So, all of these help to add incremental revenues, but also a level of stability. And as that grows over time, I would expect the degree of revenue predictability will grow.
Matt Swanson: Thank you, Steve.
Stacie Clements: Our next question comes from James Heaney at Jefferies. Please go ahead James.
James Heaney: Great. Thanks for the question. Can you talk a little bit more just about your CTV growth strategy? And how do you feel about the inventory that you currently have acted today? And do you see a world in which you could get more access to the premium CTV inventory that we’re seeing entering the market? Thank you.
Rajeev Goel: Yes. Sure James. Thank you. So, yes, when we think about CTV inventory, I feel really good about how well-positioned we are. Year-over-year CTV publisher count grew from 214 Q4 of 2022 to 271 in Q4 of 2023. So, that’s significant count or significant growth in terms of the number of publishers. And what I see happening is that there’s a lot of momentum, particularly, with the biggest names, the biggest streamers and broadcasters. And it’s being driven by a network effect with buyers and Supply Path optimization as well as the strength of our technology platform. So, buyers are increasingly consolidating their spend on our platform. Our active product extends that even further. And DISH and Sling are a good example of that, where then they want access to the dollars, of course.
And so the — as we ramp these SPO relationships and get deeper with buyers and that brings more publishers to our platform. And then the other, I think, really nice expansion opportunity is that as CTV publishers use our platform and see the benefits of it, they are moving more of their one-to-one private marketplace or programmatic guaranteed deals to our platform. So, these are — this is a deal that a publisher would sell to a single advertiser and they’re moving those deals for our platform. We grew that segment by 50% year-over-year last year. And we have, I think, a low share of the market in that arena, that one-to-one deals space and so I think there’s a lot of runway ahead of us. And then last comment I’ll just make is that the vast majority of CTV monetization that we have on our platform today is in the U.S., but we see tremendous opportunity in a variety of different parts around the world.
Europe is growing quickly. APAC, we highlighted earlier, the ACTIVATE publisher reaction in Japan. So, I think there’s a variety of different markets where we’re going to continue to grow CTV at a rapid rate.
Stacie Clements: Great. And then, Steve, maybe just one quick follow-up on the guide for 2024. Last year, you weren’t able to provide guidance, but this year, it looks like you have a little bit more visibility. Is that sort of what’s giving you the conviction to guide to the full year? Like just what’s kind of giving you that increased visibility?
Steve Pantelick : There’s actually a number of factors. First and foremost is, we do see a more constructive ad environment out there. So that’s number one. Number two is many of the things that we’ve been working on for a number of years around innovation really started to take hold in the back half of 2023. You saw the outstanding results in the fourth quarter. If you exclude the Yahoo-owned and operated inventory, our business grew 19% in the fourth quarter. And so when we look ahead at the opportunities, we’re going to build on that momentum. We have been investing behind omni-channel video, Rajeev called out some of the factors there. We are seeing terrific momentum from SPO relationships that will continue to grow as a proportion of our total business.
So that adds a tailwind to us. And then, of course, we continue to have progress with our new emerging revenues, like Activate, Connect, OpenWrap. So all told, when we look at 2024, we’re seeing a minimum growth expectation of 10-plus percent. And if you strip out the Yahoo component, that’s over 12%. So we’re feeling really good about where we are right now. Obviously, we’ll update the investor group as time goes on. But we have a really good start to the year and many things that have already gained traction in our building.
Stacie Clements: Our next question comes from Justin Patterson, KeyBanc. Please go ahead, Justin.
Justin Patterson : Great. Thank you very much, and good afternoon. To build on that last question, I wanted to dive into the headcount investments some more within there. It does sound like you have some tailwinds, so leaning into that. But how should we think about just the returns from this headcount investments? And if say, the tailwind gets a bit stronger over the course of this year, will you look to invest a little bit more aggressively than what’s currently in plan or drop more through to the bottom line? Thank you.
Steve Pantelick : Sure. I’ll take the first part and Rajeev, you could add some comments in terms of our strategy. But just to set the stage, Justin, we obviously have proven that we are a very tough business in the fourth quarter, a 46% adjusted EBITDA margin. So we have a great business model. And when we take a look at the momentum that we’ve been building up the traction in SPO in our new areas of growth. We absolutely feel this is the right time to invest more significantly. And so it’s around, of course, innovation and around sales. And so we think that with that combined investment profile, we’re going to be able to get returns this year and beyond. And we’ve certainly proven historically, our ability to make growth investments pay off.
And so if we see, there is further opportunities, there’s no reason why we wouldn’t potentially increase our rate of investment. But what makes our business particularly strong, robust and unique is our ability to still deliver robust margins. Right now, we’re aiming to be about a 30% EBITDA margin, even with the incremental investment that we’ve called out. And so we see this as focus on growth, while also delivering very strong bottom line results.
Rajeev Goel: Yeah. Hey, Justin, I’ll just add. Our priorities are clearly shifting the last 18 months or so. It’s been a fairly weak ad spend environment, as you know. And so then our priorities were really focused on covering the large customer base, we’re covering the largest customers in our customer base. Innovating for where the growth opportunity is heading to and we’ve talked a lot about those products. And then third, just making our business more efficient, and I think we did a really strong job in all of those areas. And so now as we get into a more constructive environment, we’re really focused on accelerating revenue growth, and Steve called out some of the metrics. And I think you’re seeing that acceleration happen pretty quickly through Q4 and Q1 and onwards.
So we will be very, I would say, opportunistic around where we see growth opportunities and just continuing to invest behind them. I think we’re pretty comfortable with the profitability in the business model, as Steve highlighted, strong cash generation as well. And so we’re going to put the bias towards accelerating revenue growth.
Stacie Clements: Thanks, Rajeev. Our next question comes from Matt Condon at JMP. Please go ahead, Matt.
Matt Condon: Thanks for taking my question. Just with the shutdown of Vice and BuzzFeed selling complex, can you just opine on the health of the digital publishers as we enter 2024? Is this a structural change? Or is this just a macro cycle? And then maybe a second one. Can you just talk about advertiser adoption of ID Hub, and just how you’re expecting that to trend throughout 2024? Thank you.
Rajeev Goel: Yeah, sure. Thank you, Matt, for the question. So yeah, let’s start with the first one in terms of a couple of companies you cited and health of pubs. So as we talked about over the last 1.5 years, and I just mentioned in the prior question, an answer, the growth opportunities always shift in this industry through an economic cycle and we’ve been through cycles before, so we know that to be the case. And so the opportunities really are shifting towards areas like CTV, commerce media and publishers where they have certain types of data assets. And I think what we see happening is in the case of those publishers and other digital publishers, they may not be keeping up with where those growth opportunities lie, and therefore, suffering as a result.
Now we’ve seen this coming. And so over the last several years, we’ve been really focused on innovating our products in these areas, growing the share of our business that’s coming from CTV and omnichannel video that’s coming from commerce media and that has this kind of alternative signal to the cookie attached to it, so that we can be market share gainers in this process. So I think that’s what you see at play is that even as ad spend now starts to accelerate, there’s going to be pockets, there’s going to be winners and losers. And what you see with our growth numbers is that we’re well positioned with where the high growth opportunities are. Now turning to your second question on Identity Hub, so just a quick reminder of what Identity Hub does is, it is software that publishers can deploy that allows them to easily convert data that they have on a user into a variety of different alternative IDs. So if a publisher has an e-mail address, for instance, on a user and they have consent, then they can convert that into UID2 into LiveRamp ID into I think we’re now at 29 different IDs. So we have several hundred publishers that have Identity Hub deployed, and we plan to add significantly, probably in the triple digits of additional customers this year, and we expect that we may be able to exceed those numbers as we get closer to the cookie deprecation time line.
But again, it’s a key part of growing the signal that we have in order to generate higher CPMs, 16% higher on average when we have ID’s presence.
Stacie Clements: And our next question comes from Andrew Marok at Raymond James. Please go ahead, Andrew.
Andrew Marok: Hi, guys. Thanks for taking my questions. I was wondering if you could give maybe a little bit more color on the generative AI impact on engineering productivity. Is that adoption of external products or anything generated internally because I know you guys like to own and operate your own infrastructure. And you’ve talked about the 60% increase in software releases in 2023. How impactful can these tools be for release velocity in 2024?
Rajeev Goel: Yes. Great. Thanks, Andrew. So there’s — of course, there’s multiple branches of AI, for example, machine learning and obviously, the much new regenerative AI. So just for a little bit of context, we have longstanding use and expertise in machine learning, we use that quite extensively for programmatic transactions that happen in milliseconds, things like price floors, traffic efficiency, various action management algorithms. Now with respect to generative AI, we pushed hard in 2023 to test and scale a number of new approaches to software development, to testing and release automation using Gen AI tools. And if you can name a tool, we probably tested it. So we’re using a combination, a variety of third-party tools.
We’ve also built some things in-house ourselves. We’ve seen good results and have been scaling those things up, and that’s what’s leading us to anticipate a 15% to 20% increase in engineering productivity in 2024. And maybe I can give two concrete examples of how we’re putting Gen AI to work. So the first is that by automating a lot of the software testing process, we’ve been able to increase the ratio of engineers to testing personnel. So by using Gen AI tools, we’re able to automate a lot of the manual testing that used to happen. And so that’s a structural gain now where for $1 million of engineering investment, we can have more engineers that are writing new features and new capabilities. And so that’s part of that productivity gain. And then sticking on that testing theme by automating a lot of that testing, we’re able to release software faster by really automating the entire pipeline from development to testing to deployment, so we used to have an approach a couple of years ago, where we might ship every – ship software every couple of weeks and had to go through these testing cycles and make sure that everything works properly.
Now individual engineering teams within PubMatic, they can release software at will because we’ve been able to automate. So an engineer can write code one day and within 24 hours, that code can be released in the production. And so that has a tremendous, I think, acceleration of our development and iteration cycles, which should lead to not only faster productivity but also I would expect accelerated revenue growth.
Andrew Marok: And you preempted my follow-up question on examples. So I’m all said. Thank you.
Rajeev Goel: Great. Thanks, Andrew.
Stacie Clements: Our next question comes from Jason Helfstein, Oppenheimer. Please go ahead, Jason.
Jason Helfstein: Thanks. A few questions on maybe interconnected. So just on alternative IDs, when publishers choose, let’s say, to use like a UID or ramp ID, is there any additional cost to you to help them support those IDs? Or just broadly, like is there a cost that has to be borne by the ecosystem that you have to share a piece of? That’s question one. And then I’ve got a follow-up.
Rajeev Goel: Sure. Yeah. So Jason, generally, the cost is borne by the advertiser that’s using that ID. So publishers don’t bear a cost, so let’s say, convert an e-mail address into a UID2 or into a LiveRamp ID. We do not bear licensing costs. We do have some infrastructure costs. So that’s part of the CapEx budget that Steve commented on earlier. But that’s more than offset by the fact that we generate higher CPMs with those impressions. And given our usage model, our revenue share then we’re able to make even more net revenue on those impressions. So the economics for us and for the publisher are very clear and very positive. And then obviously, each advertiser is doing their own math in terms of how much of those IDs they want to use.
Jason Helfstein: Thank you. And then follow-up I mean, I guess, kind of starting with the guidance for free cash flow being flat year-over-year despite healthy revenue growth. And then there are a number of like puts and takes in 2023 on kind of like one-time items in both revenue and cost, I mean, just how are you thinking about maybe margin expansion going forward? Just it seems like as the business gets bigger, it does require more capital, and you’re obviously hiring more people because the business is getting more complicated basically. But just how are you thinking about kind of maybe margins over margin expansion over the next few years or really kind of like close to like peak margins?
Steve Pantelick: Sure. Thanks, Jason, for the question. So we think that there is absolutely a lot of opportunity over the long run to expand margin. I mean we’re taking a very specific concrete opportunity right now given where we see momentum in the digital ad environment to invest for growth and so we’re being very thoughtful about it in terms of where we’re putting the people, the team, technology, sales, and that will have returns over the next couple of years. But if you step back and just think about the company that we’ve built over many years, we actually have many structural drivers that really support our long-term margin expansion. First and foremost, of course, we have our own and operated infrastructure. And so you saw the power of what we could do in 2023.
We were able to optimize that infrastructure and grow our capacity by 20%, while reducing our CapEx by 70%. So very powerful leverage point that we assign when we take advantage of it and how we then deploy those returns. Number two, as a reminder, we are investing in the fastest growing, most profitable component segments of the digital ad environment. Omnichannel video, mobile, the emerging revenue streams. And so these products have very high marginal profitability. So we anticipate that will be a tailwind on margin. And then, of course, we talked about the structural aspects of Generative AI and the long-term assets that we built in India with our development organization that is something that is going to sustain strong economics for years to come.
And then when you think about from a strategic point of view, what we’ve done as a business, being a pioneer and supply path optimization. We now have over 45% of all of our activity is related to SPO activity relationships, and we expect that to grow — why is that important is that we’ve already incurred the cost to process those impressions. So when we move more people, more buyers onto our platform as a result of SPO, the incremental costs are de minimis. So that sort of like structurally feel really good about where we’re going in the long run. And then, of course, all the factors of as a company, our long-term focus is on being operational excellence. 11 straight years of adjusted EBITDA profitability speaks to sort of the structural advantages we have and just the mindset that we operate with.
Jason Helfstein: Thank you.
Stacie Clements: And our last question comes from Max Michaelis at Lake Street. Please go ahead. Max.
Max Michaelis: Hey guys. Good to see the top 10 verticals grow 26% in the quarter. I was wondering if you could — if you wanted to highlight any other verticals? I know you touched on business and shopping, maybe if there’s any other verticals that performed well? And then how some of those verticals have trended into Q1 we’re about two months into the quarter?
Rajeev Goel: Sure. So, the great news is that we saw double-digit growth across every top 10 vertical in the fourth quarter. So, we have not seen that throughout the 2023. And I called out in my prepared comments that shopping was a real standout because it went from down year-over-year in the prior quarter to positive. And of course, I commented specifically on a couple of verticals that grew over 30%, but we had across the board, travel, food and drink, automotive, health and fitness, these are all double-digit growers. So, very strong across the board. And it really speaks to the strength of our platform as an omnichannel platform with a very diverse publisher base and a diverse buying ecosystem. Turning to the first quarter, we’ve seen many of those same trends continue in the first quarter.
Obviously, we’re still in the middle of it, but very pleased to see continued momentum in shopping and the other verticals like business technology also continued to grow nicely.
Max Michaelis: All right. And then last one for me. I saw the SPO retention rate was 120%, what should we think of as a normalized range for that metric?
Rajeev Goel: I don’t see why that couldn’t be a normalized metric over time based upon a couple of things. Number one, these are steep relationships and so we’re solving problems, creating opportunities for our SPL partners. And so they’re moving more and more spend. They’re looking for more opportunities across their own ecosystems and how they can take advantage of our platform and our capabilities. So, we believe that sort of adds a natural tailwind. The other facet is you’re just always adding new opportunities like ACTIVATE, commerce media. So, I think that the takeaway is — 120% is a reflection of sort of the strength of our platform, the relationships, and I think is a good indicator of what the future potentially presents.
Max Michaelis: All right. Thanks guys. Nice quarter.
Rajeev Goel: Thank you, Max.
Stacie Clements: Great. Thank you. There are no further questions in the queue. So, I’m going to turn it back over to Rajeev for closing remarks now.
Rajeev Goel: Thank you, Stacie, and thank you all for joining us today. Q4 was an inflection point where we saw prior strategic investments fuel accelerated revenue growth, strong margins and cash generation. In addition, we executed well against our top operating priorities for the year, which drove significant cost savings and efficiencies, all of which set us up well for 2024. We expect to grow our business by 10% at minimum in 2024, which is more than double our growth rate in 2023, while also expanding margins. At the same time, we’ll continue to invest in key areas and unlock emerging revenue streams. This is an exciting time in ad tech, and we’re very well-positioned to grow our market share as the industry evolves. We look forward to seeing many of you over the next month or two. As a reminder, we will be at the JMP Conference on Monday, March 4th, and the KeyBanc Conference on Tuesday, March 5. Thanks, and have a great afternoon, everyone.
