Direct Digital Holdings, Inc.

thank you for standing by this is the conference operator welcome to the direct digital holdings fourth quarter and fiscal year 2021 earnings conference call as a reminder all participants are in listen-only mode and the conference is being recorded after the presentation there will be an opportunity to ask questions to join the question queue you may press star then one on your telephone keypad Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Michael Grotel, investor relations at ICR. Please go ahead.

Good afternoon, everyone, and welcome to Direct Digital Holdings' fourth quarter and fiscal year 2021 earnings conference call. I am Michael Grotel, investor relations at ICR. Hosting today's call are Mark Walker, Chief Executive Officer, and Susan Eckhardt, Chief Financial Officer. The information discussed today is qualified in its entirety by the Form 8K that has been filed today by Direct Digital Holdings, which may be accessed on the SEC's website and on DRCT's website. Today's call is also being webcast, and a replay will be posted to DRCT's Investor Relations website. Please note that statements made during this call, including financial projections or other statements that are not historical in nature, may constitute forward-looking statements. Such statements are made on the basis of DRCT's views and assumptions regarding future events and business performance at the time they're made, and we 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 DRCP's filings with the SEC, and you should refer to and carefully consider those for more information. This cautionary statement applies to all forward-looking statements made during this call. Do not place undue reliance on any forward-looking statements. During this call, DRCT will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings release DRCT filed with its form 8K today. I will now open the call to Mark Walker. Mark, please go ahead.

Thanks, Michael, and good afternoon, everyone. It's great to be with you today to share our first update as a public company. For those of you who are new to Direct Digital Holdings, we're an advertising technology company that assists clients in driving ROI through the buying and selling of media. Our technology platform meets the demands of the underserved middle market and provides access to multicultural publishers. We're excited to share our results of continued execution against our vision of long-term organic and M&A field growth. Our company was founded in 2018 through the initial acquisition of Huddle Masses and Colossus SSP, which was the creation of our end-to-end programmatic platform. Colossus is our sell-side proprietary technology that enables publishers to sell media to buyers, while Huddle Masses, along with Orange 142, is our buy-side platform, which enables middle market businesses to purchase media to drive ROI. In 2020, we acquired Orange 142, to further develop and grow our buy-side platform and to expand our industry offerings into education, travel and tourism, financial services, and other verticals. I will begin the call providing our Q4 and our end-of-year performance and overall business strategy. After that, I'll turn it over to Susan Eckert, our CFO, who will share detailed financial results and our expectations for the full year of 2022, at which point the operator will turn the call over to your questions. Now I'm going to review the 2021 fourth quarter results. In the fourth quarter of 2021, we generated $12.9 million of revenue, an increase of $6.3 million, or 95% higher than prior year period. This was largely driven by acceleration on the sell-side platform, Colossus SSP, with growth also coming from our buy-side platform. For the full year of 2021, the company experienced steady accelerated growth And during the fourth quarter, our SSP platform processed an average of 70 billion monthly impressions and served approximately 80,000 buyers. Our buy-side customer count grew by over 30%, increasing the number of customers we serve from roughly 150 to 200 of our overall customer count. Our recent growth of the supply-side platform has been driven by a variety of factors, including increased addition of CTV, OTT, and video media and other types. For the year ended December 31, 2021, we processed approximately 2 trillion bid requests through 22 DSPs and increased our overall media properties to over 10,000. For all of 2021, Our total revenue was $38.1 million, an increase of $25.6 million, or 206% over the $12.5 million in 2020. We are profitable, and for the full year, we delivered an adjusted EBITDA of $6.4 million. All in all, 2021 was an incredible year for the company, and beginning with our IPO this year, we expect 2022 to be an even more exciting and dynamic time for Direct Digital Holdings. Let us now discuss our sell-side platform growth strategy. Our business strategy is aligned to capitalize on significant growth opportunities due to fundamental market shifts and industry inefficiencies. Several trends happening in parallel are revolutionizing the way that advertising is bought and sold. As digital media has grown and emerging marketing channels continue to gain adoption, audience segmentation, including on multicultural lines, has become more granular. A growing and increasing segment of those audiences is the multicultural audience who has been traditionally underserved in the industry. According to the US Census Bureau, racial minority and multiracial consumers represent 42% of the US population and are projected to be the numerical majority in the US by 2044. When we expand the definition of multicultural to include LGBTQ customers, the numbers are significantly greater. Advertisers and publishers alike face the same challenge. Advertisers are seeking new avenues and opportunities to connect with multicultural audiences in their natural media consumption environments while publishers are producing unique content to attract loyal consumers. The advantage will go to those innovative companies able to directly connect both sides to those audiences and leverage the insights flowing from those consumers. We believe being able to go into the programmatic platform and target general market and multicultural audiences at scale across all digital inventory is a major competitive advantage for direct digital holdings. Higher customer engagement translates into higher retention and extended customer lifecycle, representing the opportunity to sell and upsell consumers. Colossus ranks within the top five in the MediaMath Source Scorecard, which measures accountability, addressability, and transparency, and can be seen as a proxy for inventory quality and technology across 82 different SSPs as of August of 2021. With over 80,000 advertisers across more than 10,000 media properties, delivering over 70 billion monthly impressions, of which at least 5 billion monthly impressions are multicultural, and a majority being high-growth CTV OTT video inventory. Colossus is poised to benefit from shifts of digital marketing and shifts to programmatic and CTV OTT advertising within the digital marketing ecosystem. Given that most transactions take place in an auction bidding format, We continue to make investment across the platform to further reduce the processing time. In addition to the robust infrastructure supporting our platform, it is also critical that we align with key industry partners in the digital supply chain. Colossus is integrated into several leading DSPs, both directly and indirectly through BitSwitch, and partners such as Zander, AppNexus, Trade Desk, Google 360, Verizon Media, MediaMath, Samsung, and others our partners that we work with on a daily basis. We continue to add new DSP partners, especially where we believe the DSP might offer a unique advertising base seeking to target our multicultural audiences at scale. We help our advertiser clients efficiently reach diverse communities, including African American, Latin Americans, Asian Americans, LGBTQ customers in highly targeted campaigns. We partner with both large publishers, such as Hearst, Mediavine, Gannett, Newsweek, and several others, as well as smaller publishers, such as Blavity and Lenation and others. Colossus offers our publisher partners ad inventory to existing small and mid-sized buy-side clients at Huddle Masses and Orange 142, and other major DSP clients of Colossus, which enables our buy-side to curate and manage client outcomes more effectively. In addition, because it is a standalone platform, Colossus offers its ad inventory to larger multinational clients seeking more authentic advertising access to unique and often diverse and multicultural audiences. Our business strategy on the sell side also presents significant growth potential as we believe we are well positioned to be able to bring underserved multicultural publishers into the advertising ecosystem, thereby increasing our value proposition across all clients including our large clients. We believe that Colossus is the last model of delivery for our buy-side clients and that our technology curates unique, highly optimized audiences informed by data analytics and algorithmic machine learning technology. Now I'm going to provide you the growth strategy of our buy-side business. Due to COVID, small to mid-sized companies experienced the importance of having digital sales and marketing channels which has led to a wholesale change in the way that media is consumed and monetized at the local and regional levels throughout the United States. In traditional methods of advertising, such as broadcast TV, ads can target a specific network, program, or geography, but not a single household or individual as digital and OTV, CTV ads can. And each year, more and more households are watching OTT CTV rather than traditional TV due to cord cutting. Additionally, we expect that the continued destabilization, including the phase-out of digital cookies in 2023, will create more opportunities for technology companies that provide next-gen CTV and digital solutions and minimize performance disruption for advertisers and agencies. We expect to see continued benefits from the rapid transition of small and mid-sized businesses to digital marketing. These businesses are likely to achieve a higher ROI on their advertising spend by leveraging streaming service advertising, video and display, in-app, native, and audio advertisements that are delivered both at scale and on a highly targeted basis over the ROI of a traditional media campaign. Only recently have small and mid-sized businesses begun to leverage the power of digital media in a meaningful way as emerging technologies have enabled advertising across multiple channels in a highly localized nature. Campaign efficiencies yielding measurable results and higher advertising ROI, as well as the needs necessitated by the global pandemic, have prompted these small to middle market companies to begin utilizing digital advertising on an accelerated basis. We believe this market is rapidly expanding, and that small to midsize advertisers will continue to increase their digital spend. Our robust buy side has long-term client relationships and managed contracts, which allows us to have predictable and profitable revenue source with our high rates of customer retention. Our buy side provides access to first-party data management, media purchases, campaign execution analytics, and therefore helps drive increased ROI, across a wide array of digital media channels for the middle market segment. Because our company uses many of the large demand-side platforms, or DSPs, our team is able to leverage our campaign performance across multiple DSPs to drive campaign performance and ROI for our clients. By taking this DSP-agnostic approach, our platform provides the broadest market access for our clients so that clients can easily buy ads on desktop, mobile, connected TV, streaming, audio, and digital billboards. The BuySide offers technology-enabled advertising solutions and strategic planning to clients. And in particular, our BuySide focuses on small to midsize clients and enable them to leverage programmatic technology to engage their potential customers more directly on a one-on-one basis in any local market with specificity to media device and footprint. Serving the needs of approximately 200 small and mid-sized clients, the BuySite of our business leverages the insights of leading DSPs such as Xander, Google 360, MediaMath, and others to drive increased advertising ROI and reduce customer acquisition costs for our clients. The result is a benefit to our BuySite clients in that they enjoy a more even playing field compared to larger advertisers by driving more effective marketing advertising in local markets that are compatible to their business footprint. We believe that we have a unique competitive advantage due to our data-driven technology that allows us to provide front-end, by-side planning for our small and mid-sized clients, coupled with our proprietary technology, Colossus SSP, where we could curate the last mile in the execution process to drive higher ROI. Before we move over to the financial results with Susan, I want to answer a question we receive frequently. Why did we decide to go public? So to address that question, it's a very simple answer. We want to rapidly scale the DDH platform to take advantage of the favorable tailwinds we're seeing for the small to middle market digital advertising space. This market is underserved from the commercial perspective, and until our IPO, this opportunity wasn't reflected in the public markets. While we see incredible growth in organic business and results from our more recent acquisitions, we continue to see a compelling opportunity ahead of us, to accelerate the benefits to the end customer by participating as a leading player in the rationalization of the small business marketing services sector, while thus far we have focused our efforts on the first and last dollar in the programmatic value chain. We have opportunities to deepen our expertise as well as broaden across the entire ecosystem. Much like the consolidation at the upper range of the programmatic market in the recent past, there are no shortage of compelling and value-enhancing opportunities in our space. Now I'll turn over the call to Susan Eckert, our CFO, who will review our financial highlights.

Thank you, Mark. Moving right into our financial results. As Mark stated, our revenue increased to $12.9 million in the fourth quarter of 2021. an increase of 6.3 million, or 95%, over the 6.6 million in the same period of 2020. Our sell-side advertising segment grew to 6.7 million and contributed 5.4 million of the increase, or 410%, over the 1.3 million in the same period of 2020. This was driven by an increase in publishers and impression inventory. Our buy-side advertising segment grew to 6.2 million and contributed 0.9 million of the increase or 17% over the 5.3 million in the same period of 2020. This increase was driven by our land and expand strategy for increasing net new customers and existing customer spend. Gross margins for the fourth quarter of 2021 were approximately 39% compared to around 53% in the same period of 2020. We expect these margin results when the sell-side advertising segment increases the mix of its revenue concentration in certain quarters since it has a margin of approximately 19%. But it will also result in higher dollar EBITDA contribution by the sell-side segment. Operating income increased to $1.3 million for the fourth quarter compared to approximately $40,000 in the same period of 2020. Net loss for the quarter was $2.1 million compared to a loss of $0.5 million in the same period of 2020, primarily driven by the one-time loss on the early extinguishment of our debt of approximately $2.7 million related primarily to prepayment and exit fees. Adjusted EBITDA was $1.8 million for the fourth quarter, compared to $1 million in the fourth quarter of 2020. Now I'd like to turn to our full-year results. Revenue in the full year of 2021 was $38.1 million, an increase of $25.6 million or 206% over the $12.5 million in the same period of 2020. For the full year, our sell-side advertising segment ended the year at $12 million and contributed $9.2 million of the increase or 326% over the $2.8 million in the same period of 2020. Again, driven by an increase in publishers and impression inventory. Our buy side advertising segment ended the year at 26.1 million and contributed 16.5 million of the increase or 171% over the 9.7 million in the same period of 2020. As we mentioned earlier, we acquired Orange 142 in September 2020, which contributed 15.8 million to the increase and the remaining growth represented 0.7 million as our customers served grew from 150 to over 200 customers during the year. Gross margins for 2021 were approximately 48% compared to around 41% in 2020. And as noted for the quarter, we expect these margin results when the sell-side advertising segment increases the mix of its revenue concentration, but it will also result in higher dollar EBITDA contribution by the sell-side segment. Operating income increased 5.2 million or 619% to 4.4 million for 2021 compared to an operating loss of 0.8 million for 2020. Net loss for 2021 was 1.5 million compared to a loss of 0.9 million in 2020. For the full year 2021, our adjusted EBITDA increased to 6.4 million compared to 0.6 million in 2020. In addition to generating positive EBITDA results, we also generated $3.8 million in operating cash in 2021, compared to an operating cash net decrease of $0.6 million in 2020. We continue to have a strong balance sheet and ended the year with over $6 million in available liquidity. In December, we refinanced out our high interest rate debt with Silver Peak, whose interest yield was around 16%, for a lower interest rate debt with Lafayette Square, whose interest rate will range from around 8% to 9.5%. This provided us with a credit facility of up to $32 million, consisting of a $22 million term loan and up to $10 million delayed draw. Now I'd like to turn to our guidance for 2022. While we plan to offer only annual guidance and update it throughout the year, we are providing our initial expectations on Q1 2022 since we're so close to the quarter end. We expect our Q1 2022 revenue to be in the range of 11 to an 11 and a half million or 98% growth over the Q1 2021 at the midpoint. For the year, we expect revenue to be in the range of 48 to 52 million or 31% growth year over year at the midpoint. With our transition to a publicly listed company, we look forward to executing our growth plan with a keen focus on enhancing shareholder value. Additionally, we anticipate continuing to invest in our core business and infrastructure to further support our rapid organic growth and our inorganic growth strategies. We continue to focus on our top line growth and remain disciplined in our goal of increasing adjusted EBITDA and positive cash flow. Now I'd like to turn it back over to Mark for some closing comments.

Thank you, Susan. Finally, I'd like to share our heartfelt support for the people of Ukraine who are in an unjust humanitarian crisis at this time. And with that, we'd like to open up the line to questions. Operator, please go ahead.

Thank you, sir. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. you will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question is from Dan Kornos with Benchmark Company. Please go ahead.

Great, thanks. Good afternoon, everyone. Congratulations on your first public quarter. First question for you, we didn't talk about the Pigeon Forge contract, and it's interesting because as you finished up, Mark, all of the commentary around Ukraine, obviously crazy oil prices, the economy, everything else, and yet your strength with the DMOs kind of shows through here, so... Maybe just kind of thought process on the renewal, five-year deal, probably good terms, just, you know, the conversation that you had with them in light of kind of the economic backdrop, why you won that business, just kind of any incremental thoughts as it relates to the strength of the business model that you present that's differentiated from the rest of the group.

Yeah, absolutely. Dan, appreciate the question. As it relates to the buy side of the business, we have seen a strong showing of business coming in from the DMO space, and that's the destination marketing space. We currently service roughly about 55 different DMOs. who are interested in our services because they view the current market that we're in with gas prices of increasing a real opportunity to attract driving traffic into their DMO footprint. So we see that as actually a growth opportunity for us because what it is doing is it's allowing us to attract new customers to come in so that they can get more visitors into their footprint from travel and tourism space. So we're pretty excited about that opportunity, and we see it as a growth opportunity for us.

Great. And then obviously the sell-side focus here, you know, yes, on unsurprisingly more noise right out of Google with the following and Apple footsteps causing some more disruption in the marketplace. And it would be fascinating if Apple were to stand up a walled garden overnight, but you know, clearly the SSP continues to grow really at a really healthy clip here. Maybe just talk about the dynamics in that marketplace, especially, you know, even, even further down funnel, we've heard you know, certainly on the buy side, but from Roku and TradeGas talking about getting you to SNB. You guys have a really great premium publisher portfolio. Talk about maybe the relationships you have with advertisers, why you think you can drive that business, and obviously you get the seat at the table because of the multicultural angle, but we've just had Byron Allen hosting some upfronts. We're going to have the streaming upfronts coming up. And so maybe talk about sort of CTV and maybe even CTV within multicultural, if that's a thing, if that's growing. Just love to hear some more comments on how that's proceeding as we start the year on the SSP side of the business.

Yeah, absolutely. Our CTV as well as our SSP business is really strong. What we have seen in the past is that the buyers that actually leverage our SSP, they're looking for a one-stop shop to reach the multicultural audience as well as the general market audience. there definitely seems to be an appetite not just for CTV, OTT, and video, but also from display, native, and audio. What we have seen historically is that there's definitely more of an affinity and more of a marketplace for the CTV and OTT space and video space, but we really have seen a significant amount of growth in display, native, and audio. As it relates to the multicultural audience, We're seeing more and more demand from buyers interested in reaching that audience in their native space and within the small, unique publishers that we actually have within our ecosystem. We take a significant amount of time, energy, and effort and resources to actually connect them into the Colossus SSP, and then the buyers reward us with their business and the continued growth that we have continued to see quarter over quarter, as we said, from 2021, and we're starting to see carried over. So I appreciate that question.

Just one, if I could squeeze in at the end here, just on potential publisher growth, obviously, because of that setup and because of the job that you've done and you guys punching way above your weight, at least on the media mass scorecard, just how do you think about the potential to add new inventory to the platform?

Yeah, we are, our publisher team is actually on a daily basis reaching out and adding new customers, new customers that are publishers so that we can have more inventory to sell within our SSP. If you look at our performance over 2021, we actually more than doubled our impression count. If you look at where we've grown since 2018, we started off with 5 billion impressions and now we're sitting at almost 70 billion impressions. So our publisher team on our SSP business is continuing to add more publishers into our ecosystem so we can have more impressions that we can sell, and we view that trend to continue on through 2022. Terrific.

Thanks for all the color, and congrats again. Hey, thank you.

Our next question is from Darren Aftahi with Rose Capital Partners.

Please go ahead. Hey, Darren, your line is open, sir.

Pardon me, Darren, your line is open. Did you mute yourself by any chance?

Okay, he's not there.

We don't seem to have any other questions registered at this time. So I would like to just conclude today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.