Direct Digital Holdings, Inc.

I would now like to turn the conference over to Brett Malott, Investor Relations. You may begin.

Good afternoon, everyone, and welcome to Direct Digital Holdings fourth quarter and full year 2024 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, Diana Diaz. Information discussed today is qualified in its entirety with the form 8K and accompanying earnings release. We present file 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 a replay will be posted to DRCT's Investor Relations website. Usually following the speaker's presentation, there'll be a question and answer session. Please note that the statements made during the call, including any 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 risks, which could cause DRCT's actual results to differ from its historical results and forecasts, including those risks set forth in DRCT's findings of the SEC. And you should refer to those for more information. This cost-reason applies to all forward-looking statements made during this call. During this call, DRCT will be referring to non-GAP financial measures. These non-GAP measures are not prepared in accordance with generally -the-county principles. Reconciliation of the non-GAP financial measures, the most directly compatible GAP measures, is available in the earnings release that DRCT filed in its form 8K today. I'll now hand the call over to Mark Walker, Chief Executive Officer. Mark?

Thanks, Brett, and thank you to everyone joining our fourth quarter and full year of 2024 earnings call. For the full year, I'm pleased that we delivered revenue in line with our significantly revised guidance. 2024 proved to be a challenging year for the company to say the least, but I'm incredibly proud of the team for responding quickly, initiating a clear strategy, and mobilizing to execute against that strategy. Today, Direct Digital is rescaling with a significantly strengthened business model for customers, partners, and shareholders alike. Just to remind everyone, at this time last year, Direct Digital Holdings released its Q4 and full year results for 2023, announcing a top-line revenue guidance target of 170 million to 190 million, representing 15% -over-year growth at the midpoint. By early May, Direct Digital Holdings supply-side platform, Colossus SSP, had achieved revenues far ahead of the previously stated guidance, and the company was well on its way to a record quarterly result. At that time, we were fighting what we believed was an ongoing short attack since December of 2023, and believed that the worst was behind us. Unfortunately, there was a secondary attack, a second false and defamatory blog post against our supply-side platform, Colossus SSP, in mid-May 2024, caused an unexpected business disruption amongst our partners, advertisers, and clients due to a major customer pausing its connection with Colossus. The connection with this major customer, who is an intermediary in the digital ecosystem, has resumed. However, volumes have not yet returned to pre-pause levels, and this caused a meaningful reduction in our FY 2024 revenues, and is also expected to impact 2025. That said, despite the challenges faced this past year, we delivered fourth quarter results in line with our revised revenue guidance range. We have been working diligently with our multinational hold-co agency partners, our Fortune 500 brand partners, and demand-side partners to resume business, which many already have. Starting last year, we initiated a plan to, one, further expand our sources of our revenue to create a more diversified business throughout all segments, and two, conduct a cost savings review, which has resulted in significant operating expense reduction sequentially when compared to the first half of the year. Concerning our diversification strategy, in the third quarter of 2024, we announced the launch of Colossus Connections, an aggressive initiative to accelerate our direct integration efforts with leading demand-side platforms, and we have already signed up two of the leading partners in the marketplace. This initiative will optimize supply-packed efficiency for our advertising clients through direct connections with top demand-side platforms, ultimately providing advertisers with improved access to demand and cost savings. In addition, we are pursuing alternative intermediaries and pathways to send buyer spend to our publishers. We've seen sequential improvement from existing direct connections, and we're expecting to see greater revenue impacts as we move through 2025, as alternative pathways are solidified and as integrations are completed in the second half of 2025. As part of our continuing sell-side strategy, we have worked diligently with our partners to keep our key sell-side relationships intact while building back ad spend in previous levels. This plan will continue to take shape over time through 2025 as we focus on diversifying, optimizing, and future-proofing our sell-side platform. On the buy side, since we unified our two divisions, Orange 142 and Huddle Masses, we have been keenly focused on small and mid-size clients who are increasingly shifting advertising budgets to digital and require support to navigate its complexities and optimize their ad spend. Further, we see that small and mid-size brands are looking for a more high-touch and tailored client buy-side relationship. These clients are a key focus for our newly combined buy-side operation. We are now better equipped to deliver this level of premium service to our clients as they navigate emerging technologies and high-growth channels, such as AI, connected TV, and retail media. We have already brought on clients in new verticals, which are expected to generate additional incremental revenue of $5 million to $10 million in 2025, with full impact starting in the second quarter of 2025. With that, I will discuss some high-level points related to the fourth quarter, with Diana providing further details about the quarter later in the call. Revenue for the fourth quarter was down as expected, compared to the prior year due to continuing negative impact on sell-side revenue resulting from business disruption in May of 2024 and continued impact on the buy-side from certain customer spend declines partially offset by new buy-side customer growth and non-recurrent political spend on the sell-side. Despite the overall decline in revenue, gross margin increased from 23% in the prior year to 32% in the fourth quarter of 2024 due to a higher mix of buy-side revenue in the current quarter. We realized cost savings and operating expenses of $2.1 million in the fourth quarter of 2024 reflected the flexibility in our cost structure. In addition to our focus on building back our top line, and as mentioned on our call last quarter, we have undertaken a series of cost savings and operational optimization strategies, which have resulted in a more diversified, efficient business model positioning us for success in the coming years. We were able to withstand the dramatic impact to our revenue through improved gross margin and operating cost savings, which is a testament to our robust business model and the success of our cost saving initiatives. Looking forward in the 2025, we're encouraged by the growth we're seeing in segments of the ad tech arena, specifically around curation and data enrichment. We are reiterating revenue guidance of $90 million to $110 million for fiscal 2025, underscoring our confidence in our ability to scale up both our buy-side and sell-side businesses. In particular, we expect the second half of the year to deliver strong gains as we experience the full effect of new direct sell-side partners coming online, while our first quarter tends to be slower than the fourth quarter relating to seasonality in our sell-side business. We are seeing sequential improvement in the first quarter of 2025 over November and December of 2024. We believe our streamlined approach will continue to enable us to capture market share to strengthen our leading advertising marketing technology offer. I will now hand things over to Diana Diaz, our Chief Financial Officer, who will walk through some of the financial highlights in further detail.

Thank you, Mark. I'll start with a few more details related to the fourth quarter 2024 results. Related to revenue, our fourth quarter 2024 revenue was $9.1 million, a decrease of $31.9 million over the $41 million in the same period of 2023. Sell-side revenue fell to $2.7 million for the fourth quarter compared to $33.4 million in the same period of 2023. As stated before, the key driver for this reduction was the suspension by one of our large customers following the defamatory article against the company. This customer, which is an intermediary in the DSP marketplace, has since restored its connection and is continuing to scale, making up about 11% of the fourth quarter sell-side revenue in 2024. We were pleased to see a one-time positive bump in sell-side revenue in the fourth quarter of 2024 of about $600,000 driven by outside political spend in October. However, we'd like to emphasize that while this was a welcome boost, it is not representative of our repositioned business. While this was a non-recurring revenue impact, it demonstrates the opportunistic and dynamic nature of our business model, which was able to move and adapt when opportunities arise. On our buy-side for the fourth quarter, we saw revenue decrease to $6.4 million compared to $7.6 million in the same period of 2023. The $1.2 million decrease in buy-side revenue for the quarter was due to a $1.7 million decrease in spending from customers no longer actively purchasing from the company, including about $600,000 from completion of certain one-time campaigns in 2023. Partially offset by growth from existing and new customers of 8%. Due to the decrease in revenue, gross profit dollars decreased to $2.9 million in the fourth quarter from $9.3 million in the prior year. However, because of the change in mix of buy-side and sell-side business, gross margin for the fourth quarter improved from 23% in 2023 to 32% in 2024. Related to operating expenses, our fourth quarter 2024 operating expenses were $7.7 million, a decrease of $10.4 million over the $18.1 million in the same period of 2023. Operating expenses for the fourth quarter were negatively impacted in 2023 by an unusual charge for $8.8 million related to payments to a few publishers and in 2024 by about $400,000 in cost to regain compliance with respect to delinquent SEC filings. Excluding these unusual items, adjusted operating expenses were $7.2 million in the first quarter of 2024, a decrease of $2.1 million or 23% over $9.3 million in the same period of 2023. Adjusted operating expenses, which excludes the unusual compliance costs for the second half of 2024 of $13.5 million, decreased by $1.9 million or 12% from $15.4 million for the first half of 2024. Operating loss for the fourth quarter was $4.3 million compared to an operating loss of $8.8 million in the same period of 2023. The unusual operating expense items contributed $400,000 of operating loss for the fourth quarter of 2024 and $8.8 million of impact to operating income in the same period of 2023. Adjusted EBITDA for the fourth quarter of 2024 was a loss of $3.4 million compared to an adjusted EBITDA loss of $6.6 million in the same period of 2023. Excluding the unusual operating expense items, adjusted EBITDA loss for the fourth quarter was $3 million in 2024 compared to adjusted EBITDA income of $2.2 million in the same period of 2023. Turning to the balance sheet, we ended the year with cash and cash equivalents of $1.4 million compared to $5.1 million as of the end of 2023. Total cash plus our accounts receivable balance as of year end was $6.4 million compared to $42.3 million as of the end of 2023. We are actively advancing multiple funding and equity financing pathways with the goal that these efforts will restore NASDAQ compliance, strengthen the company's financial position and support key growth initiatives. Now to touch on our guidance. Our guidance assumes that the US economy does not have any major economic conditions to deteriorate or otherwise significantly reduce advertiser demand. We plan to offer annual guidance and update it throughout the year. With our visibility today, we are reiterating our fiscal year 2025 revenue guidance in the range of $90 million to $110 million underscoring our confidence and our ability to scale up of the buy side and sell side businesses. And as Mark said, we expect the second half of the year to deliver strong gains as we experience the full effect of new direct sell side partners coming online. As we continue to refocus the company, our lower cost structure, optimized performance and focus on driving efficiencies across the business are key to our accelerated path to return to profitability. We continue to be judicious in adding any new costs and we remain confident in our business to deliver strong performance for our shareholders this year. And I'd like to turn it back over to Mark for some closing comments.

Thank you, Diana. And thank you to everyone for joining. As always, we appreciate your interest in direct digital holdings and are looking forward to answering your questions. Operator, please open the line.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press the store one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, please start one again. And with that, our first question comes from the line of Dan Kernes with the Benchmark Company. Please go ahead.

Yeah, thanks. Good afternoon, Mark. Maybe I have several, let's just start kind of high level. Number one, just in Q4, we know there was a lot of noise in kind of the DV Plus arena, obviously heard from Trade Desk, Magnite, Pubmatic, everybody, you know, political was kind of a plus. You guys are recovering from obviously the attacks, which you successfully defended against, but you know, it takes a while to scale back. So I'm just trying to understand kind of how we should think about the cadence. I know you've said strong growth in the back half of this year, but how much was Q4 impacted by kind of post-election malaise which we sort of heard about? And how should we think about these clients? These clients been coming back to you in kind of Q1 and then ramping?

Yeah, no, good question, Dan. And good to hear from you as well. Yeah, I would say, you know, for the first time, especially the cycle political represented more of a percentage than it historically has. Typically it had been 10 to 15%. This time it represented probably in the 50 to 60% range of spin that came through. And I think, as you know, based upon what you probably heard from your other peers, political was very strong all the way through November. December was softer than what we would anticipate for Q4. And so we were a little bit surprised by that, but what we are seeing, and we're kind of in a different cycle right now since the last four years, we've had steady growth consistently occurring. We're seeing sequential growth month over month in regards to our overall performance, but for us and how we rebuild back, it's really about, it's not about our buyer intent, it's not about our publisher, it's not about our publisher inventory, which as you've seen by the stats, the numbers are there. It's really about us for pathways. And so we've been working on developing new pathways to connect our buyers and sellers, and that's through the direct connection piece, which we're anticipating to see that come to fruition the back half of the year based upon the contracts that we have signed and the other ones that we are currently negotiating. And then we're also anticipating having alternative pathways for our buyers to actually purchase the inventory that we represent, leveraging different deals and PMPs that we already have established. So for us, we don't see it as more of an if, it comes back, it's more about when and timing and the quarter. And so we're seeing us getting back to a good, healthy run rate for the last half of the year.

Got it, that's helpful. So let's talk about some of those initiatives, right? Obviously a lot of change has happened. We're seeing Google pullback on the SSP side as they deal with all the remedy stuff. So the marketplace is kind of in flux, PMAX is kind of a mess. You guys doing the direct connecting makes a ton of sense. We're seeing a bunch of other folks do that. You talked about top DSPs. I wonder, given your inventory and kind of who you represent on the publisher side, if there's not some kind of niche or middle market guys that you could kind of attack. And then, so maybe kind of talk through how we should think about how aggressive you stay on the connection side. And I would also love to hear about how you're thinking about kind of curation. It's sort of, it's very topical, but we're not seeing a ton of money figured out in the marketplace yet. So maybe hit those two topics for us.

Yeah, absolutely. So for us, we actually see the opportunity. One, we have excellent hold-code partnership relationships. In those bar dollars, we think we're always going to have access to those dollars coming through our pipes. And so we definitely will continue to nurture and manage those relationships as we see fit. But the opportunity that we also see is really in the middle market. The middle market dollars flowing through our pipes, if you will, or our SSP. We think that that's actually an opportunity to expand and grow. I think you've seen some DSPs and SSPs really focus on what they call the premium partnerships. We think that there's a ripe opportunity in the middle market. That's really kind of how we've managed the business for the last four years. So actually on the buyer side and also on the sell side, we see that as our sweet spot. And we're planning on doubling down into that marketplace. We think it provides us two benefits. One, diversification, where this lack of concentration of dollars, we think that that's a major benefit for us in focus on the middle market. But then also we think it's ripe for additional opportunity. And from what we've seen, that middle market has been a little bit slower to actually transition over to the digital space. So we see it as real green field for us in growing and being able to fuel our overall growth strategy and also the repeated CAGR that we've been able to perform over the last five, six years.

And the curation piece, Mark? It was a long question.

Yeah, no, no, no. No, good call. Hey, as it relates to curation, we do think that there's an opportunity for curation and it's something that we're exploring with many of our partners right now. We think that there is an opportunity but we're still working through figuring out what's the best way for us to apply that to our partners. And what we are seeing, at least off the onset, it's a case by case basis. So that's kind of the strategy that we're looking at curation. We'll be talking about that more so in the future. But the opportunity that we also see as it relates to curation is really with our buy side partners. We work with about 250 different, 225 to 250 different buy side partners. We think there's a curation opportunity with the middle market. And we think what sets us unique and what also makes us have a competitive advantage in serving the middle market is the fact that our buy side employees and our sell side employees talk and have the capability of actually leveraging curation as a competitive advantage that we actually take to the marketplace to interact with our buy side clients. So we think that gives us a unique value proposition and selling point. And so you'll see us talking more specifically about curation in the middle market and to our buy side partners as well as on the sell side is capabilities that we have.

Super helpful. Last one, I promise. Just thoughts on attacking video. I know it's not been a huge component historically. Then we started talking about the whole CTP market is kind of very top heavy at the moment. The bottom side has been challenged, but still a great opportunity for programmatic execution. So just curious how you're thinking about attacking kind of that landscape if that's part of the strategy here.

Yeah, it actually is. What we're seeing specifically on the sell side platform is people are looking for lower cost CPMs as it relates to the CTV OTT video space. And we think that there is a prime opportunity for us to provide that into the marketplace. When you think about media buy.

And excuse me, ladies and gentlemen, please stand by your conference for a momentarily and your line to be placed on this phone. We can

provide that. Yeah.

And excuse me, ladies and gentlemen, please continue to stand by your conference for a momentarily. Thank you.