Good afternoon. My name is Abbie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Direct Digital Holdings Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Brett Milotte, you may begin your conference.

Good afternoon, everyone and welcome to Direct Digital Holdings third quarter 2023 earnings conference call. My name is Brett Milotte. I'm representing Direct Digital Holdings from ICR. On today's call, we have 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 8-K and company earnings release, which has been filed today by Direct Digital Holdings, which may be accessed at the SEC's website and DRCT's website. Today's call is also being webcast, and a replay we posted to the company's Investor Relations website. Immediately following the speaker's presentation, there will be a question-and-answer session. Please note that the statements made during the call, including financial projections or other statements that are not historical in nature may constitute forward-looking statements. These statements are made on the basis of DRCT's views and assumptions regarding future events and business performance at the time they are made, and 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 filings with the SEC. You should refer to those for more information. This cautionary statement applies to all forward-looking statements made during the call. During this call, DRCT will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance to generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures are available in the earnings release that DRCT filed in its Form 8-K today. I will now hand over the conference call to Mark Walker, Chief Executive Officer. Mark?

Thanks, Brett, and thank you to everyone joining our third quarter 2023 earnings call. Proud to report incredibly strong financial results and operational performance for this quarter. As we've discussed during recent earnings calls, we made significant investments in Direct Digital Holdings technology stack, advertising platform and operational structure. We initially expected to see the impact of these investments in 2024. However, we are pleased to report these benefits and associated growth are coming to fruition within 2023. Our technology partnerships and our overarching business strategy have enabled us to meet a growing number of customers' demand and further the capabilities of our technology platforms. As a result, our open marketplace CPM platform continues to benefit as middle market businesses seek our differentiating thoughtful approach to our advertiser technology and our tech-enabled solutions. Furthermore, our recently announced strategic partnerships have also helped drive our business to new highs. Our new collaboration between Amazon Publisher Services and our Colossus SSP division, integrates Amazon's transparent ad marketplace. This integration has allowed Colossus SSP's roster of publishers, which include both minority-owned and multicultural outlets and general market properties to tap into the benefits of Amazon server-side header bidding solutions that offer a direct auction approach. Most recently, we announced the selection of HPE GreenLake Edge-to-Cloud platform to build a highly reliable, scalable and secure production environment. Our Colossus SSP division will now incorporate the HPE GreenLake platform with its on-premise infrastructure and cloud services across its entire marketplace to support Direct Digital Holding sell side platform. Our partnership with Beeswax, a FreeWheel-owned programmatic buying platform, has expanded our access to as well as simplify the path for buying multicultural alongside general market connected TV ad inventory, helping drive growth within Colossus SSP, Huddled Masses and Orange142. We will continue to explore opportunities with…

Thank you. As Mark stated, our revenue increased to $59.5 million in the third quarter of 2023, an increase of $33.5 million or 129% over the $26 million in the same period of last year. The exceptional performance of our sell side advertising segment drove the majority of the increase. Sell side advertising segment revenue grew to $51.6 million for the third quarter and contributed $32.8 million of the increase or 174% growth over the $18.9 million in revenue in the same period last year. As Mark stated, our sell side platform has heavily benefited this quarter from continued investments in the technology stack, operational structure and increasing publisher partner engagements. Our buy side advertising segment also saw strong performance, growing 10% year-over-year and contributing about $700,000 to our overall revenue growth, finishing the quarter with $7.9 million in revenue compared to $7.1 million in the same period of last year. The increase in revenue was primarily a result of increased spend and upsell opportunities from our current customers. Growth in revenue or the sell side and buy side of our business resulted in a direct positive impact on both net income and EBITDA. Now let's talk about gross profit. Gross profit for the third quarter of 2023 was $11.8 million compared to $7.5 million for the third quarter of last year, an increase of $4.3 million, primarily as a result of our revenue mix, gross margins for the third quarter were approximately 20% compared to 29% in the same period of last year. As we discussed last quarter, these margin results are in line with our margin expectations given the rate of accelerated growth in our sell side advertising segment and the resulting mix of our revenue profile. In the third quarter of 2023, the revenue mix was approximately…

Thank you, Diana, and thank you to everyone for joining. We sincerely appreciate your interest in Direct Digital Holdings and are looking forward to your questions. Operator, please open the line.

[Operator Instructions] Your first question comes from the line of Darren Aftahi from ROTH MKM. Your line is open.

Hey, thanks for taking the question. This is Dillon on for Darren. First I want to extend my congratulations on the quarter and the guidance. I guess on that note, could you sort of talk about the impact that you're seeing of those investments that were supposed to -- or you're sort of on track for it to happen in 2024, but are now happening in the second half of this year? Like was that your ability to get certain technology platforms up faster? Or was it publishers or something different that you didn't think would be on the platform until next year that are now obviously quite big in generating sizable revenue.

Yes. Hey, Dillon, first off, it's good to hear from you and thanks for the question. I'd really say it's a three-pronged approach. I mean, number one, we talked about the technology replatforming that we've been going through. I have to give -- tip my hat off to our CTO and our technology team they were able to accelerate and streamline our tech stack a little bit faster than what we initially anticipated. That gave us the type of scale that we need as we communicated to grow to that 400 billion impressions on a monthly basis, which gave us more capacity for sale. The second piece of it is, and if you dig into the numbers a little bit, we've been able to increase and go deeper with some of our buying partners and agency groups that we work with. I mean that is starting to yield fruit and come to fruition. So we've seen a doubling of the amount of investments at some of our buying groups that we have relationships with. Increase, we had the increase in capacity with the level of impressions that we've been able to deliver. And really, some of the benefits that you've seen where we are today and what we are anticipating from now until the end of the year is really all three of those components coming together in the culmination of that operational execution that our team has been able to execute against.

Great. Thank you. As a second question, just given where 3Q came in, in terms of revenue mix, and I know you're talking about getting back to the 14% to 15% sell side gross margins by Q2 of next year. But is there anything that would get in the way of that happening in terms of the revenue within sell side skewing more towards larger publishers that could potentially hit that sort of gross profit number?

No. Where we are right now, we are anticipating us, specifically on the sell side business, living in that 14%, 15% range. And we are pretty confident that that's going to hold for us through the 2024 year.

Got it. Last one for me. Could you just sort of touch on where you see yourself in terms of competition, like now that 3Q and 4Q are implying just much bigger numbers. Do you think that invites some of your peers to sort of begin to explore the middle market and other niche markets you play in more?

Yes. Well, what we think is the processes that we've been able to set up will lend ourselves to have a competitive advantage towards the middle market. I think if you look at our revenue per employee, it's significantly higher than many of our competitors. The processes we put in place, the way that we've structured our organization and the way that we are able to operate, we think that gives us the actual competitive advantage against many of our publicly traded competitors that are out there in the marketplace in some of the privately held ones that are held by other PE firms. So we feel pretty good and pretty confident about our position in the marketplace, and we are anticipating growth from now Q4 as well as in 2024.

Great. Thank you. That’s it for me. I will pass it on and congrats on the results.

Thank you.

Your next question comes from the line of Dan Kurnos from The Benchmark Company. Your line is open.

Hey, Dan.

Thank you. How are you doing, Mark?

Good.

I would be, too, if I put up $60 million of revenue in Q3. A couple of questions -- a few questions. One, I mean, I appreciate the color on incremental impression growth through tech capacity. That's helpful. You've obviously had some notable partner wins. Is there any way to just kind of parse out sort of underlying organic? And it's not really a fair question because technically, all of its organic, but just between increase? Is there a way to sort of bucket between increased spend per customer, which [indiscernible] some good metrics on. I'm talking about the sell side, by the way versus new partner wins versus just expansion of inventory impressions with the existing partner base.

Yes. I would say it's actually a combination of all three. I mean, the amount of impressions that we grew. We went from 300 million in Q2, 400 million in Q3. I think that's one benefit, right? Second benefit that you see, if you look at our revenue per advertiser, that actually went up roughly about 200% to 260% year-over-year. And so I think that you can actually put those two pieces together and really kind of figure out that our growth is actually coming from both sides. It's the strategy that we've implemented from day 1, increased level of impressions, work diligently on the buying community and the agency groups that have decided to partner with us and going deep with them by building on our relationships and honoring our commitments and operating in just. So that's really the -- everybody asks about the secret sauce for our growth. That is the secret sauce, continue growing the impressions, continue investing in the buying communities and then they come and actually spend through your platform.

Well, now you've given the recipe, Mark, they can all figure it out. No, I'm just kidding. I do -- this is -- so let me just add a little bit of a follow-on to that because I'm trying to get a sense of -- this market has been really tough for small platforms to get trials and expand its spends. And obviously, you have a unique angle in the inventory that you bring to the marketplace. But I'm just trying to get a sense of that spend per advertiser number, I know campaigns can be small, so you can have larger growth rates off of smaller numbers. But still, to get to your number here, I'm just trying to get a sense of like has it been like they've now tested with you for 12 months and they are really willing to put more dollars to work with you just because the results have been fantastic, which, by the way, it was the narrative we saw last year, too. It just was on a smaller base. Or is there some other dynamic at play in the marketplace just given the way that inventory has evolved both in the digital space and the video space here that equates to something that is beneficial just how you run -- the way that you run your strategy. So the dynamics of the marketplace are incrementally beneficial to the platform that you've developed.

Yes. I would actually say it's really operational excellence. I mean the teams that we've actually put in place. One, they come with a significant amount of experience sitting on multiple points of the value chain. So I think we have an interesting perspective that we bring to the market when we work with the different buying communities that are out in the marketplace. So I think that's number one. Thing number two, the fact that we've been in business for 4 years, even though we were operating quietly behind the scenes, it really allowed us to get our processes and structure in order to where we can make money off of smaller campaigns. And that has been actually a benefit for us. Now that you've seen us out in the marketplace, we are starting to mature. We've been able to upgrade our platform. I think you're going to start seeing on the go-forward, continued growth out of our platform and the way that we've structured the business.

The crazy part to me, Mark, is there's not -- I mean we're not even having a self-serve conversation right now, which is what everybody else is falling over, and you're putting up way better numbers than most of the peer groups. So kudos to you on that. I just -- I'll ask just in Q4, thank you for Q4 being up sequentially from Q3. There's -- The Trade Desk is out talking about some cautiousness in Q4 that stabilized in a little rough in October, stabilized in November. And I'm just -- the momentum you're seeing seems like it's continuing, especially if your guidance history is evident here, too, but just kind of curious what you're seeing in conversations right now relative to the broader macro.

Yes. For the broader macro, and I think you've seen it in our revision upwards of our guidance and the conversations we have. If we weren't confident, we wouldn't have revised up the way that we did, but we are pretty confident in the relationships that we've been able to build and the platform that we've been able to establish and the growth that we actually have on our road map. So we are still bullish on our business, even though some of our peers might be having some other difficulties, but we are really confident in the model that we've been able to build here at Direct Digital.

And just last for me, Mark, and sorry, it's a few, but just on flow-through, EBITDA was really healthy in the quarter. You guys are obviously making some further investments that you're trying to balance. But how should we be thinking about growth versus profitability both in Q4 and going forward.

Yes, I'm going to turn that over to Diana to give you some viewpoint on Q4.

So I think we've talked about the gross profit margins that where we think those will end up for both the buy side and the sell side and that our operating expenses will be at or maybe slightly higher than what they were in the third quarter. We are continuing to spend on headcount and sales and marketing initiatives and still filling our way through the public company side, but we are about at the right level. We won't be going down.

Okay. That's super helpful. I guess if this trend continues through the stock prices, you guys will be at 3x EBITDA. Okay. Super helpful. Thank you, Mark.

Yes, absolutely. Thank you.

Your next question comes from the line of Michael Kupinski from Noble. Your line is open.

Thank you. I want to offer my congratulations. All I got to say is, wow, what a great quarter. I was wondering if you can just follow a little bit on what Dan was saying, but in a different way, just to talk a little bit about the state of the marketplace. You mentioned beneficial market dynamics in the quarter. And I was just wondering, what do you see as the key drivers of that? And then I just have a couple of quick follow-ups.

I think it's a mix of two things. One, I think it's the mix of the publishers that we actually are working with. We are still seeing in the marketplace strong demand for the multicultural publishers that we've added into our inventory. There is definitely more and more continued demand. I'm trying to reach the African-American, Hispanic-American, Asian-American LBGTQ communities along with the general market, that's number one. Number two, really the operational efficiency of our platform has been an added benefit and the people and the process that we've actually put in place into the buying community. Really a combination of all three have yield -- yielded pretty much successfully for us the fruit that we saw in Q3 and we are expecting to see the same in Q4.

And in terms of the multicultural space, the advertisers looking at the initiatives targeting that particular multiculturals market. What is the percent? Can you -- is that -- is there a way for you to kind of identify what is the percent of advertisers taking out that versus maybe just a more general advertising space?

Yes. Yes. What I would say is -- I'll give you -- leave you with two stats. One stat is 40% of the U.S. population is made up of those groups that I actually outlined. That's number one. And the second stat where we sit, roughly about 10% to 20%, depending on the month of our inventories directly geared to those audiences through those publications, which are authentic. So we do think that there's still a significant amount of growth opportunity there with the overall advertising buying community to reach those audiences. And we are the beneficiaries of that upside. So we are going to continue to make more investments in adding those type of publications into our ecosystem and ultimately at some point in the future, the goal really would be for 40% of all marketing spend to be geared towards those communities. But we are not near that point yet, but that's really the point that we are working towards. And I think we are actually enjoying the benefits of that differential that's actually in the marketplace versus the publishers and the impressions that are actually available.

Excellent [ph]. Posting these types of numbers, I mean it's very likely you're going to start to see new entrants in niche marketplace. And I was just wondering, are you starting to see additional competition kind of move in? Or is it still a pretty good open field for you?

Yes. I mean I think all of our competitors, we view a lot of the publicly traded companies as competitors, and there are some private entities that are out there. They've been out in the marketplace for some time now. And so we are adept and equipped to actually to maintain and be a competitive option for the buyers to actually work through. And I think that's some of the benefit that you're seeing and they're gravitating towards us.

Okay. That’s all I have. Congratulations.

Okay. Thank you.

There are no further questions at this time. Mr. Mark Walker, I turn the call back over to you.

All right. If there's no further questions, thank you for everyone that have decided to come and listen and we are looking forward to speaking to you back in Q4. Thank you.

This concludes today's conference call. You may now disconnect.