PubMatic, Inc.

Hello everyone and welcome. We will begin momentarily. For those of you just joining us, thank you for joining us today. We will begin momentarily.

Hello, everyone, and welcome to Pubmatic's fourth quarter and full year 2023 earnings call. My name is Kelsey, and I will be your Zoom operator for today. We thank you all for your attendance today. And as a reminder, today's webinar is being recorded. And now I will turn things over to Stacey Clements with the Blue Shirt Group. Stacey, over to you.

Good afternoon, everyone, and welcome to Pubmatic's earnings call for the fourth quarter and full year ended December 31st, 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. 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 the website at investors.pubmatic.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 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 Forms 10-Q or 8-K, which are on file with the Securities and Exchange Commission and are available at investors.pubmatic.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 February 26, 2024, 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, 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. A 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 a terrific fourth quarter with results that significantly exceeded our expectations on both the top and bottom line. Revenue growth accelerated to 14% over Q4 last year, which drove strong profit and cash generation. This inflection point in our growth was fueled by innovation investments we made over the past few years, and particularly in 2023. I'm extremely proud of our entire team for their hard work, dedication, and outstanding execution. We saw year-over-year growth in the quarter for both omnichannel video and display, and I'm particularly excited about the contribution and growth of emerging revenue streams, which now represent a low single-digit share of total revenue, and I anticipate will expand significantly over the course of this year. Our results more than offset a sizable headwind from Yahoo as they shuttered their SSP business earlier in 2023 and continued to transition their technology for owned and operated inventory. Excluding Yahoo, year-over-year revenue growth in the fourth quarter accelerated to 19%. Recall we had a similar revenue headwind from Yahoo in Q3, making Q4 the second consecutive quarter of accelerating revenue growth when excluding Yahoo. This highlights the strength of our platform, the value we deliver to publishers and buyers, and the increasing importance of sell-side technology across the ecosystem. Investments we've made over the last few years are gaining momentum and are becoming meaningful growth drivers. They've allowed us to expand our customer relationships and deepen technology integrations on the back of a growing product portfolio. We have built a flexible, integrated platform that meets the needs of buyers, sellers, retailers, and data providers across the digital advertising supply chain while delivering superior efficiency. As a result, we believe we are at the early stages of a period of significant multi-year revenue growth and market share expansion. On top of that, there are several major tailwinds that we expect to benefit from. Shifts in ad budgets to CTV and commerce media, continued industry consolidation, as well as external forecasts pointing to a stable and constructive ad spend environment. With a focus on increasing shareholder value, we intend to drive market share gains, expand margins and generate strong cashflow. Underpinning this are a number of efficiency initiatives we implemented this past year across the business. In addition, we anticipate a 15 to 20% increase in engineering productivity in 2024, driven by the use of generative AI and multiple points in the software development and release process. These efficiencies, along with our expected revenue growth and strong financial profile, give us the ability to reinvest back into the business in sales and engineering for market share gains while simultaneously expanding our share repurchase program. We've significantly ramped Connect, our audience addressability platform, for a variety of privacy-compliant post-cookie solutions. Over the last few months, we have seen a marked increase in activity on post-cookie solutions as buyers and publishers prepare for the end of third-party cookies. Just in Q4 alone, the number of revenue-generating Connect customers increased by 20% from Q3 to over 100. We are also seeing more publishers adopt alternative signals, with over 80% of impressions on our platform now having these signals available to buyers. Even more compelling, alternative identifiers provide more relevant, higher ROI ads to consumers. Our analysis across more than 600 billion ad impressions processed daily by Pubmatic concluded that when alternative IDs are present, publisher revenue increased by 16%. There is a tremendous opportunity in front of us for the open Internet to take share from walled gardens. As the open Internet scales up alternative signals, which drive increased advertiser performance, combined with its inherent advantages of professionally created content relative to the walled gardens user-generated content, the open Internet will be structurally more attractive to advertisers. For instance, we are collaborating closely with GroupN on a market-leading, privacy-compliant, first-party data solution developed by Resolve, a choreographed company specializing in distributed computing and federated learning applications for the ad tech industry. This partnership empowers advertisers to enhance their ad campaign's targeting capabilities without transferring any personal data outside of their native environment. Pumatic works alongside publishers to provide consumer cohorts based on customized, next-generation, large-language models for each of GroupM's clients. Ad transactions are then facilitated on the Pumatic platform against these cohorts to deliver highly relevant ads and improve advertiser ROI. We're also working closely with Google, the UK Competition Markets Authority, and Interactive Advertising Bureau's Tech Lab on the Privacy Sandbox initiative. As part of the Google Markets Testing Grants program, we are now facilitating end-to-end transactions with Privacy Sandbox APIs between multiple publishers and demand-side platforms. Given our success and the increased market activity in advanced addressability solutions, we plan to grow our engineering team focus on this area as well as our connect to go to market team by several dozen people in 2024. The deprecation of third party cookies is driving more buyers to lean into sell side technology partnerships. As a result of this and other trends, supply path optimization continues to be a major growth driver for us as we add new SPO relationships and expand existing ones. We have been investing in SPO technology and partnerships for five years and ended 2023 with a high watermark of over 45% of total activity coming from SPO. This is nearly double where we were just a few years ago. We see a significant greenfield opportunity ahead, even beyond our initial goal of 50% of total activity. A recent study by the Association of National Advertisers identified that only one third of advertisers have engaged in SPO and that the average advertiser is working with 15 to 20 SSPs. The study also actively advocates for advertisers, in addition to large agencies, to engage in SPO, consolidating activity with preferred technology providers to drive increased efficiency, transparency, and operational simplicity. SPO is also gaining momentum among independent agencies, unlocking additional opportunities for growth. We recently launched a partnership with Dolby Promote, an independent marketing agency managing clients like Intuit QuickBooks, Peacock, Spanx, and TransUnion. Through our SPO partnership, we will provide supply chain efficiencies that enable them to solve complex challenges for their brand clients with a performance-rooted approach to media. Delby Promote's head of programmatic and video, Skylar McGill, noted, through our preferred partnership with Pubmatic, Delby Promote's clients will be able to more efficiently and transparently access curated CTV and video inventory to drive business outcomes and create unique competitive advantages. Our SPO opportunity is further boosted by Activate, which is continuing to scale in both pipeline and revenue. We have an active pipeline of over 75 advertisers, agencies, and campaigns. This pipeline is up by over 25% compared to the previous quarter. Earlier this month, we officially launched Activate in Japan, partnering with nearly a dozen leading CTV publishers in the region, including Asahi Television Broadcasting Corporation, Fuji Television, Nippon Television Network, and Tokyo Broadcasting System Television. Premium streaming companies around the world are embracing Activate as buyers seek more efficient, programmatic access to their inventory to drive measurable business outcomes. For example, a prominent luxury retailer in the U.S. wanted to drive brand awareness across channels with a focus on video and CTV during the holiday shopping season. With Activate, their agency was able to reach their niche target audience across Pubmatic's premium omnichannel video inventory, driving efficiencies across cost, operations, and scale, ultimately achieving or exceeding each campaign KPI. As we continue to drive strong ROI for clients, I'm excited to tap into the nearly $65 billion expansion of our total addressable market that Activate represents. Together, SPO and Activate delivered strong, profitable revenue growth in 2023. I continue to see tremendous opportunity ahead of us as buyers engage more closely and strategically with sell-side technology providers like Pubmatic. We plan to expand our buyer-focused sales and customer success teams by 50% in 2024 in order to capture this opportunity and accelerate growth. Our growth trends with buyers also mirror the momentum we are seeing with publishers, particularly around high-value CTV and online video formats. Omnichannel video revenue growth accelerated in the fourth quarter. We have 271 premium CTV publishers monetizing on the platform, up 27% over 2022, and we continue to have a robust pipeline of opportunity as we head into 2024. Most recently, we added Sling TV and Vivo as they seek access to the unique and differentiated demand we offer through our SPO and Activate relationships. Equally important, our strong SPO relationships are driving increased premium content to our platform, creating a network effect. For example, driven by buyer interest, we recently signed a deal with Dish Media to provide buyers with access to premium programming on Sling TV, including their broad range of live sports content. With major global sporting events like the Paris Summer Olympic Games and Copa America in the US this year, we are excited to provide advertisers transparent, signal-enhanced access to this valuable CTV inventory. We believe an interoperable approach is the only sustainable way to manage the anticipated growth in programmatic CTV advertising, particularly as newer entrants contribute to a rapid increase in CTV inventory and corresponding increases in ad dollars across the ecosystem. In 2023, we deepened engagement with CTV ad server providers like Freewheel. And most recently, we expanded our relationship with the top three DSP partner by integrating their CTV demand onto our platform. The anticipated surge in buyer demand will bring increased ad dollars and monetization opportunities for streaming content providers on Pubmatic. Our strong SPL relationships have also been instrumental in growing the size of our one-to-one private marketplace business, whereby publishers choose our platform to transact deals they sell directly to ad buyers. As publishers get familiar with the ease of use and benefits of our platform, they're increasingly using our software to run their one-to-one deals. Overall, revenue from one-to-one deals grew more than 50% year-over-year in 2023. Our strong Q4 results were built upon a foundation of sustained innovation that has been core to Pubmatic's DNA since our inception. In no year was this more evident than in 2023. Last year, we increased software releases by 60% year over year, including delivering two of our biggest product launches ever with Activate and Convert. Not only did these launches mark an innovation milestone for our company, but also reinforced our position as one of the leading independent technology providers across the digital advertising ecosystem. We have spent the past few years scaling our product development to extend the value of our core SSP platform beyond ad monetization services. We offer wrapper software to large publishers with OpenRap, solutions like Activate for Buyers, PostCookie targeting with Connect, and Commerce Media with Convert, each adding new revenue streams in addition to the core SSP revenue we generate on ad impressions flowing through our platform. These solutions increase customer stickiness with more touch points and software integrations. They enrich the data flowing through our platform, making us more invaluable to our clients, and they provide us with clear points of differentiation. Collectively, these solutions have unlocked emerging revenue streams for our business and now drive meaningful revenue generation and growth on top of our core SSP revenue. We expect these solutions to contribute mid-single-digit percentages of revenue in 2024, more than doubling year over year. The changing dynamics of the industry and the evolving digital advertising supply chain are also ushering in a new era for the open Internet. Historically, performance advertising has been the domain of walled gardens. Now, driven by the increase in first-party and identity data, further fueled by the rise of commerce media, as well as buyers' ongoing focus on efficiency, we see a long-term opportunity to drive ROI and outcomes-based advertising on the open Internet. We see Pumatic as a platform best positioned to take advantage of this new opportunity. With the closed-loop reporting and valuable commerce data available through Convert, coupled with the efficiency and end-to-end control that Activate provides and the enhanced sell-side data now available via Connect, we have the foundational building blocks in place to deliver performance advertising solutions that rival the walled gardens. While it's still early, we will increase our investment in product development and machine learning engineers to build new performance-based solutions. As I predicted last quarter, Q4 was a clear inflection point up for revenue growth. Our strong performance highlights the value of our integrated platform and our customer-centric approach to growth. As buyers continue to consolidate spend on our platform and take advantage of the growing solution suite we offer, our publishers benefit from stronger monetization and greater utilization of our technology across our software products. I see tremendous opportunity ahead of us in 2024 and beyond to grow our market share and deliver shareholder value. We plan to expand our headcount by over 150 people this year to take advantage of the revenue growth opportunities ahead of us. These investments will pay off partially in 2024 and more fully in 2025. With our focus on efficiency and a robust business model, we anticipate expanding margins in 2024. I will now hand it over to Steve for the financial details.

Thank you, Rajeev, and welcome everyone. We ended the year with outstanding results across our business with fourth quarter revenue accelerating to 14% year-over-year and 33% sequentially versus Q3. There were several factors that drove this growth inflection point. We increased the total number of impressions monetized across all formats and channels by an impressive 29% over Q4 last year. Both omnichannel video and display revenues increased year over year. We achieved robust growth in every geographic region. And our emerging revenue streams like Activate and OpenWrap added approximately three percentage points of growth in the quarter compared to Q4 2022. These results are particularly notable given the revenue headwinds in our business from Yahoo that we commented on last quarter. Our revenue growth excluding Yahoo's owned and operated inventory in the fourth quarter grew 19% over Q4 last year and grew 8% for the full year versus 2022. Along with our revenue acceleration, we've continued our long track record of profitability with adjusted EBITDA margin of 46%, and we generated the highest quarterly and full year free cash flow in the company's history at nearly 20 million for Q4 and 52.8 million for the full year. These notable results once again highlight our robust business model, our operational excellence, and our ability to grow our core business while simultaneously investing in our technology and products for revenue growth acceleration. Breaking Q4 down by format and channel, which includes Yahoo, unless otherwise called out, omnichannel video revenue grew sequentially 31% from Q3 and 7% year-over-year. These results were powered by a 30% plus increase in monetized impressions, which offset year-over-year CPM declines. As a reminder, on a year-over-year basis, video CPMs declined in early 2023, but were relatively stable from August onwards. Display returned to growth for the first time this year, delivering strong year-over-year growth at 9%. Mobile display led the way at over 20% year-over-year growth. Excluding Yahoo, total mobile and desktop display revenue grew 27% in the fourth quarter. On a regional basis, every region grew double-digit percentages in Q4. Looking at ad spend by category, we saw notable recovery in the shopping vertical, which returned to year-over-year growth for the first time in 2023. The business, technology, and personal finance categories in aggregate grew over 30%. Overall, the top 10 ad verticals combined increased by 26% over Q4 last year. Our excellent fourth quarter results were driven by ongoing innovation over many years and our focus on the operating priorities that I outlined a year ago. Collectively, we expect this rigor will accelerate revenues in 2024 while delivering expanded strong margins and healthy cash flows. To recap, our first priority was to deepen our relationships with our publishers and buyers to be well-positioned when the ad spend environment stabilizes. We did this through technology innovation on the problematic platform and partnership development. In 2023, we increased the number of high-value video impressions we monetized on behalf of our customers by over 30%. With a focus on capacity optimization and targeted CapEx investments, our rate of acceleration increased as the year progressed. We increased activity from supply path optimization to over 45% of total, up from approximately 34% at the end of 2022. We maintained high rates of net spend retention from SPO buyers and very low churn, underscoring the stickiness of these relationships. The net spend retention rate from SPO partners with at least three years of spending was 120%. We added 151 publishers in 2023, which includes premium CTV inventory and transactional commerce brands. And perhaps one of the most exciting things we accomplished in 2023 was the ramp up of our emerging revenue streams through new products, incremental data connections, and sticky software integrations. Our second operating priority was to drive free cash flow generation. Coupled with our durable model, we were disciplined in capital allocation and ongoing investments. We delivered 52.8 million of free cash flow, a 38% increase over 2022. Over the last three years, we generated over 140 million of free cash flow, which has provided us the flexibility to continually invest, accelerate growth, and differentiate our product offerings. And third, we focused on establishing a new level of efficiency in our cost structure. Our owned and operated infrastructure provides tremendous leverage in our business. On the back of CapEx investment in 2021 and 2022, our focus in 2023 was on driving increased optimization. These efforts resulted in more than 20% additional capacity on our platform while allowing us to reduce CapEx by more than 70% versus 2022. In addition, our efforts delivered an 8% reduction in cost of revenue per impression process. We also drove efficiencies across our product and engineering teams supported by generative AI and through our highly efficient and productive development organization in India. We launched and scaled a mid-market customer success team in India to deliver outstanding account management with greater focus and efficiency. Through the combination of improved engineering productivity and cost efficiency efforts, we have improved our cost base by over 20 million. Full-year gap operating expenses were $165.7 million, a 23% increase over 2022, reflecting investments across the business. Included in this total is $5.7 million of bad debt expense related to the bankruptcy of one of our buyers in Q2. Extending our long track record of standout financial performance, 2023 marked our eighth straight year of gap net income and 11th straight year of positive adjusted EBITDA. Full year gap net income was 8.9 million or 16 cents per diluted share. Non-GAAP net income, which adjusts for unrealized loss on equity investments, stock-based compensation expense, and related adjustments for income taxes was $32 million, or $0.57 per diluted share. We ended 2023 with $175.3 million in cash and marketable securities and zero debt. During the year, we used our significant free cash flow for growth investments, and we repurchased shares as planned. As of December 31st, we had repurchased 4 million shares of our Class A common stock for 59 million in cash, and we reduced our fully diluted weighted average shares outstanding. We had approximately 16 million remaining from our prior authorization at the end of the year. Consistent with our long-term capital allocation strategy, supported by our healthy balance sheet and strong cash generation, we plan to continue our capital allocation strategy of first, investing for growth, and second, return capital to shareholders. Accordingly, the Board of Directors has authorized the repurchase of up to an additional 100 million of the company's Class A common stock through the end of 2025, on top of the remaining funds from our prior authorization. Turning to 2024, we are seeing a more constructive ad spend environment and are planning for accelerated year-over-year revenue growth and incremental margin expansion. This means investing in areas where we see the highest returns while driving further efficiencies across the business. Key incremental investment areas include innovation and go-to-market resource. We plan to add more engineers to drive our post-cookie solutions and develop new revenue opportunities such as performance advertising. We plan to increase our buyer-focused sales and customer success team by 50% to accelerate growth in SPO and activate. And we plan to hire more salespeople to focus on growing our emerging revenue streams coming from our enterprise-grade OpenRap software, post-cookie targeting with Connect, and commerce media with Convert. Overall, we expect to add more than 150 net new team members this year. In addition, we expect to increase CapEx by several million dollars over 2023 levels to support the growth of our new products. And finally, we anticipate we will achieve further productivity gains through the use of AI and continued cost efficiencies by focusing on capacity and infrastructure optimization. Based on our successful long-term track record of maximizing the return of our growth investments, we are confident that our 2024 operating plan will help us accelerate our revenue growth to over 10% this year, which includes the Yahoo headwind referenced earlier. Excluding Yahoo, this growth translates to over 12% year-over-year growth. At the same time, we anticipate expanding our adjusted EBITDA margin and generating positive cash from operations in line with 2023. Turning to Q1, with a tailwind from our strong finish to the year, we are starting 2024 on solid footing. January trends were excellent with double-digit percentage increase in monetized impressions on a year-over-year basis. CPMs were in line with seasonal expectations, and emerging revenue streams continued to grow. Notably, omnichannel video revenues were up double-digit percentages year-over-year, and display revenues also increased year-over-year. Based on these recent trends, we anticipate Q1 2024 revenue to be in the range of 61 to 63 million, or 12% year-over-year growth at the midpoint, and 17% growth excluding Yahoo. In terms of costs, GAAP cost of revenue in Q1 is expected to be approximately 26 million. Over the coming quarters, as a function of continued proactive steps on productivity and cost-saving measures, We anticipate keeping sequential quarter-over-quarter cost increases in the low single-digit percentages. We expect Q1 gap up X to increase approximately 5 million versus Q4. This increase absorbs the Q4 run rate of expense, global annual cost of living adjustments that are effective in Q1, plus an additional cost related to our general global sales conference. With our focus investments for growth, we anticipate that OpEx will increase sequentially in the low single digit percentages Q2 onwards. Given our revenue guidance and our cost structure, which is largely fixed in the near term by design, we expect our Q1 adjusted EBITDA to be between 10 and 12 million or approximately 18% margin at the midpoint. As a reminder, historically, our first quarters impacted our prior year investments that are carried forward during a period of low seasonal ad spend. We expect profitability to improve as the year progresses, driven by our continued focus on productivity improvements, cost efficiencies, and typical seasonal increases in ad spend. For the full year, we expect adjusted EBITDA margin to be approximately 30%. We expect CapEx to be between 16 to 18 million for the full year. Over many years, we have developed a successful playbook to drive sustained innovation and operational excellence. This gives us the confidence to incrementally invest for future growth while continuing to deliver robust profitability and cashflow. As one of the largest independent sell-side technology providers, I'm very excited about prospects in 2024 and the trajectory we are on for sustained double-digit growth this year and beyond. With that, I'll turn the call over to Stacey for questions.

Thank you, Steve. As a reminder, you can ask a question by raising your hand located on the dashboard. If you're on your phone, please press star nine. In the interest of time, we ask that you please limit your question to one and one follow-up. Our first question comes from Shweta Kajaria at Evercourt. Please go ahead, Shweta.

Thanks, Stacey. Let me try two, please. So first one, Rajiv, on cookie deprecation. I guess the question is, what is your sense in terms of the readiness of publishers and advertisers if cookies were to go away in third quarter and more so by fourth quarter? Do you think that they are ready to transition on both sides, the large advertisers as well as publishers? And then also on cookie, this is part of question one, also on cookie, you talked about the 80% adoption of alternative IDs. I guess the question there is, How does it work once cookies do go away in terms of your revenue exposure that has been reliant on cookies? Is it simply that cookies go away, publishers have alternative IDs, so ROI goes up and potentially CPMs could go up and Those publishers that don't have alternative IDs will likely get lower CPMs. Could you help us think through how it would impact you? And then the second question for Steve is, Steve, could you please help us with the cadence of the revenue acceleration through the year as all these new incremental products will start playing a role? It sounds like mid-single digit percentage in terms of full year contribution is how you characterized it, but how should we think about it through the year? Thanks a lot.

Yeah, why don't I start? Thank you, Shweta, on the cookie piece. Then I'll turn it over to Steve. So I would say there's a mixed level of readiness across the ecosystem. We have been working for four or five years now on our Connect product. So we feel quite good about how we're positioned. Some publishers are ahead of the curve. Some publishers are behind the curve. And I would say the same is true of advertisers and agencies. You saw what we announced with GroupM and Resolve around model cohorts today. So that's a great example of, I think, of getting ahead of the curve. I do want to emphasize that we are not dependent on how Privacy Sandbox evolves or what Google does. So we have been scaling non-cookied environments such as CTV, commerce media, mobile app. All of these areas are growing as a percentage of revenue as well as just the raw volume of impressions. And so we have plenty of impression opportunities to meet advertiser needs. And as you commented, 80% of our impressions on our platform now have alternative signals available to the third party cookie. I think there will be a transition period when that cookie deprecation timeline happens. It's impossible for everybody in the ecosystem to be fully transitioned away from the cookie while the cookie is still around. But we've been building signal. That percentage has been growing. It's going to continue to grow. So we feel really good about all the things we're doing around alternative IDs, contextual advertising, publisher first-party data, and model cohorts. And then stepping back, what I see is that Privacy Sandbox is introducing significant complexity into the ecosystem. It's an entirely new parallel auction environment, and there's a collection of APIs that have to be implemented, and those APIs themselves are evolving rapidly. And so what that means is that it will take substantial and sustained engineering investment in order to compete effectively. And we're in a position to make that investment. It's factored into our 2024 plan. I suspect there are many companies in the ecosystem, in the ad tech ecosystem, that will not be in a position to make that investment. So this may very well be a share gain opportunity for us. Let me turn it over to you, Steve, on the revenue piece. Great.

Thanks, Shweta, for the question. So a couple things just to highlight. Number one, our guidance at the midpoint is about 12% year-over-year growth. So clearly a step up from where we were historically in the first half of 23. So overall, we feel that the start of the year is very robust and positive. And then to your question and comment, we have additive over time in emerging revenue streams. So I expect that through the course of the year, we'll continue to build on the momentum we've established in the first quarter. It'll probably match a more seasonal expectation in terms of historical averages. So expected growth in Q2 versus Q1, and then strong fourth quarter, which will be supplemented by emerging revenue streams. The other comment to note on emerging revenues is that it's really positive on a number of fronts for us, not the least of which is net new in many cases, but it's SaaS-like revenue and more stable and less prone to, let's say, the ups and downs of the overall ad spend environment. So we see a lot of stability in those revenue streams and build up over time. And our current expectation is that by the end of the year, we will have doubled the portion of our revenue, emerging revenue streams through the course of this ramp up and investment in these areas.

Thanks, Rajiv. Thanks, Steve. Our next question comes from Matt Swanson at RBC. Please go ahead, Matt.

Yeah, thanks, Stacey. Congratulations on the quarter, guys. I think I want to stay maybe on the SPO side. And like you mentioned, you're dangerously close to hitting those long-term targets of 50%. And I guess the two-parter on that would be, one, do you have a new number that kind of sticks out in your head as like what the long-term contribution from SPO is? And then also just kind of thinking this journey we've been on, how the value proposition of SPO has changed from today versus when it started.

Sure. Yeah. Thank you, Matt. So with respect to SPO, you know, as you mentioned, right, we're very close to the targets that we had set out earlier. You know, when I think about it, I think long term, maybe three quarters of our business could be SPO based. So let's let's, you know, put pencil that in as kind of the next frontier, the next watermark for us to hit. I think there's still a tremendous amount of opportunity. As I mentioned in the prepared remarks, we are expanding the sales and customer success teams here by 50% in order to go after it. We highlighted Delvey Promote, more of an independent agency. We see a lot of activity on the advertiser front. So in terms of how the value proposition has evolved, It certainly has been evolving. And I think the kind of economic cycle that maybe we're still in or maybe we're most of the way through, you know, has also changed where the value proposition is headed for SPO. So it used to be, you know, about simplifying operations in order to focus on high quality inventory from a media buyer's perspective today. And I think as we've gotten deeper into these SPO conversations and relationships, we found a whole set of different opportunities for us to focus on. So helping make the buyer more efficient is certainly one that buyers are very focused on these days. That ANA study where buyers are still working with 15 to 20 SSPs, obviously that's a metric that's far too high and is not going to be sustained. Buyers are looking for help with the privacy and regulatory environment. So there's, you know, more and more privacy regulations around the world and they need to be, you know, compliant in all places where they do business. There's 20 some, you know, US state regulations in place now are coming in place. Post-cookie targeting is another area, so exactly the point that we made with GroupM and Resolve. So I think it's turning into a much more multifaceted data workflow efficiency compliance opportunity, which creates tremendous, I think, innovation opportunity for us and tremendous growth opportunity for us.

And then if I could ask one more, Steve, you mentioned some of this being more SaaS-like revenue. One of the interesting parts of the SPO is it makes your spend almost more DSP-like, where it's about ad budgets and less CPM-sensitive. So can you just talk about as, let's say we got to 75% SPO activity, what that does for your visibility in terms of being able to forecast revenue?

Well, I absolutely think it grows. And to Rajiv's point, I mean, we've gone on this journey with buyers and we learn more and more every day and deep in the relationships. I shared the stickiness measure and the incremental spend that we see from our SPO relationships. So all of that contributes to what I'll call the stability of our revenues over time. But the aspect with respect to emerging revenues is that, you know, it's something that is built on you know, our innovation capabilities, and it's on top of our platform. And so we are finding significant pockets of opportunity, these SaaS business models, you know, whether it be database through our connect, open RAP software, enterprise grade software, we are able to charge for that. And of course, the significant launch of Activate, which adds a net new revenue stream in terms of buyer fees. So all of these help to add incremental revenues, but also a level of stability. And as that grows over time, I would expect the degree of revenue predictability will grow.

Thank you, Steve. Our next question comes from James Heaney at Jefferies. Please go ahead, James.

Great. Thanks for the question. Can you talk a little bit more just about your CTV growth strategy and how do you feel about the inventory that you currently have access today? And do you see a world in which you could get more access to the premium CTV inventory that we're seeing entering the market? Thank you.

Yeah, sure, James. Thank you. So, yeah, when we think about CTV inventory, I feel really good about how well positioned we are. Year over year, CTV publisher count grew from 214 Q4 of 22 to 271 in Q4 of 23. So that's significant count or significant growth in terms of the number of publishers. And what I see happening is that there's a lot of momentum, particularly with the biggest names, the biggest streamers or broadcasters. And it's being driven by a network effect with buyers and supply path optimization, as well as the strength of our technology platform. So buyers are increasingly consolidating their spend on our platform. Our Activate product extends that even further. And Dish and Sling are a good example of that, where then they want access to those dollars, of course. And so as we ramp these SPO relationships and get deeper with buyers, then that brings more publishers to our platform. And then the other, I think, really nice expansion opportunity is that as CTV publishers use our platform and see the benefits of it, they are moving more of their one-to-one private marketplace or programmatic guaranteed deals to our platform. So this is a deal that a publisher would sell to a single advertiser, and they're moving those deals to our platform. We grew that segment by 50% year over year last year. And we have, I think, a low share of the market in that arena, that one-to-one deals space. And so I think there's a lot of runway ahead of us. And the last comment I'll just make is that the vast majority of CTV monetization that we have on our platform today is in the U.S., but we see tremendous opportunity in a variety of different parts around the world. Europe is growing quickly. In APAC, we highlighted earlier the Activate publisher reaction in Japan. So I think there's a variety of different markets where we're going to continue to grow CTV at a rapid rate.

Great. And then, Steve, maybe just one quick follow-up on the guide for CTV. 2024, last year you weren't able to provide guidance, but this year it looks like you have a little bit more visibility. Is that sort of what's giving you the conviction to guide to the full year? Like just what's kind of giving you that increased visibility?

There's actually a number of factors. First and foremost is we do see a more constructive ad environment out there. So that's number one. Number two is many of the things that we've been working on for a really started to take hold in the back half of 23. You saw the outstanding results in the fourth quarter. If you exclude the Yahoo owned and operated inventory, our business grew 19% in the fourth quarter. And so when we look ahead at the opportunities, we're going to build on that momentum. We have been investing behind omnichannel video. Rajiv called out some of the factors there. We are seeing terrific, you know, momentum from SPO relationships that will continue to grow as proportion of our total business. So that adds a tailwind to us. And then, of course, we continue to, you know, have progress with our new emerging revenues like Activate, Connect, OpenRap. So all told, You know, when we look at 24, we're seeing a minimum growth expectation of 10 plus percent. And if you strip out the Yahoo component, that's 12 over 12 percent. So we're feeling really good about where we are right now. Obviously, we'll update the investor group as time goes on. But, you know, we have, you know, really good start to the year and many things that have already gained traction and, you know, are building.

Our next question comes from Justin Patterson. Please go ahead, Justin.

Great. Thank you very much, and good afternoon. To build on that last question, you know, I wanted to dive into the headcount investments some more within there. It does sound like you have some tailwinds, so leaning into that. But how should we think about just, you know, the returns from this headcount investment, and if, say, the tailwind gets a bit stronger over the course of this year, Will you look to invest a little bit more aggressively than what's currently in plan or drop more through to the bottom line? Thank you.

Sure. I'll take the first part. And Rajiv, you could add some comments in terms of our strategy. But You know, just to set the stage, Justin, we obviously have proven that we are a very profitable business in the fourth quarter, 46% adjusted EBITDA margin. So we have a great business model. And when we take a look at the momentum that we've been building up, the traction in SPO and our new areas of growth, we absolutely feel this is the right time to invest more significantly. And so it's around, of course, innovation and around sales. And so we think that with that combined investment profile, we're going to be able to get returns this year and beyond. And we've certainly proven historically our ability to make growth investments pay off. And so if we see, you know, there is further opportunities, there's no reason why we wouldn't potentially increase our rate of investment. But what makes our business particularly strong, robust and unique is our ability to still deliver robust margins. You know, right now, We're aiming to be about a 30% even margin, even with the incremental investment that we've called out. And so we see this as focus on growth while also delivering very strong bottom line results.

Yeah. Hey, Justin, I'll just add, you know, our priorities are clearly shifting. You know, the last 18 months or so, it's been a fairly weak ad spend environment, as you know. And so then our priorities were really focused on covering the large customer base, covering the largest customers in our customer base. innovating for where the growth opportunity is heading to. And we've talked a lot about those products. And then third, just making our business more efficient. And I think we did a really strong job in all of those areas. And so now as we get into a more constructive environment, we're really focused on accelerating revenue growth, right? And Steve called out some of the metrics. And I think you're seeing that acceleration happen pretty quickly through Q4 and Q1 and onwards. So we will be very, I would say, opportunistic around, you know, where we see growth opportunities and just continuing to invest behind them. I think we're pretty comfortable with the profitability in the business model, as Steve highlighted, you know, strong cash generation as well. And so we're going to put the bias towards accelerating revenue growth.

Thanks, Rajiv. Our next question comes from Matt Condon at JMT. Please go ahead, Matt.

Thanks for taking my question. Just with the shutdown of Vice and BuzzFeed selling complex, can you just opine on the health of the digital publisher as we enter 2024? Is this a structural change or is this just a macro cycle? And then maybe a second one. Can you just talk about advertiser adoption of IDHub and just how you're expecting that to trend throughout 2024? Thank you.

Yeah, sure. Thank you, Matt, for the question. So, yeah, let's start with the first one in terms of, you know, a couple of companies you cited and help of pubs. So, you know, as we talked about over the last year and a half, and I just mentioned in the prior question and answer, you know, the growth opportunities always shift in this industry through an economic cycle. And we've been through cycles before, so we know that to be the case. And so the opportunities really are shifting towards areas like CTV, commerce media, and publishers where they have certain types of data assets. And I think what we see happening is in the case of those publishers and other digital publishers, they may not be keeping up with where those growth opportunities lie and therefore suffering as a result. Now, we've seen this coming. And so over the last several years, we've been really focused on innovating our products in these areas, growing the share of our business. That's coming from CTV and omnichannel video. That's coming from commerce media and that has this kind of alternative signal to the cookie attached to it so that we can be market share gainers in this process. So I think that's kind of what you see at play is that even as ad spend now starts to accelerate, there's going to be pockets, there's going to be winners and losers. And what you see with our growth numbers is that we're well positioned with where the high growth opportunities are. Now turning to your second question around Identity Hub. So just a quick reminder of what Identity Hub does is it is software that publishers can deploy that allows them to easily convert data that they have on a user into a variety of different alternative IDs. So if a publisher has an email address, for instance, on a user and they have consent, then they can convert that into a UID2, into a LiveRamp ID, into, I think we're now at 29 different IDs. So we have several hundred publishers that have Identity Hub deployed. And we plan to add significantly, probably in the triple digits of additional customers this year. And we expect that we may be able to exceed those numbers as we get closer to the cookie deprecation timeline. But again, it's a key part of growing the signal that we have in order to generate higher CPMs, 16% higher on average when we have IDs present.

And our next question comes from Andrew Merrick at Raymond James. Please go ahead, Andrew.

Hi, guys. Thanks for taking my questions. I was wondering if you could give maybe a little bit more color on the generative AI impact on engineering productivity. Is that adoption of external products or anything generated internally? Because I know you guys like to own and operate your own infrastructure. And you've talked about the 60% increase in software releases in 23. How impactful can these tools be for release velocity in 24?

Yeah, great. Thanks, Andrew. So, you know, there's, of course, there's multiple branches of AI, for example, machine learning and, you know, obviously the much newer generative AI. So just for a little bit of context, you know, we have longstanding use and expertise in machine learning. We use that quite extensively for programmatic transactions that happen in milliseconds, things like price floors, traffic efficiency, you know, various auction management algorithms. Now, with respect to generative AI, we pushed hard in 2023 to test and scale a number of new approaches to software development, to testing and release automation using Gen AI tools. And if you can name a tool, we've probably tested it. So we're using a combination of variety of third party tools. We've also built some things in-house ourselves. We've seen good results and have been scaling those things up, and that's what's leading us to anticipate a 15-20 percent increase in engineering productivity in 2024. Maybe I can give two concrete examples of how we're putting GenAI to work. The first is that by automating a lot of the software testing process, we've been able to increase the ratio of engineers to testing personnel. So by using GenAI tools, we're able to automate a lot of the manual testing that used to happen. And so that's a structural gain now where for a million dollars of engineering investment, we can have more engineers that are writing new features and new capabilities. And so that's part of that productivity gain. And then sticking on that testing theme, by automating a lot of that testing, we're able to release software faster by really automating the entire pipeline from development to testing to deployment. So we used to have an approach a couple of years ago where We might ship software every couple of weeks and had to go through these testing cycles and make sure that everything worked properly. Now, individual engineering teams within Pubmatic, they can release software at will because we've been able to automate. So an engineer can write code one day and within 24 hours, that code can be released into production. And so that has a tremendous, I think, acceleration of our development and iteration cycles, which should lead to not only faster productivity, but also I would expect accelerated revenue growth.

And you preempted my follow-up question on examples. So I'm all set. Thank you. Great. Thanks, Andrew.

Our next question comes from... Jason Halstead at Oppenheimer. Please go ahead, Jason.

Thanks. A few questions, maybe interconnected. So just on alternative IDs, when publishers choose, let's say, to use like a UID or RAMP ID, is there any additional cost to you to help them support those IDs? Or just broadly, is there a cost that has to be borne by the ecosystem that you have to share a piece of? That's question one, and then I've got to follow up.

Sure. Yeah, so Jason, generally, the cost is borne by the advertiser that's using that ID. So publishers don't bear a cost to, let's say, convert an email address into a UID2 or into a LiveRamp ID. We do not bear licensing costs. We do have some infrastructure costs. So that's part of the CapEx budget that Steve commented on earlier. But that's more than offset by the fact that we generate higher CPMs with those impressions. And given our usage model, our revenue share, then we're able to make even more net revenue on those impressions. So the economics for us and for the publisher are very clear and very positive. And then obviously each advertiser is doing their own math in terms of, you know, how much of those IDs they want to use.

Thank you. And then follow up. I mean, I guess kind of starting with the guidance for free cash flow being flat year over year, despite healthy revenue growth. And then there are a number of like puts and takes in 2023 on kind of like one time items in both revenue and costs. I mean, just how are you thinking about maybe margin expansion going forward? Just it seems like as the business gets bigger, it does require more capital. And you're obviously hiring more people because the business is getting more complicated, basically. But just how are you thinking about kind of maybe margins over margin expansion over the next few years or really kind of like close to like peak margins?

Sure. Thanks, Jason, for the question. So we think that there is absolutely a lot of opportunity over the long run to expand margin. I mean, we're taking a very specific concrete opportunity right now, given where we see momentum and the digital ad environment to invest for growth. And so we're being very thoughtful about it in terms of where we're putting the people, the team, technology, sales teams. And that will have returns over the next couple of years. But if you step back and just think about the company that we built over many years, we actually have many structural drivers that really support our long-term margin expansion. First and foremost, of course, we have our own and operated infrastructure. And so you saw the power of what we could do in 23. We were able to optimize that infrastructure and grow our capacity by 20%. while reducing our capex by 70%. So very powerful leverage point that we decide when we take advantage of it and how we then deploy those returns. Number two, as a reminder, we are investing in the fastest growing, most profitable component segments of the digital ad environment. Omnichannel video, mobile, the emerging revenue streams. And so these products have very high marginal profitability. So we anticipate that will be a tailwind on margin. And then, of course, you know, we talked about the structural aspects of generative AI and the long term asset that we built in India with our development organization. That is something that is going to sustain, you know, strong economics for years to come. And then when you think about from a strategic point of view, what we've done as a business, being a pioneer in supply path optimization, we now have over 45% of all of our activity is related to SPO activity relationships, and we expect that to grow. Why is that important? Is that we've already incurred the cost to process those impressions. So when we move more people, more buyers onto our platform as a result of SPO, the incremental costs are de minimis. So that sort of like structurally feel really good about where we're going in the long run. And then of course, you know, all the factors of, you know, as a company, our long-term focus is on being operational excellence, right? 11 straight years of adjusted EBITDA profitability speaks to sort of the structural advantages we have and just the mindset that we operate with.

Thank you.

And our last question comes from Max Michaelis at Lake Street. Please go ahead, Max.

Hey, guys. It's good to see the top 10 verticals grow 26% in the quarter. I was wondering if you wanted to highlight any other verticals. I know you touched on Business and shopping, maybe if there's any other verticals that performed well, and then how some of those verticals have trended into Q1 now that we're about two months into the quarter.

Sure. So the great news is that we saw double digit growth across every top 10 vertical in the fourth quarter. So we have not seen that, you know, throughout the 23rd. And I called out in my prepared comments that shopping was a real standout because it went from down year over year in the prior quarters to positive. And of course, I commented specifically on a couple of the verticals that grew over 30%. But we had across the board, travel, food and drink, automotive, health and fitness. These are all double digit growers. So very strong across the board. And it really speaks to The strength of our platform as an omni-channel platform with a very diverse publisher base and a diverse buying ecosystem. Turning to the first quarter, we've seen many of those same trends continue in the first quarter. Obviously, we're still in the middle of it, but very pleased to see continued momentum in shopping and the other verticals like business technology also continue to grow nicely.

All right. And then last one for me. I said the SPO retention rate was 120%. What should we think of as a normalized range for that metric?

I don't see why that couldn't be a normalized metric over time based upon a couple things. Number one, You know, these are steep relationships. And so we're solving problems, creating opportunities for our SPL partners. And so they're moving more and more spend. They're looking for more opportunities across their own ecosystems and how they can take advantage of our platform and our capabilities. So we believe that sort of adds a natural tailwind. The other facet is it's just always adding new opportunities like Activate, Commerce Media. So I think that the takeaway is 120% is a reflection of sort of the strength of our platform, the relationships, and I think is a good indicator of what the future potentially presents.

All right. Thanks, guys. Nice quarter. Thank you, Max.

Great. Thank you. There are no further questions in the queue, so I'm going to turn it back over to Rajiv for closing remarks now.

Thank you, Stacey, and thank you all for joining us today. Q4 was an inflection point where we saw prior strategic investments fuel accelerated revenue growth, strong margins, and cash generation. In addition, we executed well against our top operating priorities for the year, which drove significant cost savings and efficiencies, all of which set us up well for 2024. We expect to grow our business by 10% at minimum in 2024, which is more than double our growth rate in 2023, while also expanding margins. At the same time, we'll continue to invest in key areas and unlock emerging revenue streams. This is an exciting time in ad tech, and we're very well positioned to grow our market share as the industry evolves. We look forward to seeing many of you over the next month or two. As a reminder, we will be at the J&P conference on Monday, March 4th, and the KeyBank conference on Tuesday, March 5th. Thanks, and have a great afternoon, everyone.