Direct Digital Holdings, Inc. (NASDAQ:DRCT) Q4 2023 Earnings Call Transcript

Direct Digital Holdings, Inc. (NASDAQ:DRCT) Q4 2023 Earnings Call Transcript March 26, 2024

Direct Digital 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: Good day, everyone, and welcome to the Direct Digital Holdings Fourth Quarter and Full Year 2023 Earnings Call. Today’s call is being recorded. And all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. I will now turn the conference over to Brett Milotte, VP of Investor Relations. Please go ahead.

Brett Milotte: Good afternoon, everyone, and welcome to Direct Digital Holdings fourth quarter and full year 2023 earnings conference call. My name is Brett Milotte, and I’m representing Direct Digital Holdings from ICR. On today’s call, our Direct Digital Holdings Chairman and Chief Executive Officer, Mark Walker; and Chief Financial Officer, Diana Diaz. Information discussed today is qualified in its entirety by the Form 8-K and accompanying earnings release, which has been filed today by Direct Digital Holdings and may be accessed at the SEC’s website and DRCT’s website. Today’s call is also being webcast, and a replay that will be posted to DRCT’s Investor Relations website. Immediately following the speaker’s presentation, there will be a question-and-answer session.

Please note that the statements made during this call, including financial projections or other statements that are not historical in nature, may constitute forward-looking statements. These statements are made on the basis of DRCT’s views and assumptions regarding future events and business performance at the time they are made and do not undertake any obligation to update these statements. Forward-looking statements are subject to risks, which could cause DRCT’s actual results to differ from its historical results and forecasts, including those risks set forth in DRCT’s filings at the SEC and on this call. And you can refer to those for more information. This cautionary statement applies to all forward-looking statements made during this call.

During this call, DRCT will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance to generally accepted accounting principles. Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings release that the DRCT filed in its Form 8-K today. I will now hand over the conference to Mark Walker, Chief Executive Officer. Mark?

Mark Walker : Thanks, Brett, and thank you to everyone joining our fourth quarter and full year 2023 earnings call. 2023 was an inflection point for our company, and I’m incredibly proud to report our strong financial results and operational performance for the year as we’re now reporting our eighth quarter of double-digit revenue growth. As we discussed in previous earnings calls, we continue to make significant investments in Direct Digital Holdings technology stack, advertising platform and operational structure throughout 2023. Our strong technology partnerships and our overarching business strategy have enabled us to meet a growing number of customers’ demand and further capabilities of our technology platforms. As a result, our open marketplace platform continues to benefit as middle market businesses seek our differentiated thoughtful approach to advertising solutions.

Before we get into more detail about our fourth quarter, I’d like to begin with a quick review of our year. We achieved total full year revenue of $157.1 million or 76% growth over the $89.4 million achieved in 2022, at 29% above our initial 2023 guidance. We also achieved adjusted EBITDA of $11.3 million, 11% higher than the $10.2 million adjusted EBITDA for the same period in 2022. In 2023, we had a number of achievements, a few of which I wanted to highlight today as we’re proud of how our team was able to grow the overall business. Firstly, we announced our new collaboration with Amazon Publisher Services with our Colossus SSP division integrated with Amazon’s Transparent Ad Marketplace, or TAM. The integration allowed Colossus SSP’s roster and publishers to tap into the benefits of TAM and serve beside header bidding solutions that offer direct auction approach.

We also announced our partnership with HPE GreenLake, providing an edge to cloud platform to build a highly reliable, scalable and secure production environment across our technology stack. Throughout the year, we had significant growth on the buy side with strategic wins with the growth of our overall client portfolio by 7% and increased revenue per customer up 10% for the year. We began the transition to a cookie-less environment and saw the integration rollout of our alternative ID solutions. In addition, we launched our AI yield management tool, which allows us to achieve good efficiency and revenue optimization and we continued the transition of DDH shared services function for increased operational scale and support. While we saw strong growth in Q4 2023 year-over-year with revenue of $41 million, which was 33% higher than the same period last year, we were down sequentially from Q3 with Q4 revenue, which was shy of our revised guidance due to two primary factors.

In the fourth quarter, based upon value change changes, it became clearer cookie deprecation would begin at Q1 2024. In addition, we noted softer demand that our revised guidance called for. As such, our team proactively began our transition off of cookies for media transactions. As a result, we believe our strategic decision to accelerate our investments has positioned us well for the future and ahead of our peers. In addition, in Q4, we did our complete beta testing on our original schedule for several strategic publishers, including Dotdash Meredith, Weather.com, NBCU and Arete Group, which would have increased overall the pressure count. These strategic publishers have all been launched in Q1 of 2024. We continue to prioritize long-term successes for short-term gain and we are confident the strategic measures in internal calibrations were made in Q4 2023 will position the company to build on the successes of 2023 and continue revenue growth and market share gains in 2024.

Our fourth quarter 2023 adjusted EBITDA of $2.3 million likewise was affected by the information revenue impacts during the quarter. Our supply side platform continues to increase publisher partner engagements in addition to increases in our impression inventory. In the fourth quarter, our sell-side advertising segment processed approximately 400 billion of month impressions, an increase of 201% over the same period of 2022 with close to 1 trillion monthly bid requests for the quarter. In addition, the company’s sell-side advertising platforms received over 83 billion bid responses in the fourth quarter of 2023, an increase of 367% over the same period of 2022. Our buyers within the platform did see some degradation due to our platform transition decreased about 50% to 84,000 buyers compared to last year’s fourth quarter.

However, our revenue per buyer increased by 133% to $397 per customer over the same period. On the buy side, these businesses served approximately 234 customers, an increase of 7% compared to the same period of 2022, with buy-side revenue per customer consistent with the same period last year. As it relates to 2024, our industry outlook and point of view is the following. We believe that the middle market, the digital ad tech space remains fragmented and consolidation opportunities exist. We will continue to evaluate those opportunities for accretive platform integration, value creation, and strategic fit. We anticipate cookie deprecation will accelerate market consolidation of opportunistic investments. For our buy-side business, the introduction of AI and complex market dynamics will accelerate the market transition in digital media from traditional media.

This transition will continue to present opportunities to expand our footprint and gain market share for tech-enabled services. In addition, alternative IDs will take on more importance in the industry as well as strong understanding of the impact of the privacy sandbox on campaign performance reporting and delivery. We also believe that the bifurcation in the marketplace between alternative ID, open CPM marketplaces and wall guards will continue to exist, along with continuing market tension between DSP and SSP relationships. We expect the streamlining of the value chain, we aim to build strategic relationships with our focus on agency and brand partnerships continuing to be the cornerstone of our strategy. Finally, AI tools will continue to proliferate through the value chain of allowing companies to leverage these tools and offer these capabilities across both of our business segments, increasing ROI and enhancing performance.

For 2024, we’re providing revenue guidance for FY 2024 of $170 million to $190 million or an increase of 50% over last year’s performance at the midpoint. I will now hand things over to our CFO, Diana Diaz, who will walk through some of the financial highlights in further detail.

Diana Diaz : Thank you, Mark. As Mark stated, our revenue increased to $41 million in the fourth quarter of 2023, an increase of $10.3 million or 33% over the $30.7 million in the same period of last year. We finished the year with total revenue of $157.1 million, which was about 8% below the low point of our guidance range, but was an increase of $67.8 million or 76% growth over the $89.4 million of revenue achieved in 2022. As Mark mentioned, revenue for the fourth quarter of 2023 was lower than anticipated due to lower-than-anticipated demand, a delay in the release of Tier 1 publishers from beta testing and proactive efforts by the company during the fourth quarter to accelerate the transition towards a cookie-less advertising platform.

Our sell-side advertising segment ended the year with a strong fourth quarter and drove the majority of the increase over the prior year. Colossus SSP grew to $33.4 million for Q4 and contributed $9.8 million of the increase or 41% over the $23.6 million of sell-side revenue in the same period of last year. For the full year, our sell-side segment achieved $122.4 million in revenue, an increase of $52.4 million or 104% of growth over the $60 million in sell-side revenue in 2022. For the fourth quarter, our buy-side businesses, Orange142 and Huddled Masses grew 7% year-over-year and contributed $500,000 of the overall increase, finishing the quarter with $7.6 million in revenue compared to $7.1 million in the same period of 2022. For the full year, our buy-side segment grew to $34.7 million, an increase of $5.3 million or 18% over the $29.3 million of buy-side revenue in 2022.

For the fourth quarter of 2023, gross profit dollars were $9.3 million compared to $8.7 million for the fourth quarter of 2022, an increase of about $600,000 as a result of higher revenue. Gross margins for the fourth quarter of 2023 were approximately 23% compared to 28% in the same period of last year. Gross profit dollars for the year were $37.6 million compared to $29.3 million for 2022. That was an increase of $8.3 million as a result of higher revenue. Gross margin for 2023 was approximately 24% compared to approximately 33% for 2022. These margin results are in line with our margin expectations given the rate of accelerated growth in our sell-side advertising segment. Our faster-growing sell-side segment has higher cost of revenues compared to our buy-side segment.

We also saw higher sell-side fixed costs related to an increase in server capacity in the amount of $1.6 million for 2023 to support our growth. Operating expenses increased to $9.3 million in the fourth quarter of 2023 or an increase of $3 million over the $6.3 million of expenses in the fourth quarter of last year. For the full year 2023, operating expenses were $30.9 million compared to $21.3 million in 2022, an increase of $9.6 million. Increases in compensation tax and benefits expense of $600,000 for the fourth quarter and $3.6 million for the year were primarily driven by head count additions throughout 2023, mainly in our operations area to support our growth as well as in shared services. The increases in general and administrative costs of $2.5 million for the fourth quarter and $6 million for the year were due to expenses associated with supporting our growth and ongoing marketing initiatives as well as our continued transition to an operation as a public company beginning in February 2022.

We expect to continue to invest in automation as well as additional head count to support sales initiatives. As a consequence of the aforementioned revenue and operating expense impacts to our fourth quarter, we saw a net loss of $1.2 million in the fourth quarter compared to net income of $1.4 million in the same period of 2022. For the full year, net income was $2 million in 2023 compared to net income of $4.2 million in 2022. For the fourth quarter, adjusted EBITDA was $2.3 million compared to adjusted EBITDA of $3.1 million for the fourth quarter of last year. For the full year, adjusted EBITDA grew to $11.3 million or 11% higher than the $10.2 million adjusted EBITDA for the full year 2022. Now turning to the balance sheet. We ended the year with cash and cash equivalents of $5.1 million, an increase of $1.1 million over the $4 million we had as of the end of 2022.

Total cash plus our accounts receivable balance as of year-end was $42.3 million compared to $30.4 million at the end of 2022. As part of our initiative to increase shareholder value and continue to facilitate our growth, during the fourth quarter of 2023, we retired all outstanding warrants issued in connection with the company’s IPO. And we improved our liquidity by securing a revolving credit facility with capacity of $10 million and up to $5 million of uncommitted incremental capacity. We expect to continue to take steps in 2024 to improve liquidity in our balance sheet to support our business as well as facilitate inorganic growth opportunities. Now let’s touch on guidance. Our guidance is subject to a variety of factors that may change over the year.

In particular, it assumes that U.S. economic conditions do not materially deteriorate or that the economy does not otherwise experience significantly reduced advertiser demand. We plan to offer annual guidance and update it throughout the year. At present, we expect fiscal 2024 revenue to be in the range of $170 million to $190 million or 15% growth year-over-year at the midpoint. We are off to a good start for 2024. Based on preliminary results through mid-March 2024, we believe sell-side revenue is on pace to grow at a rate of 10% to 20% over the prior year first quarter. And now I’d like to turn it back over to Mark for some closing comments.

Mark Walker : Thank you, Diana, and thank you to everyone for joining. As always, we appreciate your interest in Direct Digital Holdings and are looking forward to your questions. Operator, please open up the line.

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Q&A Session

Operator: Thank you. [Operator Instructions] And we’ll take our first question from Darren Aftahi with ROTH.

Darren Aftahi : Hey, guys. Good afternoon. Thanks for taking my questions. Mark, the — I guess, the three kind of items you highlighted in terms of the fourth quarter, the lower demand, the pilots not coming out of beta for the Tier 1 publishers, and then the proactive kind of moves on moving to cookie-less. I’m just kind of curious, can you kind of handicap a couple of things? One, like how did each of those kind of impact your quarter relative to kind of initial thoughts when you guys gave guidance, I believe, on November 9? And then as we have moved into 2024, I know you said some of those publishers have come out of beta. But how have those items kind of changed versus the fourth quarter? Thanks.

Mark Walker : Yeah. Thanks for the question, Darren. I think a couple of things. One, I will say that I think our transition to dealing with cookie deprecation was an important strategic move for us. What we’re seeing and what we have started to see in Q4 was that cookie deprecation was definitely occurring even though after it had four years of delay. And so switching over a platform in order to be able to manage and deal with that did take a lot of effort, and we did not anticipate that move until we got into 2024. But once we started seeing the transition in the marketplace and what we started hearing in the industry, we felt like it was a prudent approach for us to go ahead and make that transition in Q4 versus waiting to 2024 before we started making that transition.

Again, looking at long-term benefit versus short-term gain. The second thing is we want to — if you look at the amount of impressions that we delivered between Q3 and Q4 as it relates to our SSP was roughly about 400 billion for each of those. And if you noticed, we were flat. So the way that we have been historically able to grow is really by the increase of impressions that we actually be able to introduce into the marketplace. And so our delay in that beta was actually critical for us to ensure that we’re able to grow, especially in light of the transition we were making with cookie deprecation. So I would say that Q4, even though we still performed 33% year-over-year, and we were excited about that level of growth, it didn’t meet the expectations that we initially thought based upon primarily those two factors and being the impression count being really our hedge to make sure that we’re able to maintain growth.

What we are seeing in Q1 of 2024, after we have started making our move to alternative IDs and our proactive measures for cookie deprecation, we’re seeing a 10% to 20% growth as it relates to our SSP in comparison of last year’s performance, which we feel is really a justification of us making the right decision.

Darren Aftahi : And can you give any kind of color on maybe — I know January always starts off as a pretty dismal month in digital advertising, but can you talk about maybe the cadence of growth? Like has it improved since you kind of put in — since you switch the platform and working with alternative IDs, like is that what’s driving the growth? Is it the new publishers coming off of beta which drive the growth? And just going back to your — both of your comments, sorry, you talked about softer demand. I’m just kind of curious, is the softer demand correlated with the cookies or is that something that’s absolute and unique?

Mark Walker : Yeah. I would say the softer demand was a combination of the change that we saw with making the transition over cookies because of the platform impact that we actually had in Q4. And we also saw it being lighter going into the holiday season. So it was a combination of both as it relates to Q3. What we attribute the increase in performance in Q4, has everything to do with the increase in publishers that we’ve actually added the ones that were delayed in getting out of beta with in Q4, and we moved those into Q1, coupled with the transition that we’ve made to the alternative IDs, we are seeing an impact based upon that in regards to the level of transitions — the level of transactions that we’re actually seeing.

Diana Diaz : We also see the benefits of the technology changes that we made in the second half of 2023 as we compare the first quarter to last year.

Mark Walker : Yes, that is correct.

Diana Diaz : That’s helpful. Thanks, guys.

Mark Walker : Yeah.

Operator: We’ll take our next question from Dan Kurnos with The Benchmark Company.

Dan Kurnos : Mark, can we stay with that for a second? The Q1 SSP or sell-side guide is — it’s lower than 2Q of last year. It feels like there is either some revenue that you’ve decided isn’t going to continue. And I don’t want to put words in your mouth, but just — because obviously, Q3 was big, and we had a lot of momentum with the partner wins and yes, the impression growth. And your guidance for the year kind of implies that there is a scaling growth in the SSP over the course of the year, assuming buy side is, I don’t know, 10%, and maybe that’s wrong. So if you want to parse out kind of buy side, sell side in terms of the guide for next year that might be helpful. I’m just trying to understand sort of how — the choices that you made organically to, let’s call this a reset, which is fair as we move towards cookie deprecation, and how much of that volume then picks up or comes back to platform you’re assuming in the back half of the year as we think about what you’ve just kind of laid out for us, if that makes sense?