Integral Ad Science Holding Corp.
Q3 2021 Earnings Call Transcript

Published: 12 Nov 2021

[Operator:]

Good day, and thank you for standing by. Welcome to the IAS Third Quarter 2021 Earnings Conference Call. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your host today, Jonathan Schaffer, Vice President, Investor Relations. Please go ahead.

[Jonathan Schaffer:]

Thank you. Good afternoon, and welcome to the IAS 2021 Third Quarter Financial Results Conference Call. I’m joined today by Lisa Utzschneider, CEO; and Joe Pergola, CFO. Before we begin, please note that today’s call contains forward-looking statements. We refer you to the company’s filings with the SEC for more details about important risks that could cause actual results to differ materially from our expectations. On today’s call, we will also refer to non-GAAP measures. A reconciliation of non-GAAP measures to the most directly comparable GAAP measures is contained in today’s earnings release available on the company’s IR site, investors.integralads.com. With these formalities out of the way, I’d now like to turn the call over to our CEO, Lisa Utzschneider. Lisa, you may begin.

[Lisa Utzschneider:]

Thanks, Jonathan. I’d like to welcome everyone joining today’s call. I’m delighted to be here to discuss our strong third quarter results. Based on our performance to date, combined with solid business momentum, we are raising our outlook for the full year. We have a lot to share in our progress as we advance our global leadership in digital media quality. As a reminder, IAS enables marketers to improve ROI by protecting and amplifying their brands, eliminating fraud, reducing media waste and driving better engagement and outcomes. Our solutions are global, scalable and available across all devices and channels, including all major demand side platforms, or DSPs, and proprietary platforms. This allows for a seamless global customer experience. IAS’ end-to-end approach to digital media quality is based on verification, contextual targeting and optimization. We provide verification services according to our proprietary Media Rating Council or MRC accredited quality impression metric. We ensure our marketers’ ads are seen by real people in brand-safe, brand-suitable environments and in the right geographies. We offer contextual targeting to marketers and publishers, which extends our media quality capabilities beyond verification. Our customers are able to avoid undesirable context and target content that drives better outcomes for their businesses. We do this with the granularity and precision that is unmatched in the industry. We also deliver campaign optimization via our Total Visibility solution, which we believe is 1 of a kind. Total Visibility provides an understanding of both the quality of programmatic media and the supply path clouds for ad impressions in Google DV360. As a result, marketers can find the highest quality ad placements at the most efficient price within programmatic environments. The voice of the customer informs everything we do. Our brand and agency customers continue to stress the importance of effectively communicating their company values and identifying the best environments for their digital campaigns. Leading edge marketers understand that quality impressions drive better outcomes. Recently, IAS hosted 2 live panel discussions at Advertising Week in New York City with senior executives from GroupM, Mars and Samsung. The themes of quality, trust and transparency, all of which are essential to our mission, were reinforced in these panels. Turning to a few highlights from the third quarter. We exceeded our guidance for revenue and EBITDA in the period. Revenue grew 32% year-over-year to $79 million. Growth was across all products and segments with demand extending well beyond our core verification services into the new rapidly growing products we’ve introduced in the last year. We also generated strong profitability with gross margins of 82%. Adjusted EBITDA reached $25.4 million at a 32% margin. We achieved these financial results while accelerating our business momentum in several key areas, including driving customer adoption of our contextual targeting solutions in programmatic across brands, industry verticals and geographies; acquiring Publica, which transforms our connected TV, or CTV, capabilities and establishes IAS as a clear leader in the space; and scaling our infrastructure for long-term success by welcoming over 100 new employees to IAS in the period, which doubled our hiring in the second quarter. Now let’s discuss how we’re going to grow. On last quarter’s call, I outlined 4 key growth pillars for IAS

[Joseph Pergola:]

Thank you, Lisa, and welcome, everyone, joining today’s call. We delivered a very strong third quarter. I’m pleased to walk you through our results and our increased outlook for the full year. As a reminder, IAS has an agile and scalable business model, focused on high revenue growth and margins. We have significant reoccurring revenue that provides us with predictability in our forecasting. We partner closely with our advertisers and publishers to build multiyear, minimum impression commitments as well as fixed fee agreements. We command premium CPM rates for our solutions, including Context Control, video and CTV products. Turning to our results for the third quarter. Revenue increased by 32% year-over-year to $79 million, which exceeded our upwardly revised guidance for the period of $75 million to $77 million. That’s nearly 4% over the midpoint of our revised guidance range and just over 5% above the midpoint of our initial range of $74 million to $76 million. Expanding on our revenue performance, our advertiser direct revenue, which includes the open web and social platforms, increased 15% year-over-year due to higher impression volume from key accounts including Nestlé, Coca-Cola, Disney, Mars, Samsung, Sanofi, American Express, Bayer, LVMH and adidas. Social platforms continued to perform well, representing an increased component of our advertiser direct mix for the period. Over time, we expect social platforms to increase from 38% of advertiser direct revenue today to reach 50-50 parity with Open Web. Another key part of advertiser direct is video, which spans across both open web and social platforms. Video continued its strong growth in the quarter and accounted for 42% of our total advertiser direct revenue. For programmatic, our revenue increased 49% versus the prior year. Programmatic continues to benefit from ongoing customer adoption of our Context Control solutions, which represented 36% of programmatic revenue in the period compared to 30% in the 2021 second quarter. Programmatic accounted for 43% of total revenue for the quarter. Lastly, supply side revenue from publishers increased to $10.8 million. That includes a $3.2 million contribution from Publica, which was acquired midway through Q3. Publica is on track to contribute $7 million in the fourth quarter, in what will be it’s first full quarter as part of IAS. We saw significant year-over-year growth across all international markets in the period. International revenue grew 25% in the quarter and represented 36% of total revenue. Our geographic revenue splits were as follows

[Operator:]

And our first question comes from the line of Brian Fitzgerald with Wells Fargo.

[Q – Brian Fitzgerald:]

Programmatic continued to be very strong in the quarter. And we know contextual is a key tailwind there. But I also think you alluded to an expanded DSP relationship. So we’re wondering if you could unpack some of the drivers there, maybe in terms of existing customers adopting the Context Control or new customers coming to the platform specifically for contextual capabilities versus a new DSP or an expanded partnership? And then maybe a quick follow-on to that, too. Where do you think we are today in terms of contextual adoption across your customer base and the industry more broadly?

[Lisa Utzschneider:]

Great question. So I’ll take it one at a time. The first Programmatic. We’re thrilled with the continued accelerated growth that we’re seeing with programmatic and Context Control adoption, in particular. A trend that we’re seeing that’s quite promising is when we initially launched Context Control in March of 2020, where we saw the adoption rate initially and the DSP we launched with The Trade Desk was in the U.S. So last year, it was primarily U.S. adoption as we rolled context control across all of the major DSPs, including DV360. And what we’re seeing this year in Q3, in particular, is continued adoption in the U.S., but additionally, international adoption, both in EMEA and APAC. We’re seeing that nice trend of international adoption, both in terms of avoidance, but also we’re seeing increasing adoption with the Context control contextual targeting solutions. And then 1 other thing to call out that we’re also seeing nice adoption is we continue to invest in our programmatic reporting capabilities to help marketers have a more seamless experience. Its easier discoverability of context control. And I think the improvements that we’re making in reporting is also driving up adoption rates.

[Operator:]

And our next question comes from the line of Mark Mahaney with Evercore.

[Q – BenWheeler:]

This is Ben on for Mark. I just wanted to follow up on that last part. In terms of what percentage of the context control revenue is avoidance versus, I don’t know, positive targeting, the right way to say that. I understand, I think the majority of it is kind of avoidance, but I just got an update on how that trends throughout the quarter, that would be great.

[Joseph Pergola:]

Ben, this is Joe Pergola. Thanks for the question. So 36% of our overall programmatic revenue is attributed to Context control. Primarily, that’s currently today is the avoidance. We’re working actively building the pipeline with our marketers on targeting and seeing a lot of traction. But I’d say primarily today through Q3, it’s avoidance.

[Q – BenWheeler:]

Okay. And then if I can just ask a follow-up. Like how do you think the OpenSlate acquisition by Double Verify affects the competitive dynamic for selling that Context control solution to your customers?

[A – Lisa Utzschneider:]

Great question. So with the OpenSlate acquisition and Context control, the reality is we’re just seeing dozens and dozens of net new contextual activations. We saw in Q3. We anticipate to continue to see in Q4. In addition to that, some of these new DSP relationships that we announced should set us up for a solid 2023 growth as they ramp up. So we’re looking forward for accelerated growth across the board when it comes to programmatic.

[Operator:]

And our next question comes from the line of Jason Helfstein with Oppenheimer.

[Q – Jason Helfstein:]

I want to add to, so just further update on Publica now that you’ve kind of owned it for longer. Just kind of how are you thinking about that for next year? Just any color as we’re all going to try to think about our models for next year. And then can you talk about kind of you’ve got the MRC accreditation. And so what does that mean, for example, like social platforms like Facebook meta seems to not want to comply with the MRC, you having that accreditation. Like what does that mean in the context of like potentially winning a Facebook or – and just how does that play into your discussion with advertisers?

[Lisa Utzschneider:]

Okay. Thanks, Jason. I’ll take the questions one at a time. The first with Publica, as you know, we announced the acquisition of Publica in August last quarter. And we are so thrilled with the acquisition. We are heads down building our short-term and long-term road map. But ultimately, our goal is to accelerate the adoption for the entire ecosystem across users, publishers and marketers when it comes to things – all things related to CTV. I actually have had the opportunity over the last couple of month–to do a bit of a listening tour with Ben Antier, who’s the CEO of Publica. It’s similar to the listening tour I did when I joined IAS almost 3 years ago. And publishers are giving a lot of feedback in terms of what they need within programmatic CTV. What’s working for them, but areas where they really need some help around whether it be frequency, creative duplication. In parallel, I’ve been listening and spending time with marketers in terms of what they’re looking for with CTV. And what they’re looking for is transparency. And as we announced in the earnings call, we’re so looking forward to launching later this quarter granular insights around transparency, finally sharing with marketers where their ads ran in programmatic CTV, where the impression played, again, giving them the transparency that they’re looking for. And then in terms of the MRC accreditation that we announced, it includes MRC accreditation on Facebook, both impression and viewability measurement and reporting of display and video ads across both Facebook and Instagram. And as you know, we’re very bullish about the opportunity of brand safety within the live feeds. We announced the product launch with TikTok, where we’ve developed video classification for marketers. The product’s now GA, running across 3 markets

[Operator:]

And our next question comes from the line of Brent Thill with Jefferies.

[Q – Brent Thill:]

Lisa, Apple left a small wake turbulence throughout the industry this quarter. And I’m curious if anything you’re seeing post that fly over from what you’re hearing from your clients. And for Joe, really continued good performance in international as you kind of dive into it. Anything to call out that you put a bigger spotlight on?

[A – Lisa Utzschneider:]

It’s a great question. I’ll take the first question, Brent. So we actually see that as a tailwind – an ongoing tailwind for our business as marketers continue to shift away audience-based targeting to contextual targeting. And as you know, our prebid solutions, we don’t rely on cookies or individual identifiers. So again, it’s accelerated growth as more and more marketers are leaning into differentiated contextual targeting solutions like Context Control.

[Joseph Pergola:]

Yes. And Brent, thanks for the question on international. So tremendous performance internationally, as you saw. Right now, we have all regions exceeding double-digit growth. And what we’re seeing internationally is not only acceleration of new logo wins, but into our programmatic solutions as well. So we’re very pleased with the performance and look forward to the opportunity.

[Operator:]

And our next question comes from the line of Raimo Lenschow with Barclays.

[Q – Raimo Lenschow:]

Congrats from me as well. Lisa and Joe, yesterday, we discussed with another company kind of volumes in the industry. Is there anything that you’re seeing there? And then following on from Brent’s question on IDFA, like in terms of – like I know you guys are excited, but where are customers on that understanding on their journey that they need to change. Could you just kind of talk a little bit of what you’re seeing in your conversations, please?

[Lisa Utzschneider:]

Sure. Thanks, Raimo. I think I’ll take both questions. So to tackle the first round – around volume. So the trend has been very positive, both in the volumes that we’ve seen in the past quarter, as well as quarter-to-date, which is reflected in our increased outlook for the full year. So volumes continue to increase as more and more users are spending even more time on social platforms and viewing stream content, and as marketers are shifting away from linear budgets to online budgets. And then in terms of the second question, that one, could you repeat it, please, that one about Apple?

[Q – Raimo Lenschow:]

Yes. So I was just wondering – you mentioned, obviously, you are excited about IDFA, because the world is changing, and it looks like it’s coming to you. But where are customers in their journey of understanding it, kind of thinking about adopting more of your solution, et cetera. Like where are we on that journey?

[A – Lisa Utzschneider:]

Great question. So as I mentioned before, with this shift, as marketers are moving away from audience-based targeting to contextual targeting, they’re looking for differentiated sophisticated contextual targeting solutions. That’s exactly what Context Control is. We’ve launched that product early last year. But the trend that we’re seeing is twofold. The first, early adoption last year with many U.S. marketers, we’re seeing a shift where U.S. marketers continue to adopt Context Control. But now we’re seeing more and more international markets adopting Context Control, both in terms of avoidance, but also proactive contextual targeting. The other trend we're seeing is more and more markete’s leaning Into our contextual targeting solution where they’re seeking out appropriate content for their brands, and we’re seeing nice adoption rate, actually dozens and dozens of new logos signing up for Context Control across all of the markets.

[Operator:]

And our next question comes from the line of Dan Salmon with BMO Capital.

[Q – Dan Salmon:]

Two questions, one for Lisa, one for Joe. Lisa, you mentioned in your comments, Publica’s ad server and unified ad and the potential opportunity to move a little further upstream for both advertisers and publishers. Could you just spend a little bit more time on that? And what the product roadmap might have in store from those 2 products? And then, Joe, I think just a quick one for you. I saw the trailing 12-month advertiser count in the 10-Q, I may have missed the publisher total. Can you share that with us?

[A – Lisa Utzschneider:]

Yes, sure. Thanks, Dan. So in terms of Publica, we are working through that short, long-term product roadmap. But the one thing I do want to call out when it comes to Publica’s unified auction, and their video ad server, it is mutually exclusive, right? So IAS, we’re a third-party independent verification company. It’s so important that we remain neutral and independent like the Switzerland of media quality. So Publica will continue to use their unified auction ad server independent of our verification solutions. But in terms of the roadmap, as I mentioned on the call, transparency is mission critical for marketers and what marketers are looking for, I’ve mentioned this earlier, the TV 2.0, which is basically marketers moving away from ad verification towards ad intelligence, and they’re looking for granular insights to understand where the impression played when it comes to programmatic CTV. That is what they get on linear TV and they’re looking for the same thing on CTV. This is game-changing for the industry that shortly will be launching live near real-term impression level data reporting for marketers and buyers. We’ll be launching it later in fourth quarter, where – it’s the first in market where marketers finally, we’ll be able to see where their ads ran, which channel and which genre. So we’re really excited for this launch later in the quarter. Again, it’s a game changer for the industry.

[Joseph Pergola:]

And thanks, Dan, on the question for – regarding the number of publishers. Our focus continues to be on the advertiser count at 2,045, up 11%. Coupling that with our other key metrics at 129% NRR, real testament for the business as we’re scaling. From a total customer point of view, and adding in the amount of publishers, it’s at 136. But what we need to be cognizant of is the partial quarter addition of Publica in our supply side number. And then this Q4 will be our first full quarter with Publica under IAS ownership.

[Operator:]

And our last question comes from the line of Andrew Marok with Raymond James.

[Andrew Marok:]

You've given some metrics around the savings, the total visibility advertisers experience after adopting. And I assume that some of those savings are then reinvested. So with that, can you give us some color on what you see as the size of the opportunity from expanding total visibility to other DSPs? And any potential timelines around that?

[Lisa Utzschneider:]

Great. Great question. I love talking about Total Visibility. So Total Visibility, it offers visibility into supply path optimization. Total Visibility came from an acquisition of a company we acquired earlier this year called Amino Payments. And what marketers are looking for similar to what I was talking about earlier when it comes to CTV, is they want to get out of the black box of programmatic. They want greater transparency and visibility into what they're buying in programmatic and performance. And with Total Visibility, we're offering it, running it through Google DV360, Google's DSP, and it gives the marketer visibility into all of the SSPs that their advertising is running on. And even more importantly, the performance of the SSP buys. And so the marketer in real time, can adjust accordingly what's working well, what's not, drives great optimization for the marketer and gives them more transparency. With that team, the Total Visibility team, we are looking to extend some of the insights that we're gleaning from the Total Visibility product into our other programmatic reporting capabilities, and we'll be thrilled to share what that road map looks like when we're ready to share it.

[Operator:]

And this concludes our question-and-answer session. And I would like to turn the conference back over to Lisa Utzschneider for any further remarks.

[Lisa Utzschneider:]

Okay. Well, thank you again, everyone, for your time today. I hope that gives you a good understanding of the tremendous momentum that we have in the business. We are firing on all cylinders at IAS. I am so incredibly proud of our entire team and of the Q3 results that we shared today. We continue to invest in all of the growth accelerators that we mentioned earlier on the call when it comes to programmatic, CTV, social platforms and also international expansion. And we’re looking forward to a strong close of this year and rounding out next year with really great momentum. So thank you again for your time today.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.