Direct Digital Holdings, Inc.

Welcome to the Direct Digital Holdings first quarter 2022 earnings call. At this time all participants will be in a listen-only mode. Later we will conduct a question and answer session. I will now turn the call over to your host, Brett Malott, Senior Vice President, Investor Relations, ICR. Mr. Malott, you may begin.

Good afternoon, everyone, and welcome to Direct Digital Holdings first quarter 2022 earnings conference call. My name is Brett Malott, and I'm representing Direct Digital Holdings Investor Relations from ICR. On today's call are Mark Walker, Chief Executive Officer, and Susan Edgard, Chief Financial Officer. The information discussed today is qualified in its entirety by the Form 8K accompanying earnings release that's been filed today by Direct Digital Holdings, which may be accessed on the SEC's website and DRCT's website. Today's call is also being webcast in a replay we posted to DRCT's Investor Relations website. Immediately following the speaker's presentation, there will be a question and answer session. 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. We do not undertake any obligation to update these statements. Forward-looking statements are subject to risks which can cause DRCT's actual results to differ from its historical results and forecasts, including those risks set forth in DRCT's filing BSE statement. and you should refer to and carefully consider those for more information. This cautionary statement applies to all forward-looking statements made at your premise call. Do not place undue reliance on any forward-looking statements. During this call, VRCT 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 recently comparable GAAP measures is available in the earnings release VRCT filed for its form at 8K today. I will now hand over to the conference to Mark Walker, Chief Executive Officer.

Mark. Thanks, Brett, and good afternoon, everyone. This is our second earnings call as a public company, and I'm incredibly proud to report record financial performance for the first quarter. Before I go into details, I want to provide a brief overview for those of you joining us for the first time. Direct Digital Holdings is a company that leverages technology to assist 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 general multicultural market publishers through our proprietary sell-side platform, Colossus SSP. Our company's business was founded in 2018 through the initial acquisition of Huddle Masses and Colossus SSP, which was the genesis of our end-to-end programmatic platform. Colossus is our sell-side platform 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 across the United States to purchase media that 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 vertical. I will begin the call by providing a brief overview of our business strategy and main highlights for the quarter. Finally, I will turn it over to Susan Eckert, our CFO, who will share detailed financial results and will reiterate guidance for the full year of 2022. We will be happy to answer your questions at that time. In the first quarter, we continue to capitalize on the significant growth opportunities we're seeing in the market, driven primarily by industry inefficiencies and under-optimized customer opportunities. As digital media has grown and emerging marketing channels continue to gain adoption, including along multicultural lines, media targeting has become more granular. A growing and increasing segment of those audiences is the multicultural audience who has been traditionally underserved in the industry. Both advertisers and publishers face the same challenge, notably seeking new avenues and opportunities to connect with multicultural and general market audiences in the highly engaged media 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 connections. We believe being able to go into a programmatic platform and target general market and multicultural audiences at scale across all digital inventory is a major competitive advantage for direct digital holdings. We're happy to report that the success of this strategy is apparent in our first quarter 2022 results. For the first quarter, we generated 11.4 million of revenue, an increase of 5.7 million or 100% higher than the same period in 2021. This was primarily driven by our sell-side advertising segment and the continued increase in buyers, publishers, and impression inventory. We saw steady accelerated growth during the first quarter. Our SSP platform processed an average of over 90 billion monthly impressions, which is an increase of 93% over the same period last year, and served approximately 69,000 buyers, which is an increase of 87% over last year's performance. Our buy-side customer count grew by over 41% year-over-year, increasing the number of customers we serve from roughly 91 to 128 for the quarter. Our recent growth in the supply side platform has been driven by a variety of factors, including an increase in buyers and impressions, which has fueled our unprecedented growth. For the first quarter, we processed approximately 3 billion bid requests and increased our overall media properties to over 13,000 for the quarter. For the first quarter, we delivered an adjusted EBITDA of 1.1 million, up 113% year over year. I'll now hand things over to Susan Eckert, our CFO, who's going to walk you through some of our strategic highlights for the quarter.

Thank you, Mark. Moving right into our financial results, as Mark stated, our revenue doubled to $11.4 million in the first quarter of 22, an increase of $5.7 million, or 100% over the $5.7 million in the same period of 21. Our sell-side advertising segment grew to 5.5 million for Q1-22 and contributed 4.7 million of the increase or 540% over those 0.9 million in the same period of 21. This was driven by our continued increase in publishers and impression inventory. Our buy-side advertising segment grew to 5.8 million and contributed 1 million of the increase or 21% over the 4.8 million in the same period of 21. This increase was driven primarily by our land and expand customer spend as well as the addition of net new customers. Gross margins for the first quarter of 22 were approximately 42% compared to around 53% in the same period of 21. These margin results are in line with our margin expectations when the sell side advertising segment increases the mix of its revenue concentration in certain quarters. Due to the operating leverage of this programmatic business, the higher revenue results in higher dollar EBITDA contribution by the sell-side segment. Operating income increased to $0.6 million for the first quarter of 22 compared to a loss of approximately $26,000 in the same period of 21. Operating expenses increased to $4.2 million in the first quarter of 22 or an increase of $1.2 million over the $3 million of expense in the first quarter of 21. This increase is due to our strategic addition of revenue-generating headcount added to our operating businesses since Q1 of 21, as well as costs of being a public company. With our IPO transaction in February, we continue to invest in our infrastructure and public company requirements, and we estimate these costs incurred were approximately $500,000 in the quarter related to higher insurance and professional fees. We expect these costs to continue and build out our infrastructure, improve our systems, and prepare for growth. The net loss for the first quarter was $0.7 million compared to $0.8 million in the same period of 21, primarily driven by the loss on the redemption of the preferred B units of $0.6 million. adjusted EBITDA increased 113% to $1.1 million for the first quarter compared to $0.5 million in the first quarter of 21. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $4.4 million with over $5.9 million in available liquidity. As mentioned earlier, We went public in February, and we raised approximately $15.4 million from our IPO proceeds from the issuance of 2.8 million shares, which represents around a 20% public float, and used these proceeds to pay for transaction costs as well as the necessary redemption of equity units held by the former owner of Orange 142 in order to take the company public. Now to touch on our guidance. In our last call, we indicated that we expected our full year 2022 revenue to be in the range of 48 to 52 million or a 31% growth year over year at the midpoint. We continue to maintain that growth projection and will revisit that guidance as we move further into our year. 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 we also 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, and thank you to everyone for joining. We sincerely appreciate your interest in direct digital holding and the fast-growing business we're continuing to build here.

You are now going to the line for some questions.

If you would like to ask a question, please press star 1 on your telephone keypad now, and you will be placed in the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you have a question, please press star 1 on your phone now. Our first question comes from Dan Kernos from Benchmark. Please go ahead, Dan.

Great, thanks. Good afternoon. Obviously, nice start to the year here. Maybe just starting on the buy side, obviously, you know, you guys had some surprise traction, maybe not to you, but to us in terms of both Q4 and now Q1 growing, you know, over 20%. I am curious, you know, in sort of what's going on out there right now, it feels like local is actually doing very well and experiential, and it feels like that was a tailwind for you guys before. Just curious if part of that, you know, beyond even Pigeon Forge is what's driving kind of the results and what you're seeing out there, maybe just some higher-level thoughts on how BuySide might perform in the coming quarters.

Yeah, absolutely. Hey, thanks, Dan, for the question. You know, what we're seeing in the marketplace is actually some of those tailwinds continue through Q1. The DMO space or destination marketing space, because of what we're seeing in the overall marketplace as it relates to travel, we are seeing positive results with our clients making investments to try to drive some of the local and regional investments travel and vacationers into their regions. The fact that we have 55 different DMOs that we work with directly, we are seeing that those tailwinds are helping us with our business, and we're looking forward to continue to work with them in the immediate future.

And then just on the sell side, I mean, you know, not much more to say about Mark, just in terms of the growth rate, continued momentum, I mean, Q1 not being that far off from Q4 given seasonality is pretty impressive. You know, we've seen some nice traction and, frankly, even some nice leverage, I think, you know, even looking at COGS. So if we can just kind of get a sense for, you know, the momentum there, we still think we've set a new floor here. I know there could be some noise in the marketplace, especially as we move the entire marketplace is still kind of freaking out and trying to figure out how to move towards contextual, given all the uncertainty around privacy. So just any incremental thoughts on, A, the flow-through benefit that you saw. I think Susan called it out a little bit in the quarter. And then, B, just kind of, you know, where you are from sort of publisher conversations and how we should think that momentum might continue to balance the year.

Yep. Yeah, part of the momentum that we have seen going from end of year last year to Q1 of this year in regards to our sell-side business is really focused around our simple formula. Number one, we have the person who leads that team from a leadership perspective is very strong. But the other piece that I would also say is our formula is simple. Increase publishers and increase the buyers that come into our ecosystem and our marketplaces. we have seen a favorable response from the buyers wanting to transact with us for a couple of different reasons. One, the fact that our technology is ranked in the top five if you take a look at the MediaMath source scorecard, there's a level of trust in the marketplace. and working directly with us. Number two, I would also say the fact that we have a high concentration of multicultural publishers that work with us, where right now we represent about 7 billion different impressions in the multicultural space that are buying inside of our ecosystem, and that gives us a competitive advantage because now buyers have a one-stop shop to reach general market as well as multicultural. And then number three, the fact that we're continuing to make the different investments in actually moving our servers into HPE GreenLake, which is something that we're actually working on currently, we think that in the future we'll see some benefit from that as well. We think that we have the right formula as well as the right team to continue to grow that side of our business, and we're very excited about the results that we've seen thus far.

If I could just press you just a little bit, Mark, on the publisher comment, you know, I think that's probably still an area of low-hanging fruit, and given where you guys have a pretty good track record there, Any updated thoughts on how quickly or any timing, any events or anything that we can think about around publisher uptake?

Yeah. One thing that we've seen in the past is when we add new publishers into our ecosystem or to our marketplace, we definitely have seen growth occur from that. And we are very excited to continue adding more publishers into our marketplace over the course of this year. And so we're going to maintain that strategy and continue to add those publishers into our marketplace over the next year.

Okay. Fair enough. Thanks, Mark, and congrats on a good start to the year. Thank you very much.

Our next question comes from Darren Aftahi from Roth Capital Partners. Please go ahead, Darren.

Hey, guys. Thanks for taking my questions. Congrats on the quarter. Can I just kind of ask what you've kind of seen quarter to date in your sell-side business? Has that momentum continued in the kind of backdrop of the sort of unique macro that we're in right now? Have you seen any kind of headwinds kind of impact that business? And I guess it's kind of a sub-bullet to that question. Can you kind of speak to the Q1 performance in terms of growth and then how we can kind of bridge that to 31% growth, I think, at the midpoint for the year? And just is that more conservatism, kind of line of sight? Just any sort of code would be helpful.

Yeah, absolutely. In regards to what we're seeing thus far, We're not going to give forward guidance as it relates to, you know, the out quarters. But what we saw in Q1 and what we saw in Q4 was a nice, healthy trend from our model that we've set up, adding new publishers and adding new buyers and adding new DSPs that we work with. We are going to continue with that strategy. And the marketplace has been very favorable to us. and publishers wanting to work directly with us because of the buying community we've been able to assemble, and then buyers are willing to work with us because of the strong relationship that we have with different publishers, the concentration that we have in multicultural audiences, and the fact that our technology stack is trusted to provide quality inventory to our buying community. We have continued down that strategy, and we think it's working with us thus far, and we're going to continue with that throughout the rest of the year. As it relates to Q1 and what we saw with our sell-side platform, it is exactly that same formula. We saw the benefit for what we've been able to accomplish thus far. And as it relates to seasonality, Q1 is usually our slowest quarter as it follows the typical trend of most digital marketing. And so we're anticipating that as well, that Q1 is usually our slowest quarter.

That's helpful. Thanks. A couple more, if I may. I know seasonally the buy side picks up in 2Q with your DMOs. You had a pretty strong 2Q last year. I'm just kind of curious about any kind of general thoughts relative to last year's performance in that business.

Yeah. On the buy side of our business when it comes to Q1 to Q2, Usually on our buy side, because of the way media comes in specifically in the DMO space, which we have a good representation there, it's really kind of spread out between Q2 and Q3. I would say what you saw last year where we had a high concentration in Q2, you could see that same level and the way we look at our business, it really spans over Q2 and Q3. And that really just depends on what's going on in the marketplace within those specific regions. and the relationships there. So we look at it holistically between Q2 and Q3, and we see, you know, no reason for us to veer from that perspective for this year in 2022. Thanks.

And maybe one more. So in terms of the step-up in costs in the quarter, I know you guys went public intra-quarter in Q1. So two things there. In terms of hiring the plan year to date, kind of where do you stand? And then two, maybe one for Susan, how much of a step up in costs are we going to see kind of on a normalized basis as a result of you guys being public for a full quarter in two Q versus half in one Q?

Yeah, Darren, we're still evaluating that. As you know, we, you know, had a little bit higher cost in Q1 over Q1 of the prior year. A lot of that is, of course, legal audit fees of being a public company. From our hiring perspective, we have hired quite a few people since Q1, which translated into our results for the quarter. We, of course, still have hiring to do this year that will set us up nicely for 2023 targets. So all in all, we can expect to have higher costs. I'll quantify those as we get on these calls. to help you understand an apples to apples comparison. But right now, it's probably going to be in a similar range as we move through the year and continue to invest, you know, in additional software platforms, professional fees, you know, and just general overall normal costs of being a public company and doing these calls and filings.

Great. Thank you. As a reminder, if you would like to ask a question, please press star 1 on your phone now. And at this time, there appears to be no further questions. All right.

Well, thank you very much for your time, and we look forward to speaking to you next quarter. Thank you.

This concludes today's conference call. Thank you for attending.

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