Hello, everyone. And welcome to PubMatic Second Quarter 2024 Earnings Call. My name is Annabeth Ferris, and I will be your Zoom operator today. Thank you for your attendance today. As a reminder, this webinar is being recorded. I will now turn the call over to Stacie Clements with The Blueshirt Group.

Good afternoon, everyone, and welcome to PubMatic's earnings call for the second quarter ended June 30, 2024. This is Stacie Clements with The Blueshirt Group, and I'll be your operator today. Joining me on the call are Rajeev Goel, Co-Founder and CEO, and Steve Pantelick, CFO. Before we get started, I have a few housekeeping items. Today's prepared remarks have been recorded, after which Rajeev and Steve will host live Q&A. [Operator instructions]. A copy of our press release can be found on our website at investors.pubmatic.com. I would like to remind participants that during this call, management will make forward-looking statements, including, without limitation, statements regarding our future performance, market opportunity, growth strategy, and financial outlook. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and 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 and are available at investors.pubmatic.com, including our most recent Form 10-K and any subsequent filings on Form 10-Q or 8-K. 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 August 8, 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 Rajeev.

Thank you Stacie. And welcome, everyone. We continued to deliver strong growth in key secular areas. Revenue from omnichannel video which includes CTV, mobile and desktop devices, grew 19% over Q2 last year. Mobile app grew even faster. Driving this was significant growth in monetized impressions. We expanded existing customers and partners such as Haleon, Omnicom Media Group, and Mars, and we signed new marquee customers like Roku and Disney+ Hotstar. Looking beyond these rapid growth areas, our revenue in the quarter was impacted by some macro softness and a large DSP buyer on our platform that changed their bidding approach, as mentioned on our call in May. We now expect activity from this buyer to stabilize in the coming months. Importantly, the growth we've delivered outside of this one buyer highlights the momentum we're seeing in the rest of the business. The programmatic market is rapidly maturing as content creators and media buyers build out their ad tech stacks, and I'm confident that the solutions we offer today, and the investments we are making in supply path optimization, CTV, commerce media, audience targeting and performance marketing will drive long-term, profitable revenue growth. It's no coincidence that content creators and buyers are investing in these same areas to scale and grow their businesses. As inventory expands and ad budgets shift to digital, there's a fundamental shift toward programmatic. To better illustrate this, we need only look at some of the key outcomes of the recently concluded Upfronts. With the growing onslaught of streaming inventory now available, the market is maturing, bringing CTV prices down and attracting a greater share of advertisers' media budgets as they see higher ROI from this channel. We are benefiting from this lift. In the second quarter, CTV growth accelerated significantly in both monetized impressions and…

Thank you, Rajeev. And welcome, everyone. Revenue grew 6% over Q2 last year, which was lower than expected largely due to the changes made by one large DSP buyer in late May. This impact was approximately $2 million, primarily in desktop display. Late quarter weakness in several ad verticals represented an additional $1 million shortfall. Based on the timing of the DSP changes, our software optimizations will continue through Q3. In the coming months, we expect activity from this buyer to stabilize. Note, this was the last major DSP to make this shift to exclusively first price auctions and nearly all impressions on our platform are now transacted via this bidding approach. The majority of our business delivered strong results which helped partially offset this impact. Excluding this DSP buyer, our business in aggregate grew nearly 10% year-over-year. Our omnichannel video, mobile, and emerging revenue products all grew well above our expectations. This outcome highlights the value of our diverse, omnichannel platform and productive multi-year investments in key secular growth areas. Looking at the quarterly highlights. Ad buyers are consolidating spend on our platform. SPO activity, which drives greater visibility and incremental margin, was over 50%. Monetized impressions across all formats and channels grew 12% over last year and overall CPMs were stable year-over-year. Q2 was the fourth quarter in a row where our total monetized impressions grew in double-digit percentages year-over-year. Emerging revenue streams, comprised of new products like Activate and growing data partnerships and enterprise software integrations, almost doubled year-over-year and contributed 2 percentage points of growth. We added 25% incremental gross impression capacity on our platform year-over-year while at the same time, lowered the trailing twelve month cost of revenue per million impressions by 14%, driven by ongoing software optimization. Our cost management and productivity improvements allowed…

[Operator instructions]. Well, our first question comes from Ian Peterson, Evercore.

Two if I may. First, it'd be great to get just a little bit more clarity on the DSP headwind. Did that $2 million impact to Q2 come in line with your expectations or below your expectations? And how should we think about that $3 million headwind contribution to Q3 and Q4? Will it be spread evenly between the two or more so in Q3? And then my second question is it'd be great to get some more color on which verticals you are seeing softness in both Q2 and Q3 to date.

Maybe I can just start a little bit and then I'll turn it over to Steve on some of the financial aspects of your question. So we're seeing strong growth in a number of secular areas, as we talked about, but that is being overshadowed by the DSP bidding change in the near term, where that DSP converted all of its auctions to first price auctions, where historically that DSP used a combination of first and second price. And the good news is that these changes make their methodology consistent with the rest of the industry, which had made this change over the last several years. So let me turn it over to Steve now.

With respect to the impact in the second quarter, because of the timing very late, relatively speaking, to what we had assumed, we just didn't have time to optimize at scale because we operate a real time auction environment. So it was slightly worse than we had expected. So that $2 million is a function of sort of the timing. Now, when I think about the impact in the coming months, I think it'll be more weighted to the third quarter than the fourth quarter because, as I said, we have fully engaged on a real time basis optimizing, and we see some really good progress and outcomes as a result of those efforts. Now, with respect to the softness, there's a couple verticals that we start to see softness right at the tail end of Q2. And the reason why we are looking at it closely is that they were on a very strong trajectory, fourth quarter, first quarter, and then we saw some weakness emerge, and that has continued into July. So ad vertical number one is the technology area. Strong growth up until, let's call it, about June, and then on a year-over-year basis basically flatlined. In terms of other areas that we saw some softness, we saw softness in automotive, travel, and arts and entertainment. And all told, those are important verticals for us and do reflect what we've seen other companies comment in terms of softness they're seeing relative to specific verticals. Now, having said all that, we also saw a really good robust growth in very important verticals for shopping, business, food and drink, personal finance, health and fitness, all grew above 20% in the second quarter. So we see this as, I'll call it, an air pocket, not really a significant impact to the second half, and you can see that in the guidance that we've given. It's really just a couple million dollars to reflect that. And then the last thing I'll say, ultimately, we feel really good about the core growth of our business, the omnichannel video and mobile, and these are areas that we've been investing in extensively. And the transition in terms of this one, DSP, we obviously see as a short-term phenomenon and feel that it's going to be something that we'll be looking at the rearview mirror early next year.

Our next question comes from Shweta Khajuria at Wolfe.

Rajeev or Steve, Trade Desk just reported and Magnet reported yesterday, they did not call weakness out or any softness out. So any particular reason that you're calling it out in the third quarter guide?

I'll take that. So as we always endeavor to do, we are transparent in terms of the trends that we're seeing, so I can't comment on what other companies are seeing. The reality is we are a very broad scale SSP, omnichannel. We have 20 plus ad verticals. We're a global business. So we really do see a lot of activity across the globe. And these specific ad verticals wouldn't be normally sort of called out unless we saw some trend in the near term. As I said a moment ago, we're not sensing this is a major change. What we, as we always try to do, is put together a prudent guidance, reflecting the puts and the takes, and so that's what we've seen recently. At the same time, from our perspective, we have many other areas that are growing very rapidly, and I called out the ad verticals that are performing strongly.

And our next question comes from Matt Swanson at RBC.

Maybe if I could start on some of the commentary around some of the emerging products and the cross-sell into the SPO. Rajeev, I think you had one good customer example there. Could you just talk a little bit more about the SPO installed base and just, I guess, how much traction there is with the emerging products and kind of getting more leverage, I guess, out of those SPO relationships?

Why don't we talk about – I'll talk about emerging revenue streams, emerging products broadly, and then we can get into Activate and SPO, in particular. So we've, obviously, been talking about these products for quite some time, OpenWrap solution, Activate, Connect + Convert, so that's for data and for e-commerce. And collectively, what we're doing is building new innovative solutions, bringing those solutions to customers that are already on our platform, delivering value for them and also creating leverage within our business. And this is all done via cross-sell and upsell into the existing customer base, in some cases on the buy side, and in some cases on the publisher side of the ecosystem. And in the case of commerce media, bringing in a new type of customer in terms of commerce media networks or transaction or retail-based companies. So we're really excited about the progress there. Steve commented on the contribution to revenue growth. When we look specifically at SPO and Activate, we're seeing, I think, really good progress. So as a reminder with Activate, we're creating a single layer of technology for buyers to connect with publishers really for high-value transactions like CTV and online video. And it's roughly a $65 billion TAM expansion, and there's been very strong and positive feedback on our vision and capabilities. So it's resonating. The Mars Group and case study, that's I think a great example and indicates that the product is real and it's capable. It's definitely not mature or full featured yet, so we're working on a lot of new capabilities all the time, but it's clearly delivering on the promise or the value proposition. And now we're also scaling it up, so we're seeing a lot of good pipeline interaction in every region across multiple buyer customer types, agencies, and advertisers. We're signing up agencies at a at a pretty good pace. Omnicom Netherlands, expansion of SPO relationship to utilize Activate is a good example of this. And the product really came from listening to the ecosystem, right? So with SPO, we're spending more time with buyers, we heard about some of the challenges and thought about opportunities that we have to build specifically to help them create more efficiency, create more leverage in their business around some of these transaction types that had not yet moved into programmatic. So we're really excited about it. I'll turn it over to Steve if he has any comments as well.

I think just to build on that perspective and excitement that we feel. First and foremost, this set of products has really shown great momentum over the last year. We see growth every quarter sequentially. As a category, contributes 2 percentage points of total company growth, all of which have the potential to continue to grow and be much bigger parts of our business in the future. And the other facet that we've shared in the past, but is really important to understand in terms of the impact on our bottom line is that we are repurposing leveraging our existing cost base. So the marginal profitability of these offerings is quite high, and so it gives us opportunities to reinvest for further growth and obviously to our incremental profitability.

Maybe just a quick one on guidance for you, Steve. I know this isn't like the biggest contributor, but it's been a very odd political season from a seasonality standpoint. How are you thinking about when political revenue might come in Q3 versus the full-year guide?

The way that we have put together our forecast around political spend is really take a look at the last presidential cycle four years ago. Obviously, we have a lot of contacts, buyers, publishers and the ecosystem. And our latest thinking is that there's going to be relatively little contribution in the third quarter, and the bulk of it will be coming through, and let's call it the last month and a half-ish of the presidential cycle. So, primarily a fourth quarter benefit. And it's really just a function of getting in front of people, close to when they're going to vote. So from our perspective, nothing's fundamentally changed in terms of our confidence in delivering a very nice uptick as a result of political. A couple things to call out. Four years ago, we did not have a CTV business. We then built a business that's growing very rapidly. And as we shared, the monetized impressions are growing double digit. In fact, last quarter, it doubled. And so, that CTV business positions us very well to take advantage of political spend, which we do believe will index more on the CTV vector. So overall, we're feeling good about political. It's still early in the cycle, but we do anticipate to get our fair share of political spend.

And our next question comes from James Heaney from Jefferies.

Can you just talk about the trends that you're seeing on the pricing side? Is it fair to say that that's where most of the softness is showing up? And then any commentary you can provide on just pricing versus volume growth for the rest of the year? And then I had a follow up.

From our perspective, we're actually very positive about the trends that we're seeing. Number one, our progress for the majority of our business is all volume-driven. As I just mentioned a moment ago, omnichannel video is seeing double-digit growth in monetized impressions on a year-over-year basis, and we're delivering close to 20% revenue in the second quarter. And so, when I look at that part of our business through the rest of the year, I expect that we're going to continue to see very similar patterns, double-digit growth in revenues and double-digit growth in monetized impressions. Now, in terms of where we're seeing CPM pressure is really related to sort of the display format, particularly desktop, not surprisingly. And that's sort of the, what I'll call, the instantiation of what we saw from the change with the DSP spending approach that those CPMs were impacted. But overall, our overall company CPMs were stable to up in the second quarter, and that really underscores the value and the benefit of our omnichannel platform, number one. Number two, the benefit impact from having a mix moving toward higher value formats, i.e., video. So overall, our expectations are double-digit growth in the fastest growing areas of our business. I anticipate display will probably be in the single digits through the balance of the year, mostly coming through pressure of CPM, but offset by monetized impression growth. The last thing I'll comment, and I shared it in the script, and that is the core display business that we have is doing quite well. So if you strip out the impact of Yahoo! and strip out the impact of the DSP, our display revenues actually grew 20%. So what that means is that we are getting the benefit of consolidation and more and more publishers are relying on us to monetize this very important format.

Maybe just a follow-up. Looking at your Q4 revenue guide, it does look like pretty decent sequential growth and acceleration on a year-on-year basis. Could you just talk about the factors driving that, whether that's some seasonal factors or just improvements that you're expecting?

To frame it out for you and for others of the call. Last year fourth quarter, our Q4 versus Q3 grew over 30%. And so, the number you were referencing in our guidance, the implication is that we would grow our fourth quarter 36% versus the third quarter. And so, the build-up of that is a couple of things. First, the very strong secular growth that we're seeing in omnichannel video and mobile, and that's going to continue, as I said. We also are anticipating the incremental benefit of political, couple million dollars that will supplement that. In addition, we're going to see the incremental benefit from our emerging products, Activate, OpenWrap, etc. And then, Rajeev called out on the call a number of major customers that are either integrated or will be integrated that will add incremental revenues in the fourth quarter. So, overall, we feel very good about our ability to step from the third quarter guide into the fourth quarter.

Our next question comes from Steve Hromin at Oppenheimer.

Hi. This is Steve asking for Jason. So just two questions from us. So one, why did the change only impact one DSP? Do you have different protocols for different DSPs? And secondly, more of a housekeeping, does your full-year CapEx guide include capitalized software?

Rajeev, you want to take the first one?

Steve, on your first question, so this impact – this is really the last DSP of any significance to make the shift from first and second price auctions to first price only, and all other DSPs have made this change over the last several years. So that's why, on your first question, it really only affects this one DSP.

Now, with respect to the housekeeping, the CapEx is solely related to PPE – property, plant, and equipment. You'll see in our financials the incremental related to software capitalization.

Great. At this time, I'm going to turn the call back over to Rajeev for closing remarks.

Thank you, Stacie, and thank you all for joining us today. Content creators and buyers are turning to sell side technology and choosing PubMatic to build their advertising businesses. With numerous new customers and expansion of existing customers already on the platform, we believe secular areas like omnichannel video, connected TV, commerce, media, and mobile app will continue to drive our growth. With SPO activity climbing to over 50%, our opportunity will disproportionately grow as the market continues to shift to programmatic. We look forward to meeting with many of you over the next month at various investor conferences. Thanks. And have a great afternoon, everyone.