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spk01: Thank you for standing by. This is the conference operator. Welcome to the Direct Digital Holdings second quarter 2022 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 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Brett Malott from ICR. Please go ahead.
spk05: Good afternoon, everyone, and welcome to Direct Digital Holdings' second quarter 2022 earnings conference call. My name is Brett Malott, and I'm representing Direct Digital Holdings from ICR. On today's call are Direct Digital Holdings Chairman and Chief Executive Officer Mark Walker and Chief Financial Officer Susan Deckard. The information discussed today is qualified in its entirety by the Form 8K and accompanying earnings release, but have 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, and a replay will be posted to DRCT's investor relations website. Immediately following the speaker's presentation 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. Such 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 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 DRCT's filings with the SEC, and you should refer to these 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. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings release GRCT filed on its Form 8-K today. I will now head over the conference to Mark Walker, Chief Executive Officer. Mark?
spk03: Thanks, Brett, and good afternoon, everyone. This is our third earnings call as a public company, and I'm incredibly proud to report record financial performance for the second quarter and continued growth for the year. Before I go into specific 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 and multicultural market publishers through our proprietary sell-side platform. Our company's business was founded in 2018 through the initial acquisition of HuddleMasses and Colossus SSP, which was the genesis of our end-to-end programmatic platform. Colossus is our sell-side proprietary technology that enables publishers to sell media to buyers, while HuddleMasses, along with Orange 142, is our buy-side platform, which enables middle market businesses across the United States 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 by providing a brief business overview in the main financial highlights for the quarter, and we'll then turn it over to Susan Eckert, our CFO, who will share detailed financial results and revise guidance for the remainder of 2022. First, I want to address how through our strategic combination of buy and sell side platforms, Direct Digital will continue to grow due to a variety of factors. As you will see from our second quarter results, Direct Digital is experiencing strong organic growth driven by our business model. By focusing on expanding both our business segments, we have been able to deliver increased top line revenue and consequently overall growth in our adjusted EBITDA. For the second quarter, we generated $21.3 million of revenue, an increase of 90% over the same period in 2021, and we achieved adjusted EBITDA of $3.6 million, up 18% over the same period in 2021. Our sell-side platform business segment saw significant growth through a combination of expansion of our target properties, increasing our impression count, and growing our advertiser base. By continually expanding our marketplace, we now have over 16,000 properties, which is an increase of over 574% year over year. This expansion of properties led to an overall impression count of over 98 billion, up 176% in the same period in 2021. The overall influx of impressions fed our ability to increase our matrix of advertisers, which for the second quarter grew 38% year-over-year to 88,000. With our growth of advertisers, we've experienced an acceleration from our advertiser base with over 6 billion monthly bid responses, which is an 857% increase year-over-year. We are continuing to see growth of our buy-side platform, which for Q2 2022 delivered 9.3 million, which is up 2% in comparison to the same time last year. Our customer count has continued to grow with a 19% year-over-year increase with our business segment growing to 152 clients. We believe that the growth in our overall customer count for our buy-side platform will continue to fuel our organic growth strategy on that side for the foreseeable future. In viewing our business in total, we have been able to deliver over $32.6 million in top-line revenue for the first half of 2022. which is up 93% over a similar period. This growth has allowed our team to continue to deliver on our projections and exceed expectations. Based upon client feedback, advertisers are currently experiencing diminishing returns and higher costs through walled garden platforms. Clients are therefore reassessing their expenditures with walled garden platforms and searching for more cost-efficient digital advertising solutions which are both more transparent and more open in their measurement and delivering an efficient ROI. Consequently, at Direct Digital, we are strategically positioned to benefit as an open market digital platform, continuing to attract advertisers and clients who are in pursuit of effective alternatives to walled garden platforms for driving ROI through digital media. Direct Digital's comprehensive client mix focused on underserved middle market companies is diverse and broad for our buy-side business segment. With our profitable and predictable buy-side platform, we're able to provide technology-enabled service to DMOs, education, insurance, healthcare, financial services, as well as many other industries. And for the first half of 2022, we have been able to increase our buy-side business segment overall revenue by 9%. With our focus on multicultural and general market publishers, a sell-side platform has been able to attract and accelerate our growth to roughly 90,000 advertisers monthly that leverage our platform to purchase CTV, OTT video, audio, display, and native advertising. As it relates to the overall macroeconomic trends, one aspect I would like to quickly highlight is the continuing uncertainty and volatility in the market. While business spending may tighten and marketing spend may decrease, We believe that the inherent diversification of our multi-segmented business approach, coupled with our organic growth strategy, mitigates a potential downturn. In addition, we are committed to continue our organic growth strategy across both our sell-side and buy-side platforms while delivering a positive adjusted EBITDA margin. We're also proud to be named a top minority-owned business by the Houston Business Journal. Our corporate strategy is to continue hiring key revenue-generating roles in and building a culture that fosters innovation, entrepreneurship, and growth to attract and maintain talent. Finally, with the ongoing changes across the tech and advertising industries, we believe our transition of our sell-side platform infrastructure to HPE GreenLake bolsters our technological performance and allows us to scale with the demands of the business in a cost-efficient way, which furthers our ultimate growth strategy. I will now hand things over to Susan Eckerd, who is going to walk you through some of our financial highlights for the quarter and provide our annual guidance.
spk02: Thank you, Mark. Moving right into our financial results. As Mark stated, our revenue increased to $21.3 million in the second quarter of 2022, an increase of $10.1 million, or 90%, over the $11.2 million in the same period of 2021. Our sell-side advertising segment drove this increase and grew to $11.9 million for Q2 2022 and contributed $9.9 million of this increase, or 477% over the $2.1 million in the same period of 2021. This was driven by our continued increase in publishers and impression inventory. Our buy side advertising segment grew to 9.3 million and contributed 0.2 million of this increase or 2% over the 9.1 million in the same period of 2021. This increase was driven primarily by the addition of net new customers. Gross profit dollars increased 2.2 million as a result of higher revenue and gross margins for the second quarter were approximately 39% compared to 55% in the same period of 2021. These margin results are in line with our margin expectations given the rate of growth of our sell-side advertising segment. The buy-side advertising segment gross margins were 66% for the second quarter of 2022 compared to 63% in the second quarter of 2021. The sell-side advertising segment margins remained consistent at 18% period over period. 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 $3.1 million for the second quarter of 2022 compared to operating income of $2.5 million in the same period of 2021. Operating expenses increased to $5.3 million in the second quarter of 2022, or an increase of $1.6 million over the $3.7 million of expense in the second quarter of 2021. This increase is due to our strategic addition of revenue generating headcount added to our operating businesses since Q2 2021, as well as the cost of being a public company. Since our IPO transaction in February, we have continued to invest in our infrastructure and public company requirements, and we estimate that these costs incurred were approximately $670,000 in the quarter, related to higher insurance and professional fees. We anticipate operating margins will expand as revenue growth outpaces the added expense of public company costs. Net income for the second quarter was $2.6 million, compared to $1.7 million in the same period of 2021. In the second quarter 2022, adjusted EBITDA increased 18% to $3.6 million or a 16.7% margin compared to $3 million or a 26.9% margin in the second quarter of 2021. The impact of the additional public costs of approximately $670,000 impacted the EBITDA margin by around three basis points. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $4.9 million with over $6.8 million in available liquidity. As we recently reported, subsequent to the quarter end, our debt partner, Lafayette Square Loan Servicing, worked with us to amend our debt agreement and provided proceeds from our delayed draw term loan of approximately $4.3 million. This allowed us to pay off the remaining amount owed under the redemption of the common units of approximately $4 million and cover the costs of the transaction. This action will improve our working capital ratio as well as reduce future cash interest costs. As indicated in the 8-K filed on May 26, 2022, the NASDAQ issued a deficiency letter to the company with respect to our stockholders' equity being below the required amount of $2.5 million as of the end of our first quarter 2022. With the results of our second quarter performance, we are pleased to announce that our stockholders' equity increased to $4.7 million, which exceeds the NASDAQ required threshold and completes the company's plan of compliance. Now to touch on our guidance. In our last call, we indicated that we expect our full-year 2022 revenue to be in the range of 48 to 52 million or 31% growth year-over-year at the midpoint. After a strong Q2 and increased visibility to the second half of the year, we are raising our annual guidance by approximately 40% for 2022 to be in the range of 70 to 75 million or up 113% year-over-year growth at the midpoint. while continuing to target double-digit adjusted EBITDA margins for the year. As we continue to transition to being 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 both our rapid organic growth and our inorganic growth strategies. We continue to focus on our top-line growth and we 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.
spk03: Thank you, Susan, and thank you to everyone for joining. We sincerely appreciate your interest in direct digital holdings and the exciting and fast-growing business we are continuing to build.
spk05: We are now going to open the line for some questions.
spk01: 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. The first question is from Dan Kernos from The Benchmark Company. Please go ahead.
spk08: Great, thanks. Good evening. All right, Mark, let's cut to the chase on this. I don't think I heard one good thing from any of the other performance-based marketing companies. And outside of Pubmatic on the SSP side, you know, everybody else was kind of struggling. You're raising your guidance pretty meaningfully here. You beat your buy side revenue in the quarter after a tough comp last year. And I mean, we can all see what's going on on the sell side. So can you just walk us through sort of what you think the difference is here in the marketplace, why you are either taking share or outperforming the market. Is it category exposure? Is it new business wins? Is it your differentiated inventory? Just help us think through, you know, why you guys are crushing it in the face of what everybody else is calling a macro slowdown.
spk03: Yeah, no, first and foremost, appreciate the question, Dan. It's always good to hear from you. Um, I think it really boils down to our business thesis and we haven't changed it. The middle market has been underserved where we have made investments, um, in tier two, tier three media markets. We're seeing value clients are in, especially in our buy side of our business. We're able to grab new clients and grab greenfield space from, um, current, uh, competitors. and we're able to convert them to our customers as well as retain the current customer portfolio that we have. In addition to that, what I would also like to say is our strategy is to grow our customer count, specifically in the buy side of our business so that we can actually fuel and we're able to harvest revenue from those customers for the next two to three years. So that's been our strategy and it's effective and it's been working for us, specifically in those tier two, tier three media markets. As it comes to our supply-side platform, Colossus SSP, what has fueled our growth in that business segment has really been focused on our formula. We're adding new suppliers directly to our marketplace on a monthly basis, and those new impressions that are being added to our marketplace are fueling our growth. In addition to that, The way that we have managed our technology platform, as well as with the addition of more multicultural publishers being added to our mix on a monthly basis, you're seeing that there is an attraction from the marketplace to buy specifically from us. And that's the value that we've been able to deliver. Our technology has been able to perform well, and we have a very low level of IVT, so we have been able to build trust in the market with the buying community.
spk08: And just to be clear on those points, Mark, like, you know, you're not – everyone else is calling out sort of pullback in spend from either existing or, you know, challenges on the new business ones. Not that growth is bad in some of these verticals. You know, CTV, especially in open Internet, is still up probably 20%, 30%. But just how are you – you know, that message – it sounds like that messaging is just not coming – across to you guys that you're seeing increases in spend. And I wonder, you know, were there any notable wins on the sell side from a publisher perspective or any greater commits on the buy side maybe from your travel category?
spk03: Yeah, on the sell-side business, we have new buyers that are actually coming in, making commitments to buy from us. I think you have seen in the press, and we talked about it, that Bayer was one of the partners that has decided to work with us, along with HP, Ulta, Beauty. Those Fortune 500 clients are buying media that comes through Colossus SSP based upon how we have been performing in the marketplace and and based upon our value proposition. So that has fueled our growth. We are continuing to see more and more Fortune 500 companies buy from us through the multiple DSPs that we're connected to, and also we've had some new DSPs that have decided to work with us, and we're happy to have those guys on as partners as well. So I think what you'll see, at least for the last half of this year, is a continued expansion of buyers as well as impressions being added to our platform to continue to fuel our growth.
spk08: And last one for me, I'll step aside, just, you know, given the raised guide, you know, sort of reiterated the adjusted EBITDA margin as a wide range of where that could fall. How do you think about, you know, continuing to invest in the business? Are there some strategic investments that you can make now where others are having to pull back? And how are you thinking about that fueling growth versus, you know, in maybe a more uncertain time, flowing through more of those dollars through to eat it, though?
spk03: Yeah. No, we are actually investing in continuing to fuel our organic growth. As you know, we've been spending the last four years really focused in on building up the processes, the procedures, and the infrastructure of the company. And what I think you're going to see in the immediate future is us making an aggressive push in the marketplace to grab more market share. In addition, we want to maintain the financial discipline that we came from, which is being a privately held company. So being able to make the commitment of double-digit EBITDA margin is something that we use for our own benefit to make sure that we're being judicious stewards of capital that we actually have and be judicious of our shareholders. So that's the forward operating strategy that we've adopted, and that's how we see our growth being fueled. But we are planning on making investments to continue to grab market share. As it relates to inorganic growth, we always have our eye out for opportunities, and we will be opportunistic, but it has to fit into our core strategy. So we try to maintain some level of discipline there.
spk08: All right. Thanks for bearing with me. All I can say, Mark, is congrats on the crushing it.
spk04: Thank you.
spk01: The next question is from Darren Aftahi from Roth Capital Partners. Please go ahead.
spk07: Hey, guys. Thanks for taking my questions, and I'll offer my congratulations as well. A few, if I may. So, Mark, you've got a lot of visibility in your buy-side business. Seems like the self-led business is in a good place. I'm just kind of curious in light of the context of the macro, is there any area that kind of keeps you up at night or anything that could be a potential headwind kind of down the road?
spk03: Yeah, for us, we're always watching the market and we always keep an eye on the market. We are working diligently to continue to add new customers into our client base. And also, for part of our growth strategy, we're continuing to add revenue generating employees. What does keep us up at night is being able to make sure that we are able to attract the right talent that can help fuel our growth and then also make sure that we are building the type of corporate culture that encourages entrepreneurship and innovation. So if you ask me what keeps us up at night, it's being able to maintain the hiring and the recruiting of the sales teams that we're actually putting out in the field to continue to fuel our growth and and to make sure that we have the right processes in place to hold our sales folks accountable in order for them to continue to generate revenue.
spk07: Great. Another one, if I may. Impressions on the self-led business were up a couple hundred percent. Revenue grew sort of 5X. Can you just talk a little bit about pricing, what's driving that?
spk03: Yeah, on our sales side business, two things. One, we've had a significant increase in the level of impressions that we've actually added to our marketplace. That has helped fuel our growth. In addition to that, what I would also say is the buy side, specifically on the buy side, our advertiser base through the addition of a few more DSPs that we've connected into our marketplace have also helped fuel that growth. So it was a combination of adding in the impressions, which as you can see are up roughly about 400% year over, I'm sorry, about 200% year over year from 35 billion Q2 of 2021 up to 98 billion in Q2 of 2022. That helped fuel our growth as well as the addition of new advertisers, where last year, same period, we had about 64,000 buyers. Now we have about 88,000 that are coming into our ecosystem, which gave us about a 40% increase. Those were the factors that really fueled our growth, and you're going to see us continue to press those factors forward for the last half of the year.
spk07: Great. And then two more if I may. I remember last year you had a tough buy-side comp and seasonally with travel, things are pretty strong in the second quarter. You still marginally grew, so it looks like you were able to kind of grow through that comp. I'm curious as we think through to kind of the next quarter, you know, is there a big step down on the buy-side revenue or kind of how do we think about that?
spk03: Yeah, there is going to be a step down due to we have about 55 to 60 different DMOs that we work with. I think that benefited us two ways. One, I think with travel, specifically overseas travel and airline travel, Having a little bit of difficulty, I think we benefited from that. I think people are willing to get on the road and actually travel to some of the DMAs that we actually have as clients and customers. I think that was one of the benefits that we have with the model that we have present. But you are going to see a step down, but we are anticipating an increase in As you can see, for the first half of the year, we're up 9% year over year. We think we can maintain that same trajectory between now and the end of the year. And when I look at what we actually have in our backlog and where we are standing from now to the end of the year, I feel pretty optimistic that we're going to be able to maintain our run rate.
spk07: Great. And then maybe squeeze one more in for Susan. It looked like year on year, you grew revenue roughly 50%. 10 million, if I back out public company costs to kind of democratize this, like a million one of marginal EBITDA year on year. Is that kind of the right way to think about flow through of operating leverage in the model as we go forward? Or can you grow that kind of 11% yield higher?
spk02: Yeah, no, that's the right way to think about it. I think, as you're mentioning, we had about $500K for the first quarter and then the $670K for the second quarter. And, you know, those costs, hopefully we can get those a little more lower in the Q3 and Q4 range, you know, as we need less and less from our legal and audit teams. That's where the increase in professional services is coming from. But, yeah, that takes away from our EBITDA right off the bat, so we're trying to really manage those costs a little bit tighter.
spk07: Great. Thank you. Well done again. Thanks.
spk01: The next question is from Michael Kopinski from Noble Capital Markets. Please go ahead.
spk06: Thank you, and I want to add my congratulations as well. A couple of questions. You talked about the addition of customers on your buy-side business, and I was just wondering if you can talk a little bit about the categories that were added and whether or not we're starting to see a little diversification in some of your buy-side business there.
spk03: Yeah, some of the other categories that we actually have added to the mix have to do with energy, healthcare, secondary healthcare providers, as well as, I would also say, network security. We've added them as a new customer base as well. One that we don't talk about a lot is education. We have seen a strong foothold in helping colleges and universities actually attract and retain new students going to their school, and we put that as a focus almost about a year and a half ago. and it's now paying dividends for us. So we feel like with the mix of customers and clients that we actually service, specifically on our buy-side business, we're able to weather any economic storm just due to the diversification that we have and how we think about the planning process for our business.
spk06: Gotcha. And then in terms of the inflation and impact on some of your travel-related businesses, anything there that you're seeing? You mentioned that Your international travel seems like it's benefiting and also airfare, but airlines. I was just wondering, is there any other impacts that you're starting to see from the economic headwinds?
spk03: No, I think the – and I just want to make sure I'm clear. I think what we're seeing with the airlines has actually benefited us because the travel and tourism side, specifically with the DMAs that we work with, we haven't seen any degradation of that business. So we think that that has actually helped the growth that we have actually seen because I think we're a less – a more cost-efficient alternative for vacation travel. than what you might get from doing airline travel in the clients that we actually service. Outside of that, we haven't seen any other inflationary impacts to our business. And we think that the way that we're diversified specifically on our buy side, we're able to manage it.
spk06: That's terrific. And then traditionally, you do not have a lot of visibility on the sell side. And I'm curious, you mentioned commitments that you have for the second half on the sell side. Can you kind of elaborate and or maybe give us a little more color on what you mean by commitments? Because traditionally, I'm not aware that they actually give you that level of visibility normally. So I'm just curious what you mean by that.
spk03: Yeah, so the way that we think of our business, we have two types of business that actually flows through our SSP. We have open market, which I'm pretty sure you're familiar with, but then we also have buying teams that actually are calling on different buyers to get P&Ps set up and programmatic guarantees set up with those clients. So we work directly with some brands, and then we also work with some media agencies and media partners to actually have certain buying communities, certain sets of buyers with client revenue actually buy through us. And we've seen a favorable response with that business line and with those buyers doing outreach on behalf of our SSP and on behalf of our publishers. We've seen a positive impact from that, and we're going to continue with that growth strategy.
spk06: Great. I started a little late, so I apologize if you addressed this in your comments, but can you talk a little bit about the number of salespeople you ended up quarter with and what are the plans to hire to support the revenue growth that you're anticipating in the second half of the year and into the first half of 2023? Susan, do you want to take that conversation?
spk02: Yeah. I mean, I think we have about, I'm going to say, 13. I don't have the precise number, but that feels right on the salespeople on boots on the ground. And we are still trying to hire additional people to increase that in preparation for the goals that we have in place for next year's growth. So, as you know, it's a pretty tight hiring market, but we feel like we have a lot of attractive things with our business model, our remote working model, environment, our culture here. And we want to hire trained salespeople that come with the book of business. So we are pretty picky about who we bring into the fold. So we are very intentional in trying to fill those positions.
spk06: Yeah, and so far you haven't had any problems in trying to look at those, right? I mean, you added in the second quarter a few people. Okay. That's all I have. Thank you so much.
spk01: This concludes the question and answer session as well as today's conference call. You may disconnect your lines at this time. Thank you for participating and have a pleasant day.
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