This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: Good afternoon, ladies and gentlemen, and welcome to the REC Digital Holdings first quarter 2023 earnings conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, May 11, 2023. I would now like to turn the conference over to Brett Millett, Please go ahead.
spk07: Good afternoon, everyone, and welcome to Direct Digital Holdings' first quarter 2023 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, Stephen Eckhardt. Information discussed today qualifies in its entirety in the Form 8K and accompanying earnings release, which have been filed today by Direct Digital Holdings, which may be accessed at the SEC's website and DRCT's website. Today's call is also being webcast and will be posted to DRCT's Investor Relations website. Immediately following the speaker's presentation, there will also be question and answer sessions. Please note that statements made during the call, including financial projections or other statements that are not historical in nature, may constitute forward-looking statements. These statements are made on the basis of DRCT's views and assumptions regarding future events and business performance at the time they are made. We do not undertake any obligation to update these statements. Forward-looking statements are subject to risk, which would cause DRCT's actual results to differ from its historical results and forecasts, including those risks set forth in DRCT's filings at the SEC, and you should refer to 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-debt 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 on the earnings release of the RCT filed in its Form 8K today. I will now hand over the conference call to Mark Walker, Chief Executive Officer. Mark?
spk06: Thanks, Brent, and thank you to everyone joining our first quarter 2023 earnings call. I'm once again proud to report strong financial results and operational performance to start off 2023. While Q1 is typically our seasonally slowest quarter, we saw strong top-line growth across both our sell-side and buy-side businesses, as well as considerable increases in market share. Our open marketplace CPM platform continues to benefit as middle-market businesses look for less expensive, less restrictive, more accessible, and more representative advertising solutions. In Q1 2023, our revenue increased to $21.2 million, an increase of $9.9 million, or 87% over the $11.4 million in the same period of 2022. Adjusted EBITDA for the quarter was $0.5 million compared to $1.1 million in the same period of 2022. As Susan will explain in more detail shortly, we did see some one-time expenses this quarter driven by unusual events, as well as higher expenses year-over-year associated with being a new public company. Our revenue this quarter was driven by strong performance by both our buy side and sell side advertising segments, which saw record growth. We are pleased to report an increase in revenue growth of 149% and 28% respectively over the same period of 2022. In the first quarter, our sell side advertising segment processed approximately 207 billion monthly impressions, an increase of 130% over the same period of 2022. In addition, the company's sell-side advertising platform received over 6 billion bid responses in the first quarter of 2023, an increase of over 81% over the same period in 2022, through 153,000 advertisers for the quarter, which is a 121% increase over the same period in 2022. We saw new publisher, customer, and DSP wins, notably with the addition of publisher Gourmet Ads, which has 3.5 billion monthly requests, along with other niche publishers to grow our overall impression count. In Q1, we also expanded offerings to include audio within SSP and are testing some new DSPs currently. As mentioned on the buy side, our businesses also saw record growth, growing 28% year over year and serving approximately 231 customers, an increase of 3% compared to the same period of 2022. Orange 142 won and launched campaigns for Visit Tucson and Spokane Airport, while Huddle Masses saw its highest single revenue month ever in March. During the quarter, we saw a number of achievements, a few of which I wanted to highlight today. Operationally, starting at Q4 2022 and continuing into Q1 of 2023, we made considerable progress with our server transition to HPE GreenLake in our overall replatforming strategy, all the while maintaining business growth and capturing incremental market share. On the corporate side, we continue to fortify our personnel with a strategic board appointment. In January, advertising industry pioneer Misty Locke joined our board of directors, bringing more than 20 years of experience in digital performance and brand marketing following successful 10 years as the CMO of Dentsu Media and iProspect. Turning to the remainder of 2023, we believe the current market dynamics are favorable for direct digital holdings as we see an increase in media spend being targeted to reach growth and multicultural audiences. While simultaneously, middle market companies are moving dollars away from traditional media spend to digital. As a company, our primary focus for the year is to continue our strong growth trajectory, and we are reaffirming our estimate as disclosed in our year-end 2022 update of $118 million to $122 million in top-line revenue. I will now hand things over to Susan Eckert, who is going to walk you through some of the financial highlights in further detail.
spk01: Thank you. As Mark stated, our revenue increased to $21.2 million in the first quarter of 2023, an increase of $9.9 million or 87% over the $11.4 million in the same period of 2022. Seasonality in our business results in the first quarter typically being our lowest quarter of the year. Our sell-side advertising segment had a strong first quarter and drove the majority of this increase. Colossus grew to $13.8 million for Q1 and contributed $8.3 million of the increase, or 149% over the $5.5 million in the same period of 22. Our SSP continues to increase publisher partner engagements in addition to increasing our impression monetization. For the first quarter of 2023, our buy-side businesses, Orange 142 and Huddled Masses, grew 28% year over year and contributed $1.6 million of our increase, finishing the quarter with $7.4 million in revenue compared to $5.8 million in the same period of 2022. The increase was primarily a result of driving higher spending as well as new middle market customer acquisitions. For the first quarter of 2023, gross profit dollars were $6.4 million compared to $4.8 million for the first quarter of 2022, an increase of 1.6 million as a result of higher overall revenue. Primarily as a result of our revenue mix, gross margins for the first quarter of 2023 were approximately 30% compared to 42% in the same period of 22. These margin results are in line with our margin expectations given the rate of accelerated growth in our sell-side advertising segment and the resulting mix in our revenue profile. Our sell-side segment, whose revenues grew as a percentage of our overall revenue, has a lower gross margin than our buy-side segment. In Q1-22, the revenue mix was approximately 51% buy-side, 49% sell-side, while in Q1 of 23, the mix profile was 35% buy-side and 65% sell-side. The buy-side advertising segment gross margins were 60% for the first quarter of 23 compared to 65% in the first quarter of 22. This range for the buy-side margins are in line with our expectations as the mix in timing of the customer campaigns can impact this result. The sell-side advertising segment gross margins were 14% for the first quarter of 23 compared to 18% in the first quarter of 22. As this business segment continues to grow, the slight reduction in the margins are due to continued investment in our technology and our overall mix of publishers. With respect to the operating leverage of the SSP programmatic business, this higher revenue results in higher dollar EBITDA contribution by the sell-side segment. Operating expenses increased to 6.6 million in the first quarter of 2023, or an increase of 2.4 million over the 4.2 million of expenses in the first quarter of 2022. Since our IPO in February of 22, the company has increased its headcount over the course of the year with strategic headcount primarily added in our sales and operations personnel. We have also added individuals to our shared services area. In total, these additions represented approximately 45% of our operating expense increase in the first quarter. The general and administrative costs increased 1.3 million to 2.9 million in the first quarter of 23 compared to the 1.6 million in the same period of 22. Included in general and administrative expenses are quarterly one-time expenses totaling approximately 0.5 million or 3 cents per share associated with ongoing transition to HPE GreenLake, incremental growth opportunities for the company servers, and additional one-time company expenses. In addition to this one-time cost in G&A, we also saw a loss from the early termination of the Silicon Valley Bank line of credit, and these costs in total were approximately $0.8 million, or $0.05 per share, which is an impact on our net loss results for the quarter. Net loss was $1.3 million in the first quarter of 2023 compared to a net loss of $0.7 million in the same period of 2022. We believe that evaluating the impact of these one-time charges on earnings per share provides a useful measure of the company's operations, allowing better evaluation of underlying business performance and better comparability to previous periods. Our organic growth year-over-year is measured by our buy-side and sell-side operating income results. The operating income of our business segments for the first quarter of 2023 was $2.8 million compared to operating income of these segments of $1.7 million in the same period of 2022, an increase of 61% year over year. For the first quarter, adjusted EBITDA was $0.5 million compared to $1.1 million in the first quarter of 2022, impacted by the aforementioned one-time expenses seen in the quarter. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $6.7 million. an increase of $2.7 million from the $4 million as of December 31, 2022. As we previously disclosed, on January 9, 2023, we entered into a loan and security agreement with Silicon Valley Bank, which provided for a revolving credit facility. On March 13, we issued a notice of termination of the loan agreement, which was subsequently terminated. We are currently working towards a new line of credit facility and expect to have a new agreement in place in the near future. Based on our expectations of cash flow from operations and the available cash held, we believe we will have sufficient cash resources to finance our operations and service any debt obligations until at least the end of fiscal year 2023. On April 21, 2023, the company filed a registration statement on Form S3 with the Securities and Exchange Commission, which was subsequently declared effective by the SEC. This prospectus will allow the company to issue from time to time at prices and on terms to be determined at or prior to the time of the offering up to $300 million in aggregate principal amount of our Class A common stock, preferred stock, debt securities, warrants, and or units in one or more offerings. The company is not currently engaged in any transactions that would utilize the shelf registration statement, but the Form S-3 provides us flexibility for a variety of potential strategic initiatives and is considered good corporate housekeeping following our year anniversary as a public company. Now I'd like to turn it back over to Mark for some closing comments.
spk06: Thank you, Susan, and thank you to everyone for joining. We sincerely appreciate your interest in Direct Digital Holdings and are looking forward to your questions.
spk10: We are now going to open the line for some questions.
spk04: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. Again, that's star followed by the number one on your touchstone phone. If you would like to withdraw your request, please press star followed by the number two. Your first question comes from the line of Darren Eftahi from Roth MKM. Please go ahead.
spk05: Hey, this is Dylan for Darren. Thanks for taking my question. Start with some of the one-time expenses. So excluding the Silicon Valley Bank portion, on the transition to HPE, the double, I guess, double cloud costs that you're paying there, when do you expect that transition to be complete so you can sort of get rid of that double expense?
spk06: Yeah, the expectation is we pretty much have converted over, and we're expecting by Q3 it's going to start winding down. So into Q2, out of Q3, we'll start seeing those prices come back in alignment.
spk02: Got it.
spk05: And then when you, I mean, you grew sell-side impressions to $207 billion. That's a, I mean, that's a, really big increase from 4Q, let alone Q1 of last year. Can you sort of talk about what drove that increase? Is that some of the moves you're making to work with larger publishers?
spk06: Yeah, that's exactly correct. So the increase in larger publishers that we're working with, and we named one Gourmet Media, Gourmet Ads. In addition to that, we've expanded Current Relationships. and turned on different media types with some of the current partnerships that we have on the publisher side, which actually delivered more impressions to us over Q1. Our go-forward strategy, which we've said repeatedly, is to continue to add publishers and turning on more media types. As in Q1, we just turned on audio, and so we're going to look at doing that also for 2023 for the current year also as our strategy for growth.
spk02: Great. And one more, if I may.
spk05: Can you just sort of walk us through how mix is impacting EBITDA margins? So I know on the sell side, it's the lower margin, but there's a higher flow through. So, I mean, is there anything going on on the OpEx side where you can sort of squeeze out a bit more operating leverage to sort of get EBITDA margins back to sort of where they've been the last, maybe the last 12 months or so?
spk01: Yeah. Hey, Dylan. Dylan, it's Susan. Yeah, I mean, definitely, you know, we're looking at every opportunity of increasing EBITDA, of course, but we also, you know, are committed to growing our business and not having a short-term view on that. So right now, you know, as we, I think, have said before, we are in investment mode. We are trying to grow the business at headcount. OPEX is going to be impacted by that. but we still maintain that we will achieve our EBITDA goals as well.
spk02: That's it from me. I'll pass it on.
spk04: Thank you. Your next question comes from the line of Dan Kunas from Benchmark. Please go ahead.
spk08: Thanks. Good evening. All right, Mark. I know it's Q1. You just grew almost 90% off of 100% comp in the year ago period, including 150 on the sell side over a 540% comp a year ago. I know you're scaling, you're adding large partners. I get all of that. Maybe you can just talk about a couple things that you're seeing, because obviously the guide implies conservatism and or some decel, as I guess you get against larger numbers, but We're hearing TPMs start to improve a little bit, stabilization in the ad market. And it's obvious that you're putting up these numbers to what you said, that you're taking some share. So maybe you can just kind of address some of the facets that you're seeing from kind of a higher level, but talk to sort of the balance of the year.
spk06: Yeah. So our goal is to continue to expand our growth, not just on the sell side business, which I think, you know, our strategy is currently with our pipelines. and continuing to add more publishers. In addition to that, one of the other things that we've been working on diligently as part of this transition is the actual optimization of our overall performance between our hardware and our software. So some of the investments that you're seeing is also to optimize so that we can get better performance so that we can continue to grow our business. We're anticipating, as we said before, Q1 is usually our slowest quarter. As of right now, that's exactly what we're anticipating for our go forward. And so we really are looking at ramping up new partnerships on the DSP side as well as on the publisher side in order to maintain the current momentum that we actually have in the marketplace. In addition to that, what I would also say, you know, we have put in a significant amount of effort into reaching the advertising marketplace and the brand marketplace with our marketing initiatives and also with the addition of our chief growth officer. And we're starting to see some fruits from those actions as well that is benefiting us in the long run.
spk08: In your conversations with publishers, aside from just adding new ones and taking some all at share, how are those conversations going? I mean, are they what are they seeing in terms of increased ad spend, you know, either from advertisers? You've won some buy-side deals too, which is obviously, you know, critical, I think, to the strategy, as you pointed out. But I'm just curious from a high level how the conversations are going, knowing that everybody's still a little bit, you know, worried about back half, but it sounds like things have gotten maybe a little bit better sequentially.
spk06: Yeah. So let me start with the buy-side first, because I always think of the buy-side as the top of the funnel. In regards to the middle market, which is really the space that we're playing in on the buy side, as you saw, we grew by 3% in total customer count against last year's performance. But hidden underneath those numbers and what really fueled a lot of that growth is the increase in share of wallet, if you will, from some of our current partners. And that grew in the 20% to 30% range and really fueled our buy side growth. That has to do with the customer service that our teams in the field are actually providing. Plus, we put a strong initiative in adding new customers into our customer matrix that is benefiting us, and those investments are actually paying off on the buy side. What we have heard in the marketplace as it relates to our middle market customers is they are not seeing the type of slowdown that maybe some of the larger Fortune 500 companies are seeing, they're being pretty aggressive for the go forward. So we've been pretty excited about that buy side business and the growth that we've seen with that business. As it relates to the sell side, what we're hearing from the publishers is, as you probably already know, the move to CTV, OTT, and video is still prevalent. We think that there's a lot of room for growth in that marketplace, and I think you're going to start seeing more and more share of dollars going to that space. And because we have a good, strong mix of video as well as display, and we just added audio, I think you're going to be able to see us continue the growth that we're anticipating for the go forward.
spk08: Can you just talk a little bit more about scaling audio, Mark? It's been a really tricky category, I think, you know, to sort of optimize and turn a profit on. I understand that you guys are you know, the executor or the funnel of the pipe. But it's, you know, it's been a bit of a challenge over time. So just how do we think about you scaling your entry into that category and announcements or sizing of that opportunity over, you know, the short or medium term?
spk06: Yeah, we're right now in our infancy on the audio business for us. And so that's one where give me a couple more quarters and we'll be able to really better understand how we think the opportunity is going to shape up. For us, we like to test. We like to see how things are going to perform. And then we'll look at further investment as it relates to audio. But we just need a couple more months and quarters for us to be able to better understand that landscape around that medium.
spk08: Okay. I'm making a note of it now, Mark. I will ask you in a couple quarters. Congratulations on the quarter, by the way. Hey, thanks, Dan.
spk04: Thank you. Your next question comes from the line of Edward Riley from EF Hutton. Please go ahead.
spk09: Hey, guys. Congrats on the strong quarter. I'm wondering what industries you're seeing the growth from in both business segments here predominantly.
spk06: Yeah. On the buy side business, the DMO space has been very strong. I think, you know, people are still interested in vacation travel and specifically in local and regional businesses. marketplaces, and so we've seen the benefit of that DMO space, specifically people wanting to attract customers into those marketplaces. As you know, we won Spokane Airport, which we talked about on the last call, and then we've got incremental dollars for Visit Tucson. We're seeing investments from the DMO space into those marketplaces, and that's been pretty exciting for us as it relates to the buy-side business. When it comes to the sell-side business, We definitely are seeing more and more investments specifically in our larger advertisers interested in discovering new publisher relationships. And that happens to do with retail as well as it relates to some of our larger advertisers that are more retail focused on the supply side business. So we have seen, you know, strong impact from those two segments. in that sell side business, and we're anticipating that to continue on for the next few quarters.
spk09: Okay, great. My second one is probably more a question for Susan. I'm just wondering what the impact on the sell side gross margin was due to these investments in tech that you mentioned, and wondering if that'll be recurring going forward.
spk01: Yeah, some of the investments in our technology relate to around, you know, our protection of our IVT. You know, we have gotten a few more vendors in the mix so that we protect our low percentage of IVT. Overall, I think the more impact on the sell-side gross margin comes from the mix of publishers and not so much from the investments that we're making in the technology, because some of those investments are in the OPEX category. So I think you're seeing more of an impact from those larger publishers coming in with a different take rate.
spk09: Okay, all right, gotcha. And revenue per employee seems to continue to increase. What's hiring look like for the rest of the year for the subsidiaries?
spk01: Yeah, I mean, we still are putting our plan in place for continuing to hire salespeople and develop our opcos infrastructure to support that revenue target that we do have for them. So we do pay attention to our revenue per employee. I think we're around 75 employees right now. So we're going to continue to see that be a good metric for us.
spk10: Okay, great. Congrats. Thanks.
spk04: Thank you. Thank you. Your next question comes from the line of Michael Kopinski from Noble Capital Markets. Please go ahead.
spk03: Thank you and congratulations on your quarter. A couple of questions. Can you talk a little bit about the revenue cadence of the buy side heading into the second quarter? And have your thoughts changed in terms of the contributions of the buy side versus sell side as you kind of look to your revenue guide of 118 to 122 million? Yeah, go ahead.
spk01: No, Michael, hi. How's it going? No, our cadence is still around the same. We're seeing a nice, even growth with the buy side business, kind of similar to last year, continuing to have good margins on that side of our business and still working on that plan. So I don't see any changes around that.
spk03: Okay. And I know that you're an investment node, but does the strength in the buy side suggest that you might have a little bit better adjusted EBITDA than expected. And certainly you beat my number in the quarter. Or would you, seeing the strength in the buy side, would you step up your investment spend if you have strength there? Just trying to understand how you might manage the investment spend if you're seeing stronger cash flow, given the higher margin on your buy side business.
spk01: Yeah, I guess that depends on where it's coming from. I mean, as we move our revenue targets up, that has to be supported through salespeople on the buy side, and that's boots on the ground. So if we're moving those targets up or if we're seeing that expand, you know, there might be a need for more investments in people there. So I guess it just depends on the levers that are being pulled as far as the investments that are needed.
spk03: Okay. And as far as your HP servers and so forth, how is that relationship working in terms of the ability you mentioned about stepping up the capacity as you need it? How has that been working and that relationship been working just to kind of cross the T's and dot the I's?
spk06: Yeah, it's a good partnership and a good relationship. We went through a comprehensive process in selecting HPE as our hardware or our server infrastructure partner. And so we like how that relationship has operated and the amount of resources that they are able to provide to us. to help us troubleshoot and optimize. And so we see that relationship working for us for the near term and the long term.
spk10: Great.
spk03: Okay, that's all I have.
spk10: Thank you.
spk04: Thank you. That will be for our last question. Thank you so much, presenters. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day. Thank you.
Disclaimer