PubMatic, Inc. (PUBM) Q3 2021 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to PubMatic's Third Quarter 2021 Earnings Call. My name is Meghan and I will be your operator today. Before I hand the call over to the PubMatic team, I'd like to go over a few housekeeping items. As a reminder this webinar is being recorded. After the speakers' remarks, there will be a Q&A session. [Operator Instructions] Thank you for your attendance today. I will now turn the call over to Stacie Clements with The Blueshirt Group.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on PubMatics' earnings call for the third quarter ended September 30, 2021. Joining me on the call are Rajeev Goel, Co-Founder and CEO; and Steve Pantelick, CFO. Today's prepared remarks have been recorded, after which Rajeev and Steve will host live Q&A. A copy of our press release can be found on our website at investors.pubmatic.com. Before we start, I would like to remind participants that during this call, management will make forward-looking statements, including without limitation, statements regarding our future performance, growth strategy and financial outlook. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and our other future conditions. There 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. Additional information will also be set forth in our quarterly report on Form 10-Q for the quarter ended September 30, 2021. 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 9, 2021, and we do not intend and undertake no obligation to update any forward-looking statements, 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. 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 Rajeev.

Thank you, Stacie, and welcome, everyone. For the fourth consecutive quarter, we delivered exceptional results, well ahead of our expectations. As an industry-leading sell-side platform, we significantly outpaced market growth, invested for future growth and continued to fuel our profitable business model. We generated record revenue of $58.1 million or 54% organic growth over last year, $13.5 million in GAAP net income or 23% margin, an increase of 117% over last year. $24.3 million in adjusted EBITDA or 42% margin, inclusive of growth investments and we generated a record $26.4 million in cash from operations in the quarter. There are two key market dynamics underway that are fueling our strong results. First, just as the demand side of the ecosystem consolidated over the last five years, the sell side is actively consolidating at a rapid rate, with clear winners emerging based on innovation and value delivery to customers. And second, the market continues to grow at a rapid pace, with elevated digital ad spend expected for the foreseeable future. On the back of these trends, I'm pleased to share that our latest results marked four consecutive quarters where we have exceeded both 50% year-over-year revenue growth and 30% adjusted EBITDA margins. Before I go further, I would like to address the recent industry concerns about the impact of Apple's removal of the IDFA. This is not an industry-wide issue. iOS-based advertising is a small part of our business, mid-single digits on a percent of revenue basis. So its impact at most is very limited for us. We are a well-diversified omnichannel platform with scale in mobile web, desktop and CTV, which includes OTT as well as iOS and non-iOS app environments. Equally important, we have anticipated Apple’s and other similar changes for several years and have been hard at work innovating to get ahead of them. For example, our Identity Hub and Audience Encore solutions, which bring valuable identity and first-party data to our platform continue to scale aggressively. Over two-thirds of our revenue has alternative identifiers to the third-party cookie and Apple's IDFA in place, up from a majority of revenue at the end of Q1. At a macro level, we are a brand advertising platform first and a direct response platform second. So, conversion-based attribution and associated measurement challenges are relatively less impactful for us. And finally, we have a well-diversified set of advertiser verticals on our platform. Steve will have more detail on that later in this call. Now, moving on, as of the time of our IPO, we estimated that we had 2% to 3% share of the addressable market, programmatic non-walled garden advertising, with ambitions to grow our market share by 10x in the years ahead. We do this through a Land and Expand approach, coupled with a usage-based revenue model, similar to other leading high-growth software companies. In contrast, to traditional SaaS business models, when we deliver incremental value to our customers, we participate in their upside. As a result, we are growing at 2x to 3x the growth rate of the market. Our strong customer alignment also drives high revenue retention rates and provides a greater level of visibility into our future revenue giving us the confidence to raise full year 2021 expectations for the third time this year. We now expect over 50% year-over-year revenue growth. Our usage-based model incentivizes us to continuously innovate on behalf of both publishers and buyers with the objective that they expand their activity on our platform. Buyers expand usage by concentrating a higher share of their growing digital ad budgets on our platform. Publishers expand usage by monetizing more of their ad inventory on our platform at higher CPMs. All of this is done via seamless self-service interfaces or APIs for publishers and buyers, which makes it easy for them to do business with us. We have spent many years building the foundational elements that support the flywheel to our usage-based model, our technology platform, our team and breadth of customers. The more value our platform delivers, the more our customers expand their usage and the more high-margin revenue we generate, enabling us to continuously reinvest in the core growth drivers across our business. Importantly, we have been profitable for many years providing the investment dollars for us to accelerate the flywheel even further. Let me first talk about how we create value for ad buyers. Buyers are rapidly consolidating ad spend on PubMatic, driven by supply path optimization or SPO, the trend we've pioneered several years ago. Buyers spend more with us and expand their usage of our platform, because our differentiated solutions increased their ROI. We offer workflow automation, data integrations, audience addressability solutions, and high-quality inventory, all via our global omnichannel and transparent infrastructure. The addressable market for supply path optimization is increasing. In the third quarter alone, we entered into a record number of advertiser SPO deals. Additionally, as third-party cookies and Apple's IDFA are phased out, the value proposition we deliver to buyers drives further expansion, particularly via SPO. A significant industry transition is underway, in which the value of data is shifting from the buy side of the ecosystem to the sell side for publishers. Our unique access to first-party data via publishers combined with our rapid innovation and long-term focus on this opportunity is driving great results. For example, Omnicom Germany and Netherlands use data from our Audience Encore partner Semasio and applied it directly on the PubMatic platform rather than via their demand-side platform. As a result, Omnicom more than tripled the reach of their campaign when compared to applying the same data in the DSP. Further, Omnicom saw a significant uplift in viewability and click-through rates as we optimize inventory supply for their needs. Results like these create sticky buyer relationships increased ad spend on PubMatic and demonstrate how SPO creates value via increased advertiser ROI. Over the next three to five years, we believe every major agency and advertiser and many of the smaller ones will engage in supply path optimization. We are one of only a couple of sell-side platforms that meets buyers' needs, buyers' criteria for being global omnichannel and independent of any owned media. Our strategy with publishers is to continuously innovate and deliver more products that allow our publishers to increase the monetization of their ad inventory, whether through higher CPMs or through monetization of incremental ad impressions. We do this through a Land and Expand strategy, which increases our platform utilization. This in turn drives unit cost down and creates a larger pool of profitable impressions for us to monetize. This approach drives our profit growth and accelerates our flywheel. A publisher's journey with PubMatic typically starts with their need to generate revenue by monetizing their digital ad inventory. As publishers generate strong revenue through PubMatic, they are incentivized to add more inventory to our platform, including additional digital properties and additional ad formats. Newer formats, like CTV, fuel significant growth for us and provide a path for new publisher acquisition or expansion of addressable inventory within our existing publisher base. In the third quarter, CTV revenue grew over 7x year-over-year and our publisher count jumped to 154. CBS Local and Meredith are examples of landing in desktop and mobile app and expanding with CTV inventory. Other publishers, like Crackle and Newsy, started their deployment with us in CTV, and expanded into additional formats and products over time. Publishers also expand their usage of our platform through new product adoption. These products, such as Identity Hub for identity data, Audience Encore for first-party data activation, and OpenWrap for header bidding management create very sticky publisher relationships and add continued value throughout the publisher journey. Ultimately, these factors lead to our industry-leading net dollar-based retention of 157% over the last twelve months. We believe our broad product portfolio is a strong competitive moat for our business that also improves our forward revenue visibility. Our track record indicates we are driving a distinct combination of high revenue growth and GAAP profitability. Our infrastructure driven approach to digital advertising is highly differentiated, resulting in profitability that allows us to continuously re-invest in innovation, which in turn drives increased customer usage of our platform. Our usage-based business model, which is similar to some of the fastest growing software companies in the world, allows us to share in the value we create for customers and further accelerates our flywheel. The omnichannel, global, and independent nature of our platform positions us to capitalize on a large and growing addressable market, with significant runway ahead of us to grow our market share. We continue to invest aggressively in a variety of growth initiatives, such as Supply Path Optimization, audience addressability, and high-growth formats like CTV, mobile, and online video, as well as our owned and operated infrastructure, in order to enhance our moat and grow customer usage. Let me now turn it over to our Chief Financial Officer, Steve Pantelick, to provide additional detail.

Thank you, Rajeev, and welcome everyone. Our Q3 results were outstanding on a number of fronts. We saw significant top and bottom-line organic growth, we generated material cash flow from operations, and we delivered our fourth consecutive quarter well ahead of guidance. Our strong performance is driven by our well-diversified omnichannel platform, global scale and a robust usage-based model. These factors collectively have made our business both resilient and durable, giving us the confidence to significantly raise our full year guidance. Revenue for the third quarter was a record $58.1 million, an increase of 54%. This rapid growth was a significant acceleration on top of last year’s 33% year-over-year growth. The combination of revenue over-performance and cost leverage resulted in high marginal profitability with net income of $13.5 million, an increase of 117% year-over-year. Adjusted EBITDA was $24.3 million, or 42% margin, and 81% higher than last year. Our financial results are the by-product of consistent, long-term investment in innovation, our owned and operated infrastructure and operational excellence. The more value we create for customers, the more they use our platform and the stickier our relationships become. Q3 was a clear demonstration of these favorable dynamics. Q3 revenue growth was strong across every region, format and channel. As Rajeev pointed out, ad dollars on our platform are primarily associated with brand advertising budgets, as opposed to direct response ad spend. In addition, iOS-based advertising is a small part of our business. Accordingly, we saw minimal impact from the elimination of Apple’s IDFA as advertisers shifted ad dollars to other high ROI formats and channels on our platform. During Q3, more than 60,000 advertisers placed ads programmatically via our platform. With the growing array of impressions and formats, we saw the number of advertisers who spent more than $1,000 increase by over 40%. This scale, and our real-time bidded marketplace delivers multiple bids per impression for our publishers’ ad inventory. If an advertiser chooses not to bid, the impact to us and the publisher is limited. Ad spend on our platform is well diversified across more than 20 verticals. Spending across every vertical except political ads was up double or triple digits over Q3 2020. The top 10 ad verticals in aggregate were over 70% year-over-year. Revenues for our mobile and omnichannel video businesses grew 64% year-over-year and represented approximately two-thirds of our total revenues in the quarter. Our CTV business inclusive of OTT was launched in Q3 2020 and grew more than seven times over last year. 154 publishers programmatically monetized CTV inventory in the third quarter, up from 114 publishers in Q2. Total desktop business comprised of display and online video also performed strongly with revenue up 49% over Q3 last year. Revenues related to Yahoo formerly Verizon Media Group across all formats and channels grew more than 40% year-over-year and represented approximately 17% of our total revenues in the third quarter, down from 28% of revenue in 2019. Supply path optimization plays an important role as advertisers and agencies expand usage of our platform. In Q3, we continued to sign new SPO deals, renew existing agreements and grow our ad spending via these deals. SPO ad spend grew over 50% in line with total company revenue in the quarter. We also continue to expand usage from existing publishers. With our land and expand strategy, we added new impressions from our publishers driving our revenue retention. The upsell of products like OpenWrap, Identity Hub and Audience Encore expands our footprint and increases impressions from our publishers. In Q3, we processed nearly 24 trillion impressions more than double the amount processed for the same period last year. We view net dollar-based retention as an important indicator of publisher satisfaction and usage of our platform. For the 12 months ending Q3 2021, this metric had a high-water mark at 157%, significantly up over the comparable period a year ago. We'll naturally normalize from this level once Q2 2020 results are no longer in the comparison set. Our long-term strategy of owning and optimizing our infrastructure enables us to reduce our unit costs while improving customer outcomes. Importantly, as we grow and optimize our platform, the quantity of impressions we can profitably monetize continues to increase. In Q3, we successfully reduced our cost of revenue per million impressions processed by 25% year-over-year. With our focus on optimization and efficiency we achieved a 72% gross margin, our fifth consecutive quarter above 70%. Moving on to operating expenses. In pursuit of our growth goals, we have successfully increased our global team by over 20% this year with the majority of hires in technology and go-to-market teams. The combination of increased head count for growth, incremental public company costs and stock-based comp resulted in operating expenses of $28 million, up 44% year-over-year. With our strong revenue growth and cost leverage, OpEx as a percent of revenue increased four percentage points from last year's level. Rapid revenue growth, operational efficiencies and ongoing benefits from investments in our business resulted in GAAP net income in the third quarter of $13.5 million or 23% of revenue, up significantly from the 16% net margin a year ago. Q3 diluted EPS was $0.24. Adjusted EBITDA in Q3 was $24.3 million or 42% of revenue, up 35% of revenue in the prior year. Turning to our cash flow. In Q3, we generated net cash from ad activities of $26.4 million. We ended the quarter with cash, cash equivalents and marketable securities of $136.7 million, an increase of $14.7 million or 12% higher from Q2. Year-to-date, we have increased our total cash by $35.8 million. Now on to our Q4 and full year 2021 guidance. Based on our outstanding results in Q3 and the momentum so far in Q4, we are raising a full year guidance for both revenue and adjusted EBITDA. Anecdotally, we've heard that some advertisers may pull back spend in the fourth quarter due to concerns about the supply chain. While it is possible this may occur there are several reasons that give us confidence for the remainder of the year. A significant proportion of our asset occurs in categories less dependent on global supply chains such as personal finance business and health and fitness. Our business is resilient to advertiser shifts because we operate a bidded marketplace and as an omnichannel platform with global scale we have multiple growth drivers. For Q4, we expect revenue between $74 million and $76 million or 32% to 35% year-over-year growth. Keep in mind we are lapping a very strong quarter last year that benefited from one-time effects such as political ad spend. Looking at our growth on a two-year stack basis that is adding the Q4 growth from our guidance plus the 64% growth, we achieved last year provides a clear picture of our revenue momentum. This stack growth translates to 95% to 99% for the fourth quarter an acceleration from Q3's two-year stack rate of 87%. On the cost side, we will incur a new public company costs of approximately $2 million in the fourth quarter. We expect our GAAP operating expenses for Q4 to increase at a similar percentage rate as Q3's. We expect adjusted EBITDA in the fourth quarter to be between $28 million and $30 million or approximately a 40% margin. For the whole year 2021, we are raising our revenue expectations by $18 million and now expect revenue between $225 million and $227 million, representing 51% to 53% year-over-year growth. On a tier-stack basis, our full year revenue guidance implies organic growth of approximately 83%. In line with our significant revenue increase, we are also raising our full year adjusted EBITDA expectations by $20 million and expected adjusted EBITDA between $86 million and $88 million or 38% to 39% margin. We expect CapEx to be $27 million to $30 million for the full year. A significant amount of our capacity investments will be put into service over the next several months. And consequently, our Q4 gross margins may be slightly below our historical Q4 margin rates due to depreciation costs to defer from Q3 and future investment we brought forward from 2022. The effect will carry over through the first quarter of 2022. In terms of our ad impression growth we now expect the full year number of impressions processed in 2021 to increase by more than 80% compared to 2020. Looking to 2022 and the revenue growth opportunities we see, we plan to aggressively hire team members and to invest in platform capacity. Additionally, we will incur incremental costs related to office re-openings and significantly higher travel and entertainment expenses as our team reengages in-person with customers around the globe. In closing, we are very pleased with our progress in the third quarter but we are even more excited about the opportunities ahead of us. With four consecutive quarters of topline organic growth over 50% adjusted EBITDA margins over 30% and material cash generation, we have significant momentum going into the end of the year and into 2022. Our financial results reflect the value we deliver to our customers and the strength of our usage-based business model. The sell side of the ecosystem is rapidly consolidating and PubMatic is well-positioned to benefit from these trends due to our global omnichannel scale and our owned and operated infrastructure. We have a diverse set of growth drivers both in terms of publishers and buyers and a broad array of formats and channels. Based on these factors we are confident we could achieve significant revenue growth and strong profits in the coming years. With that I will turn the call over to Stacie for questions.

Thank you, Steve. [Operator Instructions] With that, the first question comes from Shweta Khajuria of Evercore. Please go ahead Shweta.

Okay. Thanks Stacie. Two questions from me please. One is on -- could you remind us what normalized retention rates could be as you lap this 2020 on a trailing 12-month basis? And then, on the same topic, could you sort of double click on what is really driving those retention rates higher? You talked about product portfolio and expanding your portfolio, but what in particular you're seeing having the biggest impact? And then a quick follow-up on SPO, did you share this time how much SPO is as a percentage of your business? Thanks.

Great. Well nice to see you again, Shweta. So let me first start out with your points and questions around retention. So, one of the very important drivers of our success has been our strategy about ensuring customer success. And it really starts out with making sure that we have all the solutions that publishers want. So, we have omnichannel solutions across all the formats that are desired by the advertisers in the ecosystem. And as you know, we've launched SPO deals, supply path optimization deals a number of years ago and that is bringing on incremental demand onto the platform. And so the cumulative effect of having the product offerings that publishers and advertisers want, combined with supply path optimization has been helping us drive our net dollar-based retention. Now, in terms of a normalized level, the expectation is that, with the adjustment once the Q2 2020 quarters now the comparison set that a normalized level will be probably in the 120% to 130% range. And that again is a very significant benchmark that compares favorably to many usage-based companies like ourselves. And in terms of the question regarding the SPO proportion, we grew SPO spend in line with our revenue growth rate. So, the proportion is roughly in line with our last quarter's percentage of total.

Great. Thank you, Shweta. Our next question comes from Jason Helfstein with Oppenheimer. Go ahead, Jason.

Thanks. I guess I will ask two. So I just want to start out on the identifier, you said two-thirds of revenue had an alternative identifier. Meanwhile, Trade Desk talked about kind of record adoption of ID 2.0. So maybe this might be a bit of a refresher, but just help us understand a bit more how the two systems work together. And then, Steve, if I play around with math, could CTV revenue be somewhere in the 15% to 30% of revenue? I was kind of just playing around just maybe a little help there probably at least in a range. Thanks.

I will. While Steve thinks about your second question, let me answer the first one. So I think Jason as you know, we've been focused really for several years now on this transition away from third-party tracking right that's things like third-party cookie and Apple IDFA towards much better ways delivering a relevant ad to the user, where the user has a voice right in terms of what data gets utilized. And so a couple of our key products in this area are Identity Hub and Audience Encore. Identity Hub is a software product that allows publishers to manage multiple first-party identifiers. Trade Desk's Unified ID 2.0 is one of those identifiers alongside LiveRamp and others I think we're supporting now something like a dozen or more identifiers. And then another solution that we have is Audience Encore, which allows publishers who have first-party audience data. So some data they know about the consumer like maybe they're interested in sort of to have a car or they're interested in homes to be able to use that data to sell targeted campaigns. And so, these things together are driving that coverage rate and that's gone from 0% to now over two-thirds of the revenue on our platform and we expect that to continue to increase over the coming quarters. And so that gives us a lot of confidence that, we are not seeing the same challenges that others are seeing around the third-party cookie and IDFA deprecation. And I would even go further to say as you and I have talked about that when we have identity, we can drive much better CPMs, much more targeted ads or relevant ads for the consumer, which leads to higher rates of utilization of our platform. So we think this is way better than a replacement. It's actually building the sustainable foundation for relevant advertising in the future on the open Internet.

And Jason, with respect to your back-of-the-envelope math, we do not break out CTV revenue separately from our omnichannel video and mobile business. But I'll tell you that as we noted, we've seen significant growth both in the CTV component over 7x last year's level. But also, when you look at the overall mobile and omnichannel video business that's grown over 60%. And the reason why we focus on sort of the broad set of offerings is that really is a core strength of our company. As an omnichannel platform, we built a very resilient business that can navigate the vagaries of the ecosystem successfully. And our focus is on consistent innovation in coming up with the formats that advertisers and publishers want. And so, from our perspective it's all about the overall platform. And the important fact is that we are well down the path of creating a very strong CTV business alongside our very significant and rapidly growing mobile and online video business.

And if I could just briefly add to that. Thanks Steve. Our differentiated results are not new. We've been growing significantly faster than several of the major market participants for several quarters now. If you look at our 50% for four consecutive quarters on revenue 30% on adjusted EBITDA compared to that last couple of quarters to Google to Facebook to Pinterest to Trade Desk, we're growing meaningfully faster. And I think that's really because we are focused on building a long-term infrastructure for the future of digital advertising. And by necessity that is omnichannel. So, we're not overly focused on one single ad format. CTV is obviously a very significant opportunity for us and something we're innovating hard against. But we're driving these differentiated results because we are focused on a wide variety of high-growth ad formats. And I think we've really positioned ourselves well there with focus on online video mobile app in addition to CTV.

Our next question comes from Matt Swanson at RBC. Go ahead Matt. Matt, I think you are on mute.

Okay three consecutive quarters. I'll start off by saying congratulations again. I just said to myself on mute there. So, I'll stay on the SPO bandwagon here. So great to see another quarter of record number of deals. When we think broadly about supply optimization who benefits it really feels like it's going to come down more and more to differentiation. Can you just talk about what features and functionalities are really driving customers to consolidate on PubMatic? And then secondarily, I guess with IDFA and cookie loss does that make supply path optimization accelerate as the differentiation becomes more and more important generating unique value?

Yes absolutely. So let me start with the first. What are the drivers of SPO. So I think there's a couple. Number one is, our ability to innovate on behalf of buyers. And Matt as I think you know we pioneered SPO with a deal with an agency several years ago. So we were very early or first to that trend. And then I've obviously followed that up with many SPO deals since. But having an ability to innovate on behalf of buyers which means, delivering ROI for those buyers is critically important. And so we have a number of different products a bid shading product for example, log level data sharing product which allows them to have transparency into what's happening in their digital advertising supply chain. So these types of solutions are quite differentiated in driving buyers to work with us. So innovation is one inventory quality is another so making sure that we have the highest levels of quality of inventory. And we were the first to put out I believe we were the first to put out a fraud-free guarantee for buyers. So if they ever thought through DV or IAS or others that they're buying fraudulent inventory on our platform we would refund them their money so they can buy with confidence on our platform. And then the other key thing I would highlight there is our omnichannel and global scale. So when advertisers and agencies are executing supply path optimization agreements they want to be able to do it on a global basis and they need to be able to do it across ad formats as they need to reach consumers across those ad formats. And so when you look at all of those things I think we're in a very unique bucket in terms of our capabilities. And then I think the other thing that we focus on is building custom solutions for the biggest buyers in the industry. And we're able to do that because we have a diverse global engineering team based partly in Silicon Valley and partly in India. So it's very efficient for us to be able to put engineers on specific projects that are going to help a major agency or advertiser with the workflow integration or some other efficiency play that helps improve their operations. So I think all of these things together are really what's helping us, I think lead the market in terms of SPO. And as I called out earlier in the prepared remarks, we think every major advertiser and agency will engage in SPO in the years ahead. And so we think that's a major tailwind for us in terms of consolidating and winning in the market.

Thanks, Rajeev. Our next question comes from Justin Patterson at KeyBanc. Go ahead, Justin.

Great. Thank you. I guess two if I can. First, very healthy impression growth. As we look ahead toward 2022, what do you see as the biggest drivers of further impression growth, and then where there could be potentially more investment to drive incremental gains? That's question number one. Then question number two. Jeff over at Trade Desk has talked a lot about simplifying the supply chain and if it's something that Trade Desk has done in the past. When you hear those comments from one of the largest DSPs, how do you think about that as say opportunity versus threat? Thank you.

Do you want to take the first one Steve and then I can take the second?

Yes. So nice to reconnect with you Justin. So from our perspective, there are significant opportunities ahead for PubMatic for many of the reasons that we've already cited, but it's worth underscoring. First, we are very well positioned in the fastest growth sector CTV, online video, mobile app. We're certainly benefiting from the long-term tailwind of expanded digital consumption. That sort of started with the pandemic, but clearly many digital behaviors are going to continue into the future. The fact that the overall digital business is growing 20% this year. We're growing two times to three times that and we anticipate being able to keep gaining market share in 2022 and beyond. The combination of those factors really give us confidence to continue to aggressively invest. And so our game plan is to invest in team that is going to drive innovation, selected go-to-market opportunities around the globe, and of course, increasing capacity to take advantage of these numerous opportunities, because we are not dependent on one particular source. We have multiple growth drivers and we are really seeing the benefit of being an omni-channel platform in a world where there is a growing fragmentation of digital consumption.

And Justin on your second question, so I did have a chance to see Jeff's comments. So I would say his focus in terms of simplifying the supply chain is very much in line with our own focus. And the reason is that a simpler, more efficient supply chain creates greater ROI for advertisers, which then allows them to spend more to deliver a targeted ad campaign, and that means more revenue for publishers. And that's very much in line with our mission, which is to feel the potential of Internet content creators. So anything that drives more revenue for publishers, we think is very positive. So we've been working with the Trade Desk for multiple years now on a variety of initiatives that they've been driving around how to simplify and improve the supply chain. And I think ultimately this looks a lot like another form of supply path optimization from a different lens coming from Trade Desk versus from an advertiser agency, but I expect it to lead to further consolidation among sell-side platforms. And I think again we'll be a beneficiary and winner in that process.

Our next question comes from James Heaney at Jefferies. Go ahead, James. I think you might be on mute, James. Okay.

Sorry. Hear me now? No? Yes.

Yes.

I'm here. Sorry about that. Apologies. So your Q4 revenue guidance implies even further acceleration on a tier stack basis. So clearly you have some pretty nice tailwinds behind you. What would you say is just the biggest driver of that upside that's leading to the magnitude of upside to the prior guide? Is it CTV, or are there any other strength in other channels that's driving that? That's my first question.

Well, from our perspective, we really are hitting on all of our cylinders. We saw strong growth mobile omni-channel video over 60% CTV 7x over last year. We saw very strong desktop growth almost 50%. So point number one is, strong momentum across the board. Point number two, this is nothing new from our perspective. We've been doing this for multiple quarters. This will be our fourth consecutive quarter with 50% revenue growth or higher. And of course, with our business model and being able to deliver a significant profit and cash flow, we never really have slowed down investment right through the pandemic. We invested in teammates and capacity and because we see the tremendous opportunities ahead of us. So the fact that, we're seeing this into the fourth quarter and beyond is really a reflection of a long-term strategy. And the benefits of our focus on not just driving the top line, but the bottom line as well. And the final point is really around our usage-based model. The fact that, we are helping our publishers be successful is a self-reinforcing flywheel effect. The more, they are successful, the more they use our platform and the more we grow as a business. So we really are heading on all the relevant factors of growth and we are investing for the future.

Great. Thanks, Steve. And maybe another one for Rajeev, we've seen definitely a lot of consolidation happening in the ad tech space. So just curious, how you guys are thinking about M&A holistically. Is there anything that that's maybe been holding you back from doing acquisitions, and just curious if there are any areas of interest in the portfolio that you think you could add to?

Yeah. So there's nothing, I would say in particular that's holding us back. I think, we've done some M&A transactions in the past, and we continue to look at the market to find the right opportunities. I think those are things that would accelerate our road map, our product, and technology build-outs in certain areas, where we're very focused in innovating. It could be something that brings us a publisher scale in a particular geographic market that we're not in today, or it could be something in the data-related space. So I think all of those opportunities are open to us. I would say that, as you can see we have a very strong focus on organic innovation and given our focus on owning and operating our own infrastructure, and the agility that comes with it, we do have a high bar given our ability – demonstrated ability to really innovate at a very rapid rate.

Great. Thanks, guys.

Thanks, James.

Our next question comes from Andrew Marok at Raymond James. Go ahead, Andrew.

Thanks for taking my question. You guys spoke a little bit about this on the call and through the Q&A, but I wanted to drill down on the growth versus margin dynamics. So with the high margins and high incremental margins from the usage-based model, I guess, how are you thinking about investment, especially on the product and R&D side? And at what point might, it make sense to really lean into that to potentially drive further value for customers? And is there anything in particular that your customers have been asking for that might make sense to build out? Thank you.

So from our perspective, there's really no shortage of investments that we can go after. We see the benefits of investment in technology innovation and it's something, we've been doing for many years. We've owned and operated our own equipment for close to a decade. And so we're going to continue to do the things that have been very successful for us, because we do see the benefits of that. And the usage-based model does drive the revenue retention that we are experiencing. And so our focus is going to be on innovation and it's going to be focused on going after the biggest growth opportunities. And so that's doing more of what we're already doing, but also investing for the future. And part of that investment is related to supply path optimization as Rajeev called out. We see a tremendous opportunity to help the buy side of the ecosystem be more effective in their processes. And we have the technology team to be able to pull that off. I mean, one of the very important points of leverage that we have in our model is that the majority of our innovation is done offshore. And that allows us to for a given dollar of investment innovate at much, much, more faster rates higher ROI so to speak. And so we're putting those resources to work to help the buy side of the ecosystem, drive SPO deals as well as help publishers be successful through our usage-based model innovation. And that really ranges from all the new products that we've launched in the last year or two, Identity Hub, Audience Encore and OpenWrap. So, this is all part of focused on innovation and driving top line growth. And the business model that we built allows us to keep on reinvesting for the future.

Our next question comes from Andrew Boone at JMP. Go ahead, Andrew.

Hey. Thanks for taking my questions. Two please, one for Rajeev and one for Steve. I want to see if I can make you smile like Jason did. Rajeev, first one early in your comments you talked about increasing your market share, by 10x? And so if we think about kind of the next two years do you have the right products in place today to be able to do that, or is there something that's missing from your product portfolio that you want to be able to add. I guess the other thing that, I'm asking is there a next wave kind of be on SPO that you see coming that can drive that 10x gain?

Look, as we look at that 10x as a long-term goal or objective. So, we aren't signing up to -- we're not committing to doing that in the next two years. But to your question, I mean we take a multi-pronged product portfolio investment approach right, meaning, we're investing at a rapid rate from an innovation perspective across a wide variety of areas that really are high growth within the market opportunity space. And we're going to let those things help carry us towards that objective. And so supply path optimization is clearly one of those. Audience addressability is another big one. We've been investing there for several years. And we continue to make large investments there. And you'll see us keep pushing in that direction, along with Trade Desk and other great partners in the ecosystem. And then, we look at high-growth ad formats as we've talked about like mobile app, like CTV, like online video. We are not singularly focused on any ad format. And then, I think geographic expansion is another one. We announced presence in Spain for instance, and there's other markets that we're looking at. So I think all of these create a portfolio of investments that we think over time are going to help us get to that 10x of market share. At the same time as the market for SSPs itself it's consolidated. So I think as the market grows, there's also going to be fewer players for a variety of different reasons and we're very focused on investing in all of the fast growth opportunities.

And then, Steve, if I think about kind of the CPMs and understood that that it's a weird metric that's kind of an output. But with SPO fairly flat quarter-over-quarter kind of the growth in the shift to Android, where I would assume CPMs were up in the quarter, CTV kind of other premium ad formats that may be growing faster. Can you just help us understand the down 24% year-over-year for CPMs?

Sure. Let me just unpack the question a little bit. First, I want to just articulate the SPO business is growing as opposed to being flat. It's flat to the percentage of the total. But our business for SPO is growing nicely above 50%. And that's really an indication of how embedded it's become in our overall business. Now with respect to CPMs, there's a very important dynamic to understand. And the dynamic strikes out with the confidence that we have in a number of opportunities to grow our business. And that it starts out with, our land-and-expand strategy. When we're successful doing that we get more impression. And so to take advantage of that we expand our gross impression capacity. And that's the 24 trillion, number that I quoted in my comments. So we have created the opportunity to sell up to 24 trillion impressions this past quarter. In a bidded marketplace you don't actually sell all that. It depends on the dynamics of the marketplace. So we sell a proportion of those total gross impressions. And those get monetized and sold. In our model, we get to participate in that, because it's a usage-based model. Now with respect to CPMs, our CPMs have actually been stable to up. So the dynamic that you see between gross impressions and our revenue is really a function of just a bidded marketplace and our ability to be able to drive CPMs and overall revenues, which in the third quarter as we noted grew over 50%. So we have confidence to do that to grow our impressions at these rates, because of our long-term strategy of owning and operating our own infrastructure. This allows us to reduce unit costs. Last quarter we reduced our year-over-year unit cost by 27%, this past Q3 by 25%. So it's our ability to get efficiencies, expand our gross processing capacity and then ultimately drive monetization of all those impressions is what's made us successful and really sets the foundation for our long-term success.

Right. Our next question comes from Alex Ross at Berenberg. Go ahead, Alex.

Hi. Thanks for taking my question and congrats on the quarter. I just had one with respect to the Identity Hub. As of last quarter you had a dozen plus ID solutions integrated. I was just wondering if you had a plan for adding more? Are there any specific IDs that users are asking for, or are the main ones already integrated? And then a second question. You mentioned increasing head count. I know that as of the first half of this year you increased it by 20%, or for the first nine months of 2021. I was just wondering if you see the rate of head count continuing to grow throughout 2022? Thank you.

Hey, Alex, why don't I take the first question and then Steve can follow-up on the head count piece? So with respect to Identity Hub, our goal is to integrate every, let's say, viable identity solution in the markets that we -- geographic markets that we participate in. And the reason why geography is important is the same IDs that are, let's say, prevalent here in the US are not necessarily the same ones in Europe or in Asia, right? Different countries, different regulatory environments, different sources of data. You might see different IDs come to the forefront. So there is no limit really to what we can implement or support. So we are constantly in dialogue with buyers on our platform as well as sellers and we will put -- we will implement any ID that we get a critical mass of requests for from buyers and sellers. So I would expect that number to continue to increase over time. Steve, over to you.

Yes. Well, nice to speak with you Alex. So from our perspective, as Rajeev and I have outlined, we have multiple growth drivers ahead of us. We've been able to have considerable success to-date with four quarters 50% growth or higher with profit and cash flow generation. And throughout that time, we've been investing in people and infrastructure, and we don't anticipate that slowing down. Overall, the digital ad spend globally is expected to grow about 20-ish percent this year. The current projections it will be about 10% to 12% next year. We expect to grow faster by double that rate in 2022. To support that growth, we're going to keep on investing in technology teams around the globe particularly in India, go-to-market team members, and of course, our infrastructure to keep driving our usage based model. And so when you factor all those things together, the revenue opportunities that we see ahead of us, a very proven robust business model that delivers bottom line results and cash we're going to keep on investing for the foreseeable future.

Great. Thank you.

Our next question comes from Chris Quintero at Macquarie. Go ahead, Chris.

Hey, guys. Thanks for take the questions. Two questions for me. First, thought the Omnicom SPO case study for your Audience Encore product was really interesting. So can you expand on that a little bit more? And do you see that as a product as a way to gain some market share from DSPs? And any update on how many customers are using it? I think you said you had about 30 last quarter? And then second question is, how quickly are you seeing kind of CTV move more into programmatic? It seems like the major media players don't want to give up too much controls to the machines, but do you think there's an opportunity with CTV inventory from smaller and midsized media players to drive that growth for you guys in the short to medium-term?

Sure. Yes. So on the first part of your question Audience Encore and Omnicom, there is a meaningful shift underway, which is we think a big tailwind for us, which is the applicability and usage of data shifting from the buy side of the ecosystem to the sell side, right? And that's happening because of privacy regulations, third-party cookies, IDFA things like that going away, consumers becoming more aware of how their data is being used. And that ultimately puts the publisher in the driver's seat because the publisher is the one that has the relationship with the consumer. They're able to get consent for targeted advertising from the consumer. They're able to enforce privacy regulations. So we think that's a real powerful tailwind for us. And that Audience Encore example with Omnicom is just one example right where we're able to triple the reach of the campaign. And the reason is that between the consumer to the publisher, publisher to SSP, SSP to DSP, if you apply data on the demand side, there's just additional hops. And at each hop you have some level of cookie degradation. And so the number of users that then you can target drops when you get to the buy side of the ecosystem. Because we're embedded with the publisher, we're able to apply that on a much broader set of users. And so that's a -- we think that's a big opportunity for us. And I commented on that earlier that, it should lead to higher levels of utilization of our infrastructure. I think closer partnerships with agencies and advertisers and it's a key part of what we're doing as part of our supply path optimization engagements, where again we're able to show to the buyer that when you engage in SPO with us, we can drive more ROI for your ad campaigns and that leads to more value for the buyer. They're willing to pay more and that leads to more revenue for the publisher. Now the second part of your question CTV. So we are big believers in a bidded approach or a bidded marketplace. And the reason for that is that it's simply far more efficient and transparent for all of the participants. And I think we saw some of the other players in the market just in the last quarter where certain advertisers step back in more of a managed service or a kind of direct sales approach. And that creates problems because it may take months to go sell a campaign. And so if an advertiser steps back, now you've got to take a few more months to sell the campaign. Well, that impression is gone. In our approach which is a fully bidded approach, there's typically a variety a number of different bidders could be five could be 10 could be 15 for each ad impression. So if one buyer steps back, it's not a problem, we've got plenty of other bids for that ad impression. Recently at Adweek in New York, I think there was a lot of talk about growth of programmatic advertising for CTV and that's one of the key drivers of what's leading us to 7x growth, whether it's in private marketplace deals or more private transactions or it's an open market. That's a key part of our growth strategy. And we think that will be the preponderance of how CTV transactions are executed in the future.

Thank you.

Thanks, Rajeev. We have a few questions that have come in from the larger investment community as well. The first question is for you Rajeev. It's around the concept you mentioned in your script about the power shift happening in ad tech from the demand side to the sell side. And how are those privacy changes helping to shift this power dynamic?

Yeah. I think we just touched on that a little bit with Chris' question. But again, there's a real shift in where data is being applied and we think that's a long-term tailwind for us. And we're positioned here already I think as leaders and beneficiaries with our multiyear innovation focus on Identity Hub and Audience Encore as well as our extensive footprint and relationships with the world's most premium publishers. So again, because of regulation, because of how consumers are more and more aware of how their data is used online and also platform changes by the likes of Apple, Google and others, the foundation of data targeting in the industry is changing third-party data is going away. And what's sustainable now is first-party data, which is the relationship between the consumer and the publisher. And the publisher is in a unique position to get consent from the consumer and also to capture that consented data as well as enforce privacy regulations. And so, we're benefiting from this in at least two ways. One is we have a usage-based model. So as publishers' CPMs rise from the application of this data on their inventory, they're able to demand higher pricing from advertisers and we benefit with our usage-based model. And then second those highly innovative products like Audience Encore and Identity hub, they put us in a position to have much stickier relationships and create more value for the publisher. Most publishers are not in a position to build those capabilities themselves. So when they deploy our solutions, obviously it creates a much stickier relationship for us.

Great. And I think we have time for one more question. This person would like to better understand our infrastructure-driven approach. Aside from cost savings, what other benefits does your infrastructure provide? How is it a competitive differentiator?

Yes. So our infrastructure-driven approach creates a significant competitive moat for us really for two reasons: better outcomes for our customers, and its more efficient for us leading to higher profitability. So with our own infrastructure, we're able to control all layers of the infrastructure stack. That's network, it's hardware and it's software. And that's really important in an industry that's characterized by real-time transaction processing, ads in real time right and also that is very data-intensive. So let me just give you two brief examples of how we generate better outcomes. So by controlling the network layer, we can process transactions faster with the demand-side platforms with the DSPs. That means we can get more bids for each auction that we run. And we run hundreds of billions of auctions per day. So more bids means higher liquidity, which means higher prices for our publishers. And of course that creates stickier relationships with our publishers, and again, given our usage-based model higher revenue for us. And then second, by controlling the hardware, we're able to deploy specialized hardware to speed up the transaction processing times. In a real-time auction where you have maybe 150 milliseconds to process the transaction, we're always racing against the clock to do as much analysis as you can within that 150 milliseconds to figure out the most relevant ad at the highest price. So if we're able to speed up the processing time now that means we have more time for data analysis, so we can run more algorithms, we can use a broader set of data. We can do different things to get to an optimal outcome. And again that leads to higher prices for our publishers, which creates stickier relationships with our publishers and higher revenue for us. And you can't do those things in public cloud, because you don't own the network and you don't own the hardware. And then clearly, as mentioned, owning our own infrastructure is far more efficient from a cost perspective, once you reach a certain level of scale, which clearly we have. And so this is a key part of our moat, because then we can take a portion of our profitability and reinvest that back into innovation and that really drives the flywheel effect that we've talked about.

Great. We're just about at the top of the hour actually a minute or two over that. So, I'm going to turn it back over to you Rajeev for closing remarks.

Great. Well, thank you everyone for joining us today. This is a very exciting time for us be our usage-based model, which is consistent with many of the fastest-growing software companies in the world. We're driving a distinct combination of high revenue growth and profitability. We have a proven flywheel that allows us to invest into a wide variety of growth levers for the future. And we really couldn't be more excited about how we're positioned and the opportunities in front of us. Thank you all.

This concludes our call today. We look forward to speaking with you over the coming weeks. Have a great rest of your afternoon everyone. Thank you.