PubMatic, Inc.

Hello everyone and welcome. We will begin in just a moment. Hello, everyone, and welcome to Pubmatic's first quarter 2023 earnings call. My name is Catherine, and I'll be your Zoom operator today. Thank you for your attendance today. The webinar is being recorded. I will now turn the call over to Stacey Clements with the Blue Shirt Group.

Good afternoon, everyone, and welcome to Pubmatic's earnings call for the first quarter ended March 31, 2023. This is Stacey Clements with the Blue Shirt Group, and I'll be your operator today. Joining me on the call are Rajiv Goel, co-founder and CEO, and Steve Pantelik, CFO. Before we get started, I have a few housekeeping items. Today's prepared remarks have been recorded, after which Rajiv and Steve will host live Q&A. If you plan to ask a question, please ensure you've set your Zoom name to display your full name and firm. If you would like to ask a question, please use the raise hand function located at the bottom of your screen. A copy of our press release can be found on our website at investors.pamatic.com. I would like to remind participants that during this call management will make forward looking statements, including without limitation statements regarding our future performance market opportunity growth strategy and financial outlook. forward looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. These forward-looking statements are subject to inherent risks, uncertainties, and changes in circumstances that are difficult to predict. You can find more information about these risks, uncertainties, and other factors in our reports filed from time to time with the Securities and Exchange Commission, including our most recent Form 10-K and any subsequent filings on Form 10-Q or 8-K, which are on file with the Securities and Exchange Commission and are available at investors.pomatic.com. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. All information discussed today is as of May 9, 2023, and we do not intend and undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as may be required by law. In addition, today's discussion will include references to certain non-GAAP financial measures, including adjusted EBITDA and non-GAAP net income. These non-GAAP measures are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our press release. And with that, I will now turn the call over to Rajeev.

Thank you, Stacey, and good afternoon, everyone. Our focused strategy, strong execution, and deep customer relationships drove revenue in the quarter significantly above expectations. Underscoring the strength of our model and our continued focus on efficiency and infrastructure optimization, the majority of incremental revenue dropped to the bottom line for having stronger than expected adjusted EBITDA, net income, and free cash flow. Our results reinforce the value of our platform, our ability to manage through the current environment, and how we are positioned to continue to capture market share despite the economic uncertainty. While we saw sequential improvement through the quarter, it's too early to say if the ad spend environment has troughed and whether the pronounced uptick we saw in March will continue. We therefore remain cautious with respect to our outlook and investment decisions. A key element of our strategy is to leverage our business model and strong degree of profitability to make targeted investments that position us for outsized market share gains when ad spend growth reaccelerates. We believe the current environment is accelerating consolidation in our industry and will benefit companies like Pubmatic that are global, scaled, and profitable. Macro pressures have driven publishers to prioritize their highest margin revenue streams, such as programmatic advertising, and increase their reliance on global omnichannel technology providers to manage a greater portion of their ad tech stacks. The pace of new publisher agreements remains strong. We signed over 65 new publishers in the first quarter. We now have nearly 1700 publishers and app developer customers, up 14% from a year ago. We expect to grow our roster of customers and increase stickiness with them in this environment. This is particularly true for our omnichannel video segment, which is a key growth driver. The omnichannel video market is expected to be a $215 billion market this year. A subset of omnichannel video, CTV, is expected to be a $65 billion market this year. Publishers are increasingly adopting programmatic monetization strategies in order to tap into growing ad budgets that they previously were not accessing. As a result, our CTV revenue was up over 50% year over year in Q1. We are accelerating the pace of new business growth in CTV. We saw a 10% increase in our CTV publisher customer base over Q4 to 237 publishers. Driving this is the growing recognition within the media and advertising industry of the advantages of programmatic CTV. Automated transactions are more efficient and data-driven than traditional buying methods, delivering higher ROI to advertisers and revenue gains to publishers. Podmatic has been a leader in providing programmatic technology for more than a decade, and we have seen this trend play out time and again across formats and channels. I believe that we will look back on this period as the turning point that structurally changed the nature of CTV advertising towards more programmatic monetization. At the same time, we are growing our existing relationships with premium streaming content providers as we provide the ability to both monetize their inventory and leverage their valuable first-party data. For instance, Pomatic helped A&E networks grow its programmatic business by passing valuable data in the bid stream, such as content genre and channel, making it easier for advertisers to reach their target audiences across A&E's properties and drive campaign ROI. We recently expanded our partnership with iQiyi, one of the largest online entertainment companies in China, who implemented our OpenRamp OTT unified bidding technology to provide global advertisers more efficient and effective access to the company's streaming inventory. The breadth of our publisher base makes us a scaled provider in the CTV market. We are working with six of the top seven global smart TV providers that have ad-supported streaming services, four of the top eight major addressable broadcast video on demand streaming platforms in the US, and five of the top eight free ad-supported TV streamers in the US. We also work with all of the top five addressable broadcast video on demand platforms in both Australia and Japan, two of APAC's largest CTV markets. We are seeing OpenWrap, our pre-bid based wrapper solution, drive increased stickiness for publishers across channels and formats. Originally launched in 2016, over the last few years, we have diligently brought in the footprint of OpenWrap to cover all leading ad formats and platforms, including CTV, mobile app, and web, as well as video, display, and soon to be launched native, making us one of only a few skilled providers with a comprehensive pre-bid based software solution across all major formats and channels. Over the last several quarters, we have seen a surge in adoption of our wrapper solution as publishers increasingly abandoned their homegrown pre-bid wrappers for alternative solutions for Pubmatic's OpenWrap. OpenWrap is now a critical component of publishers' ad tech stacks and central to their operations teams. Overall, signed OpenWrap agreements grew 27% year-over-year for Q1 as more publishers opt for the performance benefits and customer service Pubmatic provides. In the case of online car shopping site headman's, although they already had a header bidding solution, they were seeking an alternative that could give them more control over their yield management. After switching to OpenRap, they not only saw an average eCPM uplift of 35%, but also identified that the trusted header bidding expertise of the PAMATIC team was critical to their success. We also continue to deepen our buy-side relationships, where consolidation is most evident as agencies and advertisers lean into scaled and transparent technology providers that can help them increase operational efficiency and innovation. Supply path optimization expanded throughout Q1 and represented over 35% of activity. We have been able to leverage our profitability to deepen buy-side relationships, investing in our team and technology to offer a single integrated platform that delivers value to our customers. Plus, as we anticipated, the macro environment has been an accelerant for SPO, as major advertisers and agencies seek to improve return on ad spend and streamline their operations. Our existing SPO buyers continue to consolidate more of their business on Pubmatic. Five of the six global agency holding companies grew their SPO spend with Pubmatic by 20% or more sequentially from February to March. Even with the significant gains we have made in SPO, we see a long runway of growth ahead. In the past quarter alone, we have seen an over 80% increase in buyers interested in engaging in SPO with Pomatic for the first time, and now have an active pipeline of several dozen buyers. Long term, we believe there are hundreds, if not thousands of buyers that we can engage in SPO with globally. The consolidation we've seen across our industry has resulted in the rapid evolution of the advertising supply chain, and we believe the industry is at an inflection point. It's becoming increasingly difficult for publishers and buyers to stay ahead of the curve, requiring significant investment and expertise. As such, we have focused our innovation investments in two areas, both of which expand our addressable market and will create durable long-term growth, supply path optimization and commerce media. Yesterday, we announced Activate, an SPO solution that we have been working towards over the past 18 months and which leverages our recent acquisition of Martin. Activate is an end-to-end SPO solution that enables buyers to execute non-bidded direct deals on Pubmatic's platform, accessing CTV and premium video inventory at scale and unlocking unique demand for our publishers. This groundbreaking solution introduces a new industry paradigm for the supply chain of the future. But Matic has taken an infrastructure driven approach to solving some of the industry's biggest challenges that historically have prevented billions of dollars of insertion orders from entering the programmatic ecosystem. Our single layer technology approach does away with data leakage, discrepancies, multiple hops in the supply chain, opacity, and high aggregate fees associated with having multiple technology providers like SSPs and DSPs. In 2023, approximately $35 billion or almost 60% of CTV spend is expected to be transacted via IOs. Direct IOs also account for more than $27 billion or approximately 18% of online video spend. By providing a path to bring these direct dollars to programmatic, Activate represents a nearly $65 billion expansion of our total addressable market. With Activate, our SPO solutions become even stickier. We expect buyers who use Activate will benefit from greater control over their supply chain and increased ROI. Publishers will benefit from increased revenue. Over the last few months, as we have engaged with prospective Activate customers, I've been blown away by the magnitude of interest in the solution, which validates our vision and roadmap, as well as Pubmatic's market position as a partner of choice. We have seen strong interest among agencies, advertisers, and publishers in every major region and across verticals and buyer size, including global advertiser Mars, agency holding companies Dentsu, Avast Media Group, GroupM, and Omnicom Media Group Germany, and CTV publishers Fubo and LG. As a key launch partner for Activate, GroupM is further expanding its SPO relationship with Pubmatic. The GroupM Premium Marketplace, an initiative that provides GroupM clients with direct, transparent, and efficient access to CTV and online video inventory is built on pragmatic technology and will now extend to Activate. With Activate, GroupM clients can buy GroupM Premium Marketplace inventory on a guaranteed basis in a more efficient and direct manner with less costs involved in the supply chain. It is also an opportunity for them to bring clients who heavily rely on direct IOs into the programmatic ecosystem. As a result, GroupM intends to improve their clients' working media and ultimately generate better outcomes. To be clear, Activate is not a demand-side platform. Our industry already has a number of scaled DSPs, but Matic is not offering a bidder, bid optimization, creative optimization, or a variety of other services that are core to the value proposition of a DSP. As I mentioned, Activate is specifically designed to transition non-programmatic insertion orders for CTV and online video into non-vetted programmatic buying transactions. But Matic already has a strong foundation in programmatic guaranteed and private marketplace deals, and Activate further expands this opportunity. For Pubmatic, we expect to see significant strategic and financial benefits, including Activate being a catalyst for faster CTV and online video growth over the medium term, as well as an accelerated mix shift toward more premium omnichannel video formats, resulting in higher gross and net margins. Activate also facilitates greater stickiness with buyers, which increases revenue visibility and greater stickiness with publishers, allowing them to access unique ad dollars only available via the Pubmatic platform. As we bring more advertisers spent to our platform, we are also unlocking opportunities to further scale other areas of our business, such as retail or commerce media. Commerce media expands on the retail media opportunity set to include not just retailers, but a wide variety of transaction-based businesses like transportation or food delivery providers, travel and event providers, fintech companies, and more. We continue to grow our existing customers like Kroger Precision Marketing, providing the technology and solutions to enable them to activate their retail audiences across Pugmatic's CTV, video, and display inventory. We're also growing our footprint with additional commerce businesses that have high transaction volumes and valuable data. Over the past quarter, we've had several new customer wins, such as Lyft and TripAdvisor, who are using our growing suite of onsite monetization solutions to help grow their commerce media businesses. This is a tremendous growth opportunity for us with an estimated market size of more than 120 billion. Data access and control are key areas of importance for commerce media, both areas where Podmatic already has market leading solutions. In addition, we have the financial profile to make focused investments in technology that specifically aligns to current and future commerce media needs, such as audience extension, onsite multi-format monetization, and operational efficiencies to help commerce media companies scale their businesses further. Operating under a similar playbook as we did with SPO, making focused investments that lead to market expansion and high growth revenue, we believe our strategy around commerce media will have similar returns. I look forward to sharing more with you in the coming quarters. Our execution over the course of this quarter reinforces the value of the Pomadic platform within the digital advertising ecosystem and our ability to continue to consolidate the market as advertisers seek alternatives to the walled gardens. We are rapidly growing the platform with new publishers and buyers and creating greater stickiness with existing customers. Our omnichannel platform, global scale, and strong financial profile are key differentiators and enable us to rapidly expand our addressable market. We will continue to prioritize long-term growth opportunities through highly focused investment, which we believe will drive outsized market share gains and greater shareholder returns. I'll now turn the call over to Steve for the operational and financial details.