AdTheorent Holding Company, Inc.

Ladies and gentlemen, thank you for standing by and welcome to AdSense second quarter 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 DeStefano with Industrial Relations. David. Please go ahead.

Good afternoon, and welcome to AdTherent's second quarter 2022 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me today are AdTherent's Chief Executive Officer, Jim Lawson, and Chief Financial Officer, Chuck Jordan. 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 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.adverit.com. All of our non-revenue financial measures we discussed today are non-GAAP unless we state otherwise. With that, let me turn the call over to Jim.

Thank you, David, and good afternoon, everyone. Thank you for joining our second quarter 2022 earnings call. During today's call, I will provide an overview of company results for the second quarter of 2022, and we'll discuss key drivers of that performance. I will also review what we are hearing from our customers and how this has informed our guidance for the third quarter and the remainder of the year. Then I will turn it over to Chuck for a more in-depth look at our results, after which I will briefly contextualize our guidance, and then we will take your questions. In the second quarter, we generated $42.5 million in revenue, up 6.5% year-over-year, adjusted gross profit of $28.3 million, up 6.4% year-over-year, and active customers grew by 44 active customers, or 15% year-over-year, to 331 at the end of the second quarter. Growth in the quarter was led by our healthcare and retail verticals. and by our connected TV or CTV and direct access offerings, all of which were up very strong double digits, or in the case of CTV, triple digits. Importantly, these are opportunities in which we are investing most aggressively, and we are heartened to see these investments paying off. Even with the later than expected revenue, we delivered $7.3 million in EBITDA above the high end of our guidance range issued in May. representing over 25% margin. And we did this while investing behind people and technology that will power Adtheorant for years to come. For example, based on current headcount, by year end, our go-to-market team will have 17 more fully ramped sellers than year end 2021. And in the first half of the year, we filled 21 key tech, product, data science, analytics, and strategic partnership positions. all in a tight hiring environment. We will start to see the real benefits of these hires in late 2022 and throughout 2023. In short, we had a highly profitable quarter while investing for the future, and we have a better business now as a result. I want to put this in the context of the unfolding macroeconomic environment and what we are hearing from our advertiser customers. It has been a challenging and unusual few months. with negative macroeconomic sentiment increasingly driving delays, pauses, or postponement of advertising campaigns, and causing advertisers to become less transparent about future spending. Some are now projecting spend in weeks or months instead of quarters or fiscal years. Others have deferred decision-making or lowered spending forecasts. This has reduced our visibility into future campaign activity. supply chain and other idiosyncratic business disruptions also continue to pressure results. For example, airlines and hotels pausing advertising because flights and properties are fully booked. In addition, against this backdrop, ramp time for our new sales hires has been a bit slower than planned, although we remain confident that this exceptional group of talented and proven industry leaders will have a meaningful impact on the business in late 2022 and throughout 2023. As a result of these macro considerations, our business planning and guidance reflects an increased level of conservatism about which campaign opportunities we assume will be executed in full and on time. We've also made significant proactive adjustments to our second half spending plan to adapt to changing market dynamics, including substantially curtailing hiring in the back half of 2022. And if necessary, we have additional levers to flex spending up or down as market conditions dictate. This will enable us to maintain a double-digit adjusted EBITDA margin for full year 2022 while investing behind initiatives that extend our technological lead over competitors. Our investments will be more surgically focused on the highest value opportunities to advance our business near term. including our best-in-class CTV solution, our new direct access transaction model, and a transformational adherent health initiative. I will discuss each of these in more detail shortly. Despite the near-term pressures, brands must still advertise to drive their businesses, and lessons learned following the COVID shutdown are fresh in advertisers' minds. Those who pulled back too much lost out on sales when conditions improved. and we are confident that the investments we have made and will continue to make ensure we will be positioned for accelerating growth when things improve, as they always do. In the meantime, we are working closely with customers, helping plan how they can use our platform and solutions to drive an immediate and profitable return on their marketing investment. Now I would like to walk through some highlights from the quarter and our near-term investment focus. Starting with CTV, Adtheon's unique machine learning powered advancement discussed on our last few calls have further increased our differentiation in this dynamic and rapidly growing channel, and we are seeing impressive results. CTV revenue grew 107% during the quarter to over 4 million, as compared to 2 million in the second quarter of 2021. Customers are seeing value in our enhanced machine learning optimized version of programmatic CTV, which we have brought to market as A-plus CTV. For example, in the quarter, we helped a nonprofit advertiser drive efficient donations, utilizing a mix of CTV and display, leveraging valuable data from the so-called upper funnel, meaning awareness advertising tactics. To inform our predictive models and drive higher conversion rates, in the lower funnel, meaning the more transactional and performance-focused advertising tactics. Our conversion influence reporting showed that consumers who receive both ad theorem CTV and display ads convert at a 2,000-plus percent higher rate than if exposed to the CTV ad alone, and a 46% higher rate than if exposed to only the display ad. As a result, we drove an approximately 300% return on ad spend for the client, three times above its benchmark. We continue to enhance our CTV offering, and in the second quarter, we rolled out Dynamic CTV. This personalizes a viewer's experience using location, time, and weather signals. For example, a tourism board in a warm weather destination can serve a different version of its creative based on temperature, or other weather conditions in the individual's location. With this new solution, Adtheon can amplify a brand's messaging with many different creative iterations without the need to build out individual video assets. And we have several exciting advancements in the pipeline for the back half of the year and for 2023. I would also like to talk about Adtheon Health. Healthcare is already our largest industry vertical. Through the first half of 2022, we added 37 new healthcare and pharma active customer advertisers year over year and enjoyed strong double-digit growth, driven by our ability to use privacy-forward ad-targeting methods to drive healthcare advertising outcomes more efficiently than other platforms. In the second quarter, we further advanced our Ad Theron Health product development and data infrastructure by executing and operationalizing an expansive de-identified insurance claims data license. This allows us to incorporate privacy-friendly claims data into our algorithms, further increasing the predictive accuracy of our models and solidifying our position as the most data-driven, performance-driving, and privacy-forward digital advertising platform in the sector. We also advanced our go-to-market plan for our healthcare vertical during the quarter, deploying dedicated healthcare leadership and teams and educating customers about our unique value proposition. It is early, but extremely positive feedback from a number of large, existing, and potential customers suggests we have an unprecedented near-term opportunity to accelerate our foothold in this sector, which in 2020 spent $7 billion on advertising. The upfront investment behind this transformational opportunity has been made and will benefit us for years to come. We will share updates about this enhanced out there and health offering in coming quarters. Finally, I would like to comment on our efforts in retail and CPG. As I noted, we drove double-digit year-over-year growth in our retail vertical, driven in large part by earlier investments that enable us to target online and offline sales simultaneously by layering our CPG capabilities onto sophisticated machine learning models which optimize towards these lower funnel metrics. For example, during the second quarter, we partnered with a large retail brand to execute a full funnel campaign utilizing the upper funnel tactics of CTV and video in conjunction with lower funnel tactics of display to drive heightened online sales and site traffic. We saw that users exposed to both video or CTV and then display converted at a 390% higher rate than those exposed to a single tactic only, highlighting that users exposed to the full funnel campaign elements converted at a much higher rate. Lastly, we will continue investing strategically in other verticals, such as CPG. During the second quarter, for example, we formalized a partnership with Catalina to optimize in-progress campaigns based on in-store sales attributed to adherent media. Catalina has access to 22,000 multi-outlet retail stores nationwide and collects purchase data from more than 420 million loyalty cards through retailer point-of-sale systems. By pairing Catalina data with Adtheron's machine learning and predictive targeting capabilities, Adtheron is able to make real-time campaign optimizations across mobile, desktop, and CPV devices to maximize sales for its CPG clients. Shifting focus to our technology. I'd like to give a few quick updates about our ongoing machine learning and platform development. This work is core to who we are and where we are going. We believe that our industry generally relies on stale, inefficient, and ineffective ad targeting methods that cannot deliver the advertiser value offered by ad theorists. Most demand-side platforms, or DSPs, are engineered to target databases of digital IDs, whether they be cookies or audience segment IDs. We offer a disruptive alternative to that status quo based on machine learning and predictive decisioning that will lead the digital advertising industry into the post-ID era. Each quarter, in furtherance of this goal, we operationalize and automate within our platform and across our verticalized solutions new and innovative machine learning advancements and data partnerships. Again, Our business premise is that we target ad impressions with the highest statistical likelihood of driving a customer conversion event. We don't chase user IDs. In Q2, we were pleased to be issued a U.S. patent, data learning and analytics apparatuses, methods, and systems, recognizing one of our valuable ML-based advertising innovations, which we leverage as part of our cost-per-action, or CPA, and KPI optimization strategy. capability suite. This and other innovations enable us to use advanced ML and statistics to score ad impressions and drive KPI performance for customers. We made a number of critical platform enhancements in Q2 which further separate our platform from the alternative programmatic media buying platforms. Among them, we advanced our capabilities in the area of predictive contextual advertising. which we offer as an alternative to standard contextual advertising, which is essentially ad targeting based on publisher content categorization. For example, think serve sports ads to phishing websites. We use impression-specific predictive scoring to identify the impressions within contextually relevant properties, which are most likely to drive specific KPI conversions, such as website sales. Based on historic sales or other KPI conversions, which resulted from ad exposure. And now, due to advancements in Q2, we are incorporating advanced keyword extraction processes into our model building. In plain English, this means we are able to identify keyword combinations on web pages, which our data suggests are more likely to drive sales or other KPI conversions for customer campaigns. And our models will factor these learnings into our platform's real-time scoring and bidding processes, The more impression data we have, the more accurate are our models, and the better return on ad spend we deliver to customers. This is another big step forward for us. In the quarter, we also made substantial progress towards our forthcoming Q3 rollout of ad theorem predictive audiences, which will allow programmatic advertisers to target audiences in a more precise, data-driven, and less opaque manner than is currently possible with traditional targetable audience segments. We mentioned last quarter that we executed a license agreement, which expands to almost 900, the number of impression-specific data objects that our models may consider in evaluating impressions. We are integrating that data into our bidders and solutions and processes, and we are excited to discuss our rollout of Ask Aaron Predictive Audiences next quarter. In support of these efforts, in Q2, we signed another important data license with Peer 39, to operationalize additional contextual data into our solutions. Through this integration, our internal and direct access platform users will be able to perform pre-bid targeting based on contextual sentiment, content quality, and their own brand safety criteria. Advertisers will also be able to curate and activate for campaigns custom categories of inventory that specifically fit their brand significantly. This data will be leveraged within AdSense predicted models to introduce additional ID-independent contextual signals. Finally, I would like to share a quick update and example of our ongoing efforts to operationalize and automate within our platform valuable data science learning. In Q2, we implemented platform automation related to the ingestion of advertiser brand website visitor engagement data for use in our predicted models. and we are already using it to improve customer campaigns. For example, in Q2, we used this platform automation to drive brand website visitation for a destination marketing organization. In a very short campaign window of two and a half weeks, we were able to surpass client benchmarks, driving 3.6 times more visits than the client's campaign goal. Despite the difficult backdrop and decreased visibility into the back half of 2022, we are pleased with the progress we have made in extending the reach of our platform and growing awareness of ads here in the market. We feel great about our positioning in the market and see a tremendous opportunity ahead to capture more of the $13 billion US programmatic digital media market, opportunity that is focused on performance driving execution. Unlike other platforms that focus on targeting users, Attheir predicts the performance of media opportunities using the industry's most advanced machine-learning-powered media buying platform. And we do it in a privacy-forward way without reliance on third-party data licenses, cookies, device IDs, or any of the new unified or individualized IDs in the market now. Most importantly, our platform and products drive industry-leading performance for our customers' campaigns. measured in real business terms such as incremental sales, store visits, registration, travel bookings, online orders, drug prescription bills, insurance policy sales, and other business outcomes. This measurement is increasingly important to brands, and proving return on ad spend is even more important in periods of economic uncertainty. I would like to conclude my remarks by thanking the Ad Theorem team, whose efforts amidst broader macroeconomic uncertainty have been commendable. We are focused on our opportunities and clear objectives, and there is no better team. I will now turn the call over to Chuck to talk about our financial results and guidance, and then I will conclude by offering some perspective on this guidance before going to Q&A.