PubMatic, Inc.

Hello, everyone, and welcome to PubMatic's third quarter 2023 earnings call. My name is Christian, and I will be your Zoom operator today. Thank you for your attendance. This 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 third quarter ended September 30th, 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 that you set your Zoom name to display your full name and firm, and 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 limitations, 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 the inherent risks, uncertainties, and changes in circumstances that are difficult to predict. You can find more information about these risks and 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 Forms 10-Q or 8-K, which are on file with the Securities Exchange Commission and are available at investors.pamedic.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 November 8, 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. And today, in addition, today's discussion will include references to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net income, and free cash flow. 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. The reconciliation of these measures to the most directly comparable GAAP measures is available in our press release. And now I will turn the call over to Rajiv.

Thank you, Stacey, and welcome, everyone. We delivered above expectations for both revenue and adjusted EBITDA. The upside in revenue was driven by an increase in monetized impressions across all formats. And once again, our durable model led to increased profitability, margin expansion, and healthy free cash flow. This quarter, we continue to add new logos and deepen existing publisher and buyer relationships. Total activity from SPO deals grew to an all-time high of 45%, hated partly by the launch of Activate. And customers and partners are seeing great results from our expanded solution suite. This quarter highlights the momentum we're building in the business and fuels our growth expectations for the fourth quarter of mid-single-digit year-over-year revenue growth. I recently spent a week with customers and prospects at Advertising Week New York, and I've never been more energized about our long-term growth opportunities. Our customer interactions indicate that sell-side technology that sits closest to the publisher and therefore to the consumer is key to driving long-term, sustainable growth in the programmatic ad market. Several key trends are driving this, and we believe our buyer and publisher relationships are strengthening as a result. First, buyers are embracing programmatic advertising to automate the purchase of high-value connected TV and video ad inventory. Cell-side technology companies like Pubmatic enabled this access at scale across the open Internet. Second, consumer privacy changes have resulted in increased global regulation and the looming deprecation of the third-party cookies. These trends have fueled tremendous innovation across the industry, and many new solutions are best leveraged when the technology sits closer to the consumer and publisher. At Podmatic, we are the technology platform at the point of consumer consent. And lastly, as our industry matures, there's been an ongoing imperative for greater control over the digital advertising supply chain and increased efficiency across the ecosystems. These trends are forcing publishers and buyers to reevaluate and reconstruct their supply chains to meet their evolving needs. Hubmatic is a key technology partner in this process. Our success stems from our owned and operated infrastructure that provides greater control over the supply chain and we believe is more efficient than alternatives in the market. This need is a driving force in our development of Activate. Since our inception, we have prided ourselves on our ability to anticipate market trends and build for the future. I'm extremely proud of the team and the new bar they have set for product development and speed to market. Our pace of innovation has accelerated and engineering productivity has increased over the course of the year. Fueled in part by generative AI, we have and continue to accelerate software development, automate software testing, and optimize code within our infrastructure. As a result, we released two major software products this year, Activate and Convert, with ongoing feature releases already in the works. We also added a record number of impressions processed with an annual year-over-year reduction in capex by 70%. Our durable financial model allows us to invest for future growth, even amidst a challenging economic environment. We believe this model, alongside our innovation vision for how the ecosystem is evolving, our expanding product suite, and our differentiated infrastructure, uniquely position Pumatic to gain market share. I'd like to spend some time today talking about how our innovative solutions are driving deep customer engagement in key areas of industry growth and set the stage for market share gains ahead. In May, we launched Activate to seamlessly connect buyers and publishers for premium CTV and online video monetization, which represents a $65 billion TAM expansion controlled from the sell side. Six months in, we are already seeing a tremendous response from buyers and publishers with an active pipeline of more than 50 advertisers, agencies, and campaigns. Most recently, we launched Activate in the Asia-Pacific region with partners including Dentsu APAC, iQiyi, Kineso India, a unit of IPG, Madison Digital, and Wish Media. Central to our conversations around Activate is the need to simplify the digital advertising supply chain and drive greater efficiency. This was a driving force for one of our launch partners, global confectionery and pet care company, Mars. Mars, a top 30 global advertiser, is innovating its supply chain for digital advertising with a particular focus on increasing efficiency in order to increase return on ad spend and lower its carbon footprint. Mars sees supply path optimization and activate as key drivers of their strategy, particularly for high-value growth formats such as CTV and online video. Mars exceeded their campaign objectives with their initial campaign tests in Q2 and Q3, resulting in measurable ROI improvements. As a result, Mars is significantly expanding its use of Activate to more products and ad campaigns. I think Ron Hamrim, Senior Director of Global Media at Mars, explained it best when he said, and I quote, we are excited about our growing partnership with Pubmatic. Mars is committed to creating efficiency and sustainability in our advertising supply chain, and Activate helps us get closer to the publisher and consumers, which contributes to the overall growth of our business. Agency holding companies are also seeing success with Activate. One global agency expanded its SPO relationship to include the use of Activate in order to drive better campaign performance, particularly for CTV on behalf of their clients. With the structural efficiencies and real-time supply optimization benefits of Activate, the agency was able to exceed the client's cost per user acquisition target by over 20%, and it has since expanded its use of Activate to more campaigns and more accounts across their client portfolio. With the incremental, though still early, benefit of Activate, SPO as a share of activity has grown significantly to 45% in Q3, as both agencies and major brands sign strategic deals to grow their business with Pubmatic. I'm particularly excited about this metric as it highlights the upside growth potential inherent in our business. First, buyers continue to consolidate ad spend across a smaller number of platforms. When the ad market returns to robust growth, we believe Pubmatic should disproportionately benefit and so should our publishers. And second, SPO activity comes from some of the largest ad buyers and agencies in the world. These are typically multi-year, sticky partnerships. At almost 50% of total activity on the platform, we've reached another inflection point of sizable, durable scale and growth. This increased buyer activity strengthens and expands our publisher relationships. Through our SPO offerings, premium publishers can access ad budgets from brands they have been unable to reach previously. We are particularly excited about the growth potential in CTV, where PMP and programmatic guarantee transactions are most prevalent. LocalNow, an ad-supported streaming service owned by the Weather Channel that delivers local geofence content, wanted a technology partner that has proven expertise in CTV, PMP, and programmatic guarantee deals, alongside unique advertiser demands. With Pubmatic, LocalNow was able to optimize data available to buyers, curate and package their inventory and audiences, and leverage our extensive SPO relationships, resulting in a more than tripling of their CTV revenue via Pubmatic. The benefits that LocalNow gained are not unique. We've seen significant growth in our P&P business over the past year, with nearly a third of our revenue now coming from these transaction types, up nearly 10 percentage points year over year. Much of this growth is coming from CTV as we continue to acquire new streaming publishers at a rapid pace as they look to secure ad dollars shifting from linear TV to CTV. We're also expanding technology partnerships across the ecosystem. Just last month, we announced an expanded partnership with leading connected TV advertising platform Freewheel, a Comcast company, creating a direct path for buyers to access a broad set of CTV inventory via Activate. We expect this expanded partnership to increase PTV revenue flowing through Activate. Our focus on the fastest growing segments of the industry led us to further expand our technology into commerce media, a natural expansion given our existing customer base. We estimate that Convert grows our addressable market by $10 billion and includes monetization of both on-site and off-site media. While it remains early days with Convert, there is strong market recognition for the need for an integrated platform that addresses core use cases from sponsored listings to audience extension to deal ID generation. For large commerce businesses, they can seamlessly manage inventory and consumer data in one system that brands can access and lower operating costs. Partly driven by the success of existing customers, our pipeline of Convert opportunities has jumped 40% in just the past three months. The expanding opportunities for Convert supplement our strong existing business with retailers who leverage our products to drive monetization. For example, Zulily, the online superstore for moms, is using Pubmatic to manage their on-site inventory, embracing our open wrap header bidding wrapper to maximize monetization from their inventory. Other commerce sites leverage Pubmatic for off-site audience extension through Connect. As privacy regulation continues to increase around the world with the consumer at the center of how their data is used to deliver relevant advertising to them, through Connect, we have developed and scaled a portfolio of approaches to help publishers and ad buyers move beyond the limitations of anonymous targeting solutions such as third-party cookies or Apple's IDFA. As the primary programmatic advertising platform at the intersection of the consumer and the publisher, we sit at the nexus of consumer consent. which we believe is a long-term structural advantage. In many cases, Connect's offerings are superior to the cookie. They provide for consumer privacy and choice, as well as deliver increased ROI for advertisers. As the timeline for third-party cookie deprecation potentially draws nearer, we are seeing increasing adoption of our solutions. Already, nearly three-quarters of impressions on our platform have alternative targeting signals attached other than the cookie, and we are confident that the remaining quarter will transition as well. Regardless, there is no shortage of impressions for buyers to transact on within our platform, with hundreds of billions of daily ad impressions with alternative targeting signals available. We are now integrated with 29 alternative IDs with a varying mix depending on the countries. These IDs drive increased ROI for advertisers as well as an increase in publisher revenue and CPMs. For example, Silo, the leading entertainment-focused TV streaming service, implemented Trade Desk Unified ID 2.0 on our platform in Q3 and saw an almost doubling of revenue as a result of buyers' ability to deliver more relevant ads to the consumer. We have also scaled Connect to support dozens of global data providers, further extending privacy-safe, targetable data available for buyers. The end result is, again, higher ROI for the buyer and incremental revenue for our publishers. For example, Audigent utilizes Connect to offer buyers premium, multi-publisher curated data sets to meet advertisers' goals across CTV, online video, mobile, and display inventory at scale. And in an industry first, buyers now have access to experience unique commerce media targeting capabilities. including data such as spending models, property data, automotive audiences, and shopping preferences. O-Matic is the first and only SSP with direct access to this data in both the United Kingdom and United States. Lastly, we are actively working with Google to test the Privacy Sandbox APIs, specifically Topics and Protected Audience, which allow for targeting user cohorts and aim for providing relevant advertising to those users while safeguarding their privacy. As digital advertising evolves from cookies to various privacy-safe approaches, we will continue to further scale Connect and provide buyers with the targetable audiences and media that they are looking for. The role of sell-side technology, and in particular Pubmatic, has never been more compelling, as publishers look for unbiased technology partnerships to help them drive growth, and buyers seek to simplify their technology stacks to become more efficient and to navigate privacy changes. As a result, we are seeing increased interest in adoption of our technology across our product suite. The third quarter marks strong execution and our steadfast focus on innovation, strengthening customer relationships, and driving operational efficiencies. This momentum positions us well for growth opportunities ahead and sets the foundation for the fourth quarter and what we believe will be an inflection point for growth. I'll now hand it over to Steve for the financial details.