorent’s fourth quarter and full year 2022 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me today are AdTheorent’s Chief Executive Officer, James Lawson; and Chief Financial Officer, Patrick Elliott. Before we begin, I’d like to remind you that today’s conference call will include forward-looking statements based on the company’s current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today’s earnings release and our other reports and filings with the Securities and Exchange Commission.

All of today’s statements are made based upon information available to us today, and we assume no obligation to update any such statements, except as required by law. We will also refer to both GAAP and non-GAAP financial measures during the call. You can find the reconciliation of our GAAP to non-GAAP measures included in our press release posted to the Investor Relations section of our website at www.adtheorent.com. All of our non-revenue financial measures we discuss today are non-GAAP unless we state otherwise. With that, let me turn the call over to James.

James Lawson: Thank you, David, and good afternoon, everyone. Thank you for joining our fourth quarter and full year 2022 earnings call. I’ll discuss our 2022 achievements, our high level results and highlights, and then turn the call over to Patrick, who will provide a more detailed look at our fourth quarter and full year results and provide guidance for the first quarter and full year 2023. We accomplished many great things in 2022. We grew CTD revenue 54% year-over-year. We grew our active customer base by 12%. We launched our Direct Access business, which is the only self-service DSP that offers a privacy-forward alternative to the dated user profile focused methods used by competitors. Our predictive models now have access to over 1,000 attributes for impression scoring, up from 200 in 2021, further distancing adherent campaign performance from other DSPs. We revolutionized the concept of what a targetable programmatic audience can be with the launch of our platform’s audience builder.

We introduced a disruptive health version of our audience builder, and we expanded our technological advantage over competing CTD products with several key innovations that further increase our performance advantage versus the competition. We also received more industry recognition for advancements that elevate the state of programmatic advertising across the open Internet. Among them, AdExchanger recognized us as a top 50 programmatic power player and Digiday recognized us for having the best mobile marketing platform. We also had our sixth consecutive BIG Innovation Award for our privacy-forward machine learning platform, our fifth consecutive win of the AI Breakthrough Award for machine learning, our third consecutive MarTech Breakthrough Award for programmatic marketing innovation and our ninth consecutive year ranking in Cranes New York Best Places to Work.

Our strong balance sheet and profitability allowed us to continue investing behind products and capabilities that expand our technological advantage over other DSPs. As a result, we continue to see impressive momentum in each of our core growth pillars. CTV revenue increased 46% in Q4 2022 compared to Q4 2021. Health continued to generate solid interest from advertisers and Direct Access impressions purchased through the platform grew 79% as compared to the third quarter. Now I will speak to these and other core growth opportunities. First, on CTV. No other programmatic platform offers better outcomes-based CTV capabilities. CTV should be more than just an upper funnel awareness screen, and we are proving that for our customers. Our commitment to CTV innovation drove 46% growth year-over-year to $5.4 million in the fourth quarter or 10.4% of revenue despite continued budgetary constraints in the advertising industry and a limited marketing investment.

As a result, CTV was 9.4% of revenue during the full year 2022, up from 6.1% in full year 2021 and less than 3% in 2020. Our CTV offering wins because we offer a unique product that delivers superior performance as measured by return on ad spend, advanced attribution, strict privacy protections and seamless omnichannel coordination. During the fourth quarter, we deployed new CTV inventory, increasing supply and targeting capabilities through direct publisher partnerships. This improves our scale and gives our advertisers access to more premium CTV content. We also introduced a new CTV solution that quantifies Advent’s incremental value to advertiser’s linear TV activity, opening the door to net new linear TV budgets. Looking forward, our use of first-party and customer data to build predictive models for audience quality, together with machine learning optimization at the KPI level is a sustainable competitive advantage versus peers who rely on assumptions based and user profile base targeting approaches.

And it is important to note our historic CTV business has largely been focused on managed customers as we scale our direct access or self-service line of business. Among many other benefits, our CTV revenue will further accelerate because we will have access to larger and more sustained budgets from a wider client base. Second, our audience builder products. The industry has been overdue for the transformational change we have brought to the practice of building targetable digital audiences with our new cutting-edge audience builder interface tool, which we refer to as AbbVie. Advertisers can use AbbVie with their own first-party data and/or adherent platform data to create customized ID independent audiences that are powered by Aderant’s audience quality algorithms.

Competing platforms target ads by activating cookie ID lists or other user ID lists, often with catchy names like moms or sports enthusiasts. But the origins of these ID lists are often not known or shared and their effectiveness is limited. We have invented a better tool to drive actual data-driven audience quality. AbbVie combines everything advertisers already love about AdTheorent with the ability to use primary source data signals to define their target audiences. For example, in-market auto shoppers likely to purchase a car in the next 3 months. It uses those parameters to limit campaign delivery to that desired audience and then further optimizes ad delivery within this audience only based on the statistical likelihood of achieving a campaign-specific KPI such as purchasing a product.

This is a giant step forward from the Black Box ID list used by other programmatic platforms. It also reduces third-party audience fees, providing incremental margin or AdTheorent platform users while helping us redefine the market. Third, our health vertical. We have a unique and powerful rate to win in this vertical, which is our largest and fastest growing. Health advertising is more complicated than other sectors due to stringent privacy laws and large generalist DSPs do not have the techniques, safeguards or solutions to operate effectively in this vertical. Generally speaking, advertising to likely condition sufferers or advertising based on medical data or health inferences, cannot be done lawfully on a one-to-one basis, but other DSPs are premised on one-to-one targeting through ID-based audience lists.

And the one-to-one workaround historical used in health advertising have been incomplete or deficient. Our innovations in Q4 changed the landscape dramatically, and we are excited to be in market with these new offerings, which will build on the existing momentum that drove our 21% health revenue growth year-over-year for full year 2022. Our advantage in this vertical is pronounced, and we are poised to capitalize on it in the immediate future. Our health audience builder, which we refer to as HAVI elevates our core audience builder by customizing it for this important vertical. We introduced this in Q4 as well. HAVI leverages anonymized and primary source pharmacy and medical claims data, allowing advertisers to explore, create and activate new ID free predictive health audiences in a matter of hours rather than the weeks or months that it takes to curate traditional health audience segments, which are ID-based.

For example, customers can use HAVI to build statistical, predictive health audiences such as people diagnosed with high cholesterol within the last 12 months who were prescribed X medication and had the script filled at Y Pharmacy. We are thrilled to report the results from one of our early successes with predictive health audiences built using HAVI. During the quarter, we executed a campaign intended to reach people suffering from a specific mental health condition, encouraging them to ask their doctors for the medication by name. In a head-to-head test, predictive health audience is built with HAVi outperformed third-party audience segments by more than three times on this KPI and drove 77% of overall patient engagements despite equal ad dollars being allocated to each platform in the test.

This was possible because our tools allow programmatic advertisers to target audiences in a more precise data-driven and less opaque manner. Our client was impressed and has already expanded the number of campaigns running with Adaire adding video and display campaigns as well. With increasing scrutiny around the use of personal health information, our privacy forward ad targeting methods position us to capture a significant portion of the nearly $16 billion in annual health care advertising spend. Next, on other verticals. Health was our first use case and the reason we built our platforms audience builder interface, but the opportunities extend beyond a single industry vertical. Although AbbVie can be used as is in any vertical, we will be releasing additional vertical-specific AbbVie solutions in 2023 that will further elevate performance and accelerate growth in other verticals.

Beyond our audience builder functionality, we rolled out a number of other capabilities during the quarter that will enhance our right to win in other verticals. First, driving real-world consumer in-store visitation is an important KPI to quick service restaurant or QSR and retail and travel advertisers. And we have made a number of enhancements to our visitation models that are driving even greater campaign in performance. Our ML models now distinguish density differences in rural versus metropolitan areas to ensure physical visits are most accurately attributed back to ad served impressions. Our visitation models now also evaluate visits on users’ mobile devices that resulted from ad served impressions to those same users’ desktop or CTV devices, giving us a clearer and more comprehensive picture of consumer in-store visitation.

These enhancements give our models more signals to consider, which will generate measurable ROI uplift for advertisers using our platform. Second, we expanded our performance driving points of interest capabilities into Canada, making us even more competitive in this important market. As a reminder, our POI capabilities provide deep location context data across over 33 million POIs and 17,000 categories, improving our targeting and modeling. Third, we added a new shopper marketing solution for our CPG clients that allows us to optimize and measure in-store sales for shopper marketing campaigns focused on single retailer sales, such as in Walmart or Walgreens. Finally, we introduced sentiment analysis into our platforms targeting and ML modelling logic.

This supports all verticals, but here’s a quick example for how sentiment helps in the automotive vertical. Traditional DSPs target user IDs that have visited an automotive website or that appear on a site showing the vehicle being advertised, not realizing that the page is actually a negative review. AdTheorent can utilize this negative sentiment as a signal in its models or explicitly target away from this content, ultimately improving performance for the advertiser. Looking ahead, we have several exciting launches slated for Q1, including a product catalog that allows us to serve ad experiences based on the exact products or content browse on a given advertiser’s website. We will also launch augmented reality ad units, which enable us to provide interactive ad experiences with virtual information placed in a real-world environment, allowing shoppers to try on sunglasses or hats, for example.

We remain committed to introducing additional vertical solutions to drive exceptional results for our clients, which will improve our growth trajectory. Moving to Direct Access. Our Direct Access offering is a transformative self-service business model that gives us access to much larger budgets and spend commitments. And as a result, it offers a meaningful incremental revenue growth opportunity. Since we started building our award-winning platform in 2012, our focus has been the brain, VML engine, operationalizing complex data science processes, algorithm creation and automation, platform optimizers and more. We have pursued the difficult campaigns with sophisticated brand customers because we have the unique tools to deliver ROI as measured by real campaign outcomes.

Our platform’s user experience has traditionally been tailored to our internal super users. In 2023, that changes with the launch of our modern UI and new platform front end, which will combine the industry’s best programmatic brain with an equally impressive user experience and workflow. This will fuel growth opportunities that will transform Aderant essentially making our award-winning brain more accessible. This will create a truly turnkey offering for large agencies and brands, successfully removing barriers to adoption for this incremental customer, enabling them to make larger spend commitments and quickly driving superior return on ad spend on our platform with no specialized knowledge or training. Early market feedback and results from Direct Access remain extremely encouraging.

Our Direct Access platform retained all beta clients in 2022 and during the fourth quarter, most of them sophisticated global advertisers and digital ad impressions served for Direct Access clients rose 79% sequentially, highlighting the substantial impact of our ongoing investment in this initiative. Although we are still very early, the clients and campaigns we secured during the quarter spanned several key verticals, including CPG, pharma, B2B and government. These gains came despite partners’ typical reluctance to test new solutions during the fourth quarter. Now I’d like to switch to our market opportunity in the context of recent and near-term financial performance and the current macro environment. Many of the near-term dynamics we discussed last quarter remain, including reduced or deferred ad budgets, campaign delays and vendor consolidation.

Even though these dynamics limit our near-term growth prospects and as Patrick will discuss in a moment, we intend to be cautious when we forecast near-term growth. We believe that these market dynamics are temporary and that our opportunity and the shareholder value we are building is much bigger than our growth rates over the next few quarters. In 2023, we expect to continue to grow as we have in different macro environments for the past 11-plus years, and we will do so profitably. We believe that we have the most important thing, better technology and a machine learning premise that is perfectly suited for the emerging privacy norms and accelerating privacy requirements, including among them, California’s recent amendment to its privacy law and four new state digital privacy laws effective in 2023.

Because of that, we are confident we will gain share and generate sustainable growth and profitability when the environment normalizes. To date, holding company media spend consolidation has been limited to self-serve platforms. But in 2023, we have a direct access platform that we believe is additive and better, allowing us to participate in this immense opportunity. We believe in time, we’ll benefit from that as we continue to show that our platform and our price efficient and outcomes-focused predictive advertising is an important component of a well-rounded media buying tech stack. Similarly, we believe we have a rate to win with more large brands who are in-housing media buying capabilities and looking for alternatives due to the hidden fees, lack of fee transparency, conflicts of interest and unclear ROI provided by other programmatic platforms.

We are eager to have more of those conversations. In times of uncertainty and volatility, it is more important than ever to stay true to our core values and maintain a long-term perspective. While we recognize the challenges posed by the current macroeconomic backdrop, we remain committed to delivering on our strategic priorities and investing in our future growth. We are able to do so given the strength of our balance sheet and strong cash flow characteristics. By staying focused on the fundamentals and taking tight control of costs, we are confident in our ability to navigate these choppy waters and emerge even stronger. As macro headwinds subside, our investments in innovation and operating with a lean cost structure will enable us to fulfill our commitment to generating strong top line growth and returning to historic levels of profitability.

With that, I’m thrilled to introduce Patrick Elliott, who is appointed AdTheorent’s CFO effective January 30. Patrick brings a wealth of experience and expertise to our executive team and joins us at a critical moment in our company’s evolution, as we continue to expand our footprint and drive long-term value for our customers and shareholders. With a track record of financial leadership and strategic insight, Patrick is ideally positioned to help guide us through the opportunities and challenges ahead. At SkillSoft, Patrick played a key role in driving growth and innovation, leveraging deep insights into the financial drivers of success and a commitment to excellence at every turn. The wealth of knowledge and experience he brings to our team will make him a strong partner to me, the Board and the entire organization.

Please join me in thanking Chuck Jordan again for his contributions and welcoming Patrick to our team. We look forward to working together to build a great future for our company and our stakeholders. Thank you. Patrick, I’ll now turn it over to you.

Patrick Elliott: Thanks, James. Good afternoon, and thank you all for joining us today. I am delighted to share that AdTheorent had a strong quarter and year, thanks to the hard work and dedication of our exceptional team. AdTheorent’s leadership in the ad tech space is truly remarkable, and I’m excited to be part of a company that drives innovation and success. I’m thrilled to take on the role of Chief Financial Officer and be part of a company that aligns with my vision and values. Chuck has led us through significant milestones in becoming a publicly traded company and has helped build a strong finance team, facilitating a very smooth transition for me. Throughout my career, I have demonstrated valuable senior financial leadership in diverse technology companies that have experienced strong growth and emerge as leaders in their industries.

At AdTheorent, I will help drive both strategic and operational priorities to create value for stakeholders. And I am confident that with our talented team of innovators and cutting-edge technology, we will reaccelerate growth and bring adherent to even greater heights. I am pleased to announce that the company achieved a record level of revenue in 2022 with total revenue for the year reaching $166.1 million, exceeding the high end of our previous outlook. In Q4, our revenue also surpassed our expectations, reaching $51.8 million, a decline of 5.8% compared to the same period last year due to the impact of macroeconomic conditions and the contraction in advertising budgets across several industries, particularly in our retail and financial services verticals.

This led to lower revenue from our average customer during the quarter. Nevertheless, we saw a 12% year-over-year growth in active customers and impressive growth rates in our areas of investment, including 46% growth in CTV, strong performance in direct access and positive momentum in our health vertical. These achievements are a testament to our strategic investments, and we remain committed to pursuing the enormous opportunities ahead, as Jim mentioned in his remarks. In discussing the remainder of the income statement, unless otherwise noted, our references to our expenses and operating results are on a non-GAAP basis. You can find information on the most directly comparable GAAP metrics in our fourth quarter earnings press release. In the fourth quarter, our adjusted gross profit, defined as GAAP revenue less traffic acquisition costs, was $33.7 million, representing 65.2% of revenue and surpassing the high end of our outlook of $29.8 million to $33 million.

This compares to 66.1% of revenue in the same period of the prior year. Regarding operating expenses, we recorded $46.2 million in the fourth quarter, down from $65.1 million last year or $47.9 million last year, excluding nonrecurring transaction costs and management fees related to our Go Public transaction. The increase in adjusted operating expenses as a percentage of sales to 89.3% in the fourth quarter of 2022 versus 87.1% in the fourth quarter of 2021 was driven by higher public company costs, particularly in insurance and continued investment in future growth opportunities, such as our health care platform. We partially offset these increases by implementing operational efficiencies, including a modest reduction in headcount relative to Q3.

Our adjusted EBITDA for the quarter was $10.1 million, down $5.1 million compared to Q4 2021. However, this result exceeded by $2.3 million, the high end of our outlook range of $5.3 million to $7.8 million. Our adjusted EBITDA margin was 30% for the quarter, down from 42% last year, reflecting the higher operating expenses already discussed. The company’s continued strong profitability demonstrates our resiliency and agility amidst an ever-changing market landscape. Now for the full year. To summarize, Aderant’s full year revenue for 2022 was $166.1 million, slightly up from the previous year. The increase was driven by strength in various vertical segments such as Health, which was up 21% in 2022 and growth within channels like CTV, which was up 54% in the year.

This was largely offset by other vertical segments that were more impacted by the macro backdrop. Adjusted gross profit for the full year was $109.8 million or 66.1% of revenue, which was above the high end of the expected range and flat with full year 2021, which was also a 66.1% margin. For the full year 2022, operating expenses were $164.8 million, roughly flat with the $164.4 million of operating expenses in full year 2021, which included $25.4 million of nonrecurring transaction costs, management fees and onetime lease termination fee. Adjusted EBITDA for the year was $22.3 million, which was a 20.3% margin against adjusted gross profit. This exceeded expectations but was down from the previous year due to investments in sales and technology talent, cost to stand up a public company infrastructure and investments in data related to some of the new products Jim discussed.

Moving to our balance sheet. We closed out the year with $72.6 million in cash and cash equivalents, which is $4.7 million more than we had at the end of the third quarter of 2022. Our free cash flow for the year was $10.8 million, which is $19.4 million higher than the previous year. This increase was largely due to onetime costs related to the business combination and a lease termination fee incurred in 2021. In addition, we paid down $39 million in debt on our revolving credit facility during 2022, and we currently have a strong capital structure with no debt and ample liquidity. Looking ahead to 2023, we see many opportunities for growth and success. Despite challenges posed by external factors such as the global economic uncertainty, we remain optimistic about our ability to continue innovating and expanding our market share.

Based on the current business environment, recent performance and current trends in the marketplace, we assume the company’s performance will continue to be impacted by the aforementioned macro factors. We will continue to invest in product development, technology and go-to-market to drive growth while we maintain our focus on profitability and generate positive cash flow. For the first quarter of 2023, we expect revenue to be in the range of $31 million to $33 million, which represents a 6.5% decrease at the midpoint compared to the first quarter of 2022. This is our most difficult comparison of the year but is also our smallest quarter. We expect revenue growth to improve in the second half of the year, assuming the macro environment does not worsen.

We also expect revenue to grow for the full year, driven by strong demand for our new products from customers across a variety of verticals. Adjusted gross profit for the first quarter of 2023 is expected to be around 65% of revenue, down from 67% in the first quarter of 2022. For the full year, we anticipate adjusted gross profit to be between 64% and 65% of revenue compared to 66% in 2022. The slight decrease in AGP margin is mainly due to changes in product mix. In the first quarter of 2023, we expect adjusted EBITDA to be approximately breakeven — for the full year, we anticipate adjusted EBITDA margin to be between 16% and 19% of adjusted gross profit compared to 20% in 2022. This is due to investments we will make to enhance our platform offerings and accelerate our time to market.

In summary, we are pleased with our financial performance for 2022, surpassing our revised expectations for all metrics, both in the quarter and for the full year. Our company is consistently profitable, generating positive free cash flow, and we are strategically investing in growth opportunities to enhance shareholder value in 2023 and beyond. At this time, we would like to transition to the Q&A session moderated by the operator.

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Q&A Session

Operator: Thank you We’ll take our first question from Laura Martin with Needham.

Laura Martin: Good morning. Thank you very much. So, let’s talk about CTV a little bit. A couple of pieces on this, James. One is, is it opening new clients for you in CTV? Second, when you – I always think of your competitive advantage as being bottom of funnel. Can you give us an example of where you’re — what kind of products you’re actually delivering to CTV at bottom of funnel? And then lastly on CTG, you said a comment about opening linear budgets. Could you drill down on that? That’s my first question. Thank you.

James Lawson: Yes. Thank you, Laura, for the question. Yes, CTV is opening the door to new clients. We’re quite excited by the enthusiasm we’re seeing in the market about the investments that we’ve made in our CTV offering. We’ve invested in premium publishers. We’ve invested in the data that we have accessible in the midstream so that we can make CTV more of a performance channel and less in the only upper funnel channel. We think CTV should be a full funnel channel. It should be a channel that can help advertisers drive outcomes. So, we’re seeing a lot of positive receptivity to that. We’ve made a number of investments in our prebid integrations to prevent IBT and fraud in the CTV ecosystem. And we’ve made a number of investments around our POI capabilities and understanding how contextual geo contextual signals can drive outcomes for CTV and then connecting the screens, being able to attribute a conversion, for example, on a sale on a website back to a CTV exposure and being able to give advertisers that holistic view of their media spend.

So I think at the end of the day, the clients are attracted to our version of performance CTV, which by definition includes the bottom funnel. And I think the linear budgets are following. I think we have a really interesting opportunity now to drive net new customer opportunities with linear budgets. There are a lot of linear budgets that are seeking more of a data-driven ROI and how they’re spending their money on television advertising. And when you can come to the table with a truly differentiated, data-driven way to use CTV ads to sell products to get customers in store, that’s a special offering. And a lot of our competitors that are scaling their CTV are more focused on the upper funnel. They’re more focused on awareness. So, we think it’s a huge, huge opportunity for us that we will continue to invest in, in 2023.

Laura Martin: Okay. Fantastic. Great, thank you. And can you talk about the decision process? Because when you go through the comments, you have a lot of cool new products like direct access, and I know you just launch the health product and the CTV innovations. What is the process by which you decide to allocate resources to the next product? Because I sort of feel like we’re getting a little diffused here. So, can you tell us about that?

James Lawson: Thank you so much for that question because I think it’s very important to make it quite clear that all of our innovations are focused essentially towards the same goal, which is delivering to the programmatic marketplace and advertisers who are buying programmatic media, a truly accountable and data-driven alternative to the current status quo. And what I mean by that is the investments that we’re making are in data and the data that were allowed – that we are able to use to drive performance outcomes. We’ve invested in data this year so that we could build, for example, our predictive audiences, our audience builders. And what those do is they represent an alternative to the third-party audience segments that are essentially ID lists that are used by literally every other DSP.