Integral Ad Science Holding Corp.
Q4 2021 Earnings Call Transcript

Published: 3 Mar 2022

[Operator:]

Good afternoon, ladies and gentlemen, thank you for standing by. And welcome to the IAS 2021 Fourth Quarter and Full Year Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker host, Jonathan Schaffer, Head of Investor Relations of IAS. Please go ahead.

[Jonathan Schaffer:]

Thank you. Good afternoon, and welcome to the IAS 2021 Fourth Quarter and Full Year 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 and uncertainties 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, and welcome to everyone joining today’s call. I am delighted to share our strong fourth quarter and year-end results for our first year as a public company. We also introduced a positive financial outlook for the coming year. Our fourth quarter results exceeded our prior guidance and capped off a tremendous year of growth and innovation for IAS. Our investments in our technology, people, customers, and partners set the stage for durable growth and performance in 2022 and beyond. Throughout the fourth quarter and full year 2021, we extended our leadership position in digital media quality, while advancing our capabilities to address high growth opportunities. Our focus remains on innovating for our customers to help drive business outcomes. Many of the top global brands including Adidas, Danone, H&R Block, HP, Shopify, Sony, and Warner Media partner with IAS, because they value the effective media quality solutions we provide. Through our core verification solutions, we ensure that marketers’ ads are viewable, by real humans, in brand-safe, brand-suitable contexts, and within the desired campaign geographies. Because of IAS’ deep integration across the digital ecosystem, we process a significant amount of data. We analyze over 100 billion web transactions and score over 1 billion web pages daily. By leading with deep technology, we have expanded our capabilities to go beyond verification. We help marketers validate their media quality, optimize their advertising investments, and contextually target their campaigns with unmatched precision. Our holistic, end-to-end approach to media quality enables marketers to drive better outcomes with greater efficiency. Before diving into our fourth quarter results and recent progress on our 4 growth pillars, I’d like to highlight some key accomplishments from 2021. We realized double-digit revenue gains for the full year across our business by expanding the depth and breadth of our solutions to help marketers drive outcomes. Highlights include the rapid adoption of Context Control, the launch of our pre-bid brand safety solution in the live feed of TikTok, and the growth of our CTV solutions. We strengthened our enterprise relationships and extended our market position as a trusted partner and technology innovator. I joined IAS 3 years ago with a tech leadership background at Microsoft, Amazon, and Yahoo. My focus at IAS has been on building enterprise-level relationships. Our strong net revenue retention rate was 128% for the fourth quarter and the average customer tenure of our top 100 accounts is now 6.9 years. Once again, we had zero churn in our top 100 customers in the quarter. During 2021, we successfully completed 3 acquisitions including Amino Payments, Publica, and Context. All 3 tech acquisitions have accelerated our product roadmap in important growth areas including contextual targeting, CTV, social media, and supply path optimization. IAS has a strong track record of making strategic acquisitions that are quickly integrated and monetized. We expanded our international footprint in 2021, launching our products in over 108 countries, which is a key differentiator for IAS. International revenue, including Publica, represented 34% of total revenue in the fourth quarter of 2021. Our strong international presence is critical as global marketers look to partner with 1 provider across geographies. We scaled our organization to meet heightened demand for our solutions. We ended the year with 760 employees. Lastly, we became a public company in 2021, raising net proceeds of approximately $275 million and providing us with currency and liquidity to grow our business and attract and retain top talent. Our IPO has also helped to increase visibility and awareness of IAS with marketers, publishers, and partners. We’re excited about the opportunities that come with being a public company and look forward to continuing to share our value proposition with you. Turning to our fourth quarter results, we exceeded our guidance for revenue and profitability in the period. Revenue grew 31% to $102.5 million. Gross margin was 84%. Adjusted EBITDA reached $33.4 million at a 33% margin. Consistent with our prior quarterly calls, I’d like to review the 4 key growth pillars that drove our performance in the fourth quarter. These include

[Joseph Pergola:]

Thanks Lisa, and welcome to everyone joining today’s call. Our results for the fourth quarter and full year 2021 exceeded our prior expectations. I’m pleased to walk you through our performance and discuss our business momentum which is highlighted by our strong financial outlook for 2022. As a reminder, IAS has an agile and scalable business model, focused on high revenue growth and margins. We have significant re-occurring revenue that provides us with visibility and predictability. We partner closely with our advertisers and publishers to build multiyear, minimum impression commitments, as well as fixed fee agreements independent of the media rate. We command premium CPM rates for our solutions including

[Operator:]

Thank you. And our first question coming from the line of Mark Mahaney from Evercore ISI. Your line is open.

[Mark Mahaney:]

Okay. Thanks. Let me try 2 questions. First, Joe, just in terms of the revenue guidance for the full year, organically, if you were to take out Publica, what would be the growth rate? Or if you include Publica for both periods, what would be the growth rate just in terms of helping us figure out what the growth rate will be post this year? And then second question, I want to ask Lisa about the TikTok integration, there was a couple of interesting data points there. I don’t know I’ve asked you just to qualify or quantify, how far along is the integration with TikTok? How much more upside is there in terms of different markets, different properties within TikTok that where you could integrate? Thank you

[Joseph Pergola:]

Yeah. Hi, Mark. So regarding the guide for the year with Publica, we anticipate Publica to contribute 8% to our total revenue, and then follow same as seasonality trends.

[Mark Mahaney:]

Is there a way though to think through the growth rate though like organically or on a full pro forma basis, Publica, if it had been in last year or 2? Is there a way to think through that?

[Joseph Pergola:]

Yeah, I would say, we would expect continued top-line accretive growth from Publica contributing to our numbers, along with also adjusted EBITDA margin contribution.

[Mark Mahaney:]

Okay.

[Lisa Utzschneider:]

Okay. Hi, Mark. I’ll take the second question about TikTok. So you might remember that we’ve launched our multimedia classification tech with TikTok last September. We launched it in 3 markets, U.S., France and Germany. We’ve seen incredibly positive feedback from our marketers and high demand for the product. To date, we’ve applied the product to 80 campaigns across those 3 markets. We are on track with our TikTok roadmap for the first half of this year. The plan is to both roll out that existing product to multiple international markets, and then also to launch a postpaid product. The one other thing I’ll call out about TikTok is, Mark, you probably remember, we also announced an acquisition of the company Context at the end of fourth quarter. And Context is – as a leading AI technology that only enhances our classification capabilities. So stay tuned for additional information about what the content integration means for our tech.

[Mark Mahaney:]

Okay. Thank you, Lisa. Thank you, Joe.

[Lisa Utzschneider:]

Thanks, Mark.

[Operator:]

And our next question coming from the line of Brent Thill from Jefferies. Your line is open.

[Brent Thill:]

Thanks, Lisa. Programmatic growth, 43% above direct advertiser. Can you just walk through the dynamics and what you’re seeing there?

[Lisa Utzschneider:]

Sure, Brent. So we’re thrilled that programmatic continues to be a tailwind for our business, and it continues to drive accelerated growth. You might remember it’s Context Control that is driving a good portion of that growth as more and more marketers shift away from audience based targeting right the PII data over to contextual targeting. The great news is, is in fourth quarter we actually added 39 new contextual targeting customers, and also we believe 20 new segments, including Luxury Goods and Travel Enthusiasts. For 2022, we’ll continue to drive Context Control, both from an avoidance perspective, marketers looking to avoid certain types of content, but we now have the sales team really double down and focused on driving the contextual targeting with marketers, helping marketers seek out appropriate content for their brands.

[Brent Thill:]

And Lisa, just on cracking the code in social. What else needs to happen here for you to fully crack it open? Can you can you walk through your – a little bit of the playbook and how you’re opening up that market?

[Lisa Utzschneider:]

Sure, Brent. I love that you’re speaking my language, cracking the code in social. So as I had mentioned to Mark earlier, TikTok is our first platform, social platform that we launched our multimedia classification tech, seeing high adoption there. We’re also marching down the path with Twitter, that roadmap for 2022 first half is also moving along nicely. Meta, we all know Meta announced publicly in fourth quarter that they’re open – they plan to open up their live feed to third-party verification companies. They have not announced yet publicly, who they’ve selected, but we’re keeping a close eye on Meta and continue to ensure that our partnership is strategic with Meta. So those are the first 3 platforms that we’re taking a look at. But the good news is, is that the technology that we built that is 100% machine learning and AI-based, it is scalable. Everything we build is to scale and global, and we’ll be able to transport that tech over to future social platforms when they open up their live feeds.

[Brent Thill:]

Thank you.

[Lisa Utzschneider:]

Thanks, Brent.

[Operator:]

And our next question coming from the line of Jason Helfstein with Oppenheimer. Your line is open.

[Jason Helfstein:]

Thanks. Let me ask to, did you see any weakness in the fourth quarter from macro pressure? I mean, we heard that for most companies? Or is any macro pressure anticipated in the first quarter guide, given that I think the full year guidance does imply second half acceleration? And then also, is there a way to say how large video and CTV combined is as a percent of the business today? And where do you see that going over the next few years? Thanks.

[Lisa Utzschneider:]

Okay. Thanks, Jason, for the 2 questions. So I’ll take the first one. So we’re keeping a close eye on the macro issues, one being supply chain, but similar to what I said in fourth quarter, it’s a non-issue for business. We’re seeing one-off examples, but really no material impact on our business. It’s the same thing for first quarter, keeping a close eye, but just don’t see a material impact on our business.

[Joseph Pergola:]

Yeah. Hey, Jason, it’s Joe Pergola. On the video question, we see video currently around 40% of our advertiser direct, accelerating to 50% as we continue to go deeper and deeper into social platforms where we have premium video CPMs. CTV is going to continue to accelerate, it’s a tough combo to have with the video side of things. But, especially with the acquisition of Publica, we see accretive growth there.

[Operator:]

And our next question coming from the line of Dan Salmon with BMO Capital Markets. Your line is open.

[Daniel Salmon:]

Hey, good afternoon, everyone. Thank you for taking the question. Lisa, I want to follow-up on Context Control. You mentioned the big shift to selling it for targeting as well as measurement, and that’s a new important use case. And then maybe another way to look at it is, we still got over a year until chrome addresses cookies and the 2-year Android clock just started. And so still a lot of surface area to which these types of tools will need to be applied. So my question, I’ll just ask the baseball analogy. What inning are we in with the Context Control? Is there a lot more to go? A little more to go? I’d love to just hear your bigger picture thoughts on how long that can remain a sustained driver of the programmatic business. And then for either Lisa or Joe, as you continue to expand the product base, any updated thoughts on pursuing more dynamic or variable pricing for your services? Thanks.

[Lisa Utzschneider:]

Okay, I’ll take the first question, Dan. So Context Control, love the baseball analogy. So you might remember, as I just mentioned, the product, there’s actually 2 parts of the product. The first is avoidance. So the content that brands find unsafe for their brands, they don’t want to run any brands adjacent to the content. Over 90% of our Context Control revenue is avoidance. So in terms of baseball for avoidance, I would say sixth inning, but sixth, seventh innings. But one thing I’ll add is the majority of our Context Control revenue actually is in the U.S. So where we’re seeing nice adoption is in the international markets of Context Control, so earlier in the baseball game internationally and when it comes to the avoidance side of Context Control. If you shift to what I call the proactive contextual targeting, so that’s the content that marketers seek out that’s appropriate for the brand, they like the brand adjacency, I call it first inning. And so now we have the sales team, we’ve trained them up. It is a different conversation with the marketer. You are now talking about campaign by campaign. It was of a set it and forget it, the way avoidance works. But we are engaged with our marketers globally. We are pitching the product hard. But the good news of contextual targeting is the TAM is quite sizable. So there is a ton of runway ahead when it comes to contextual targeting, especially as more and more marketers are shifting away from the PII audience based targeting and leaning into contextual targeting.

[Joseph Pergola:]

Hi, Dan, this is Joe. I’ll take the dynamic pricing question. Yeah. So as you know, we have premium pricing across our videos, CTV, programmatic and our Context Control channels. So we’re still a very high re-occurring revenue model, transactional business revenue model. And that’s what the market is demanding. Our marketers want to purchase from us in that way and we see that globally.

[Daniel Salmon:]

Okay. And then maybe, Lisa, just one follow-up on avoidance versus targeting. It sounded like as you put it with avoidance, it’s more of a set it and forget it with customers, whereas more campaign by campaign on targeting, though very early there. But you said it’s more maybe the bigger TAM overall. Do you think in the end, targeting is bigger than avoidance?

[Lisa Utzschneider:]

In the end, contextual targeting is bigger than avoidance. Yes.

[Daniel Salmon:]

Yeah. Fantastic. Okay. Thank you.

[Lisa Utzschneider:]

Thanks, Dan.

[Operator:]

Our next question coming from the line of Brian Nowak with Morgan Stanley. Your line is open.

[Brian Nowak:]

Okay. Thanks for taking my question. Probably a pretty easy one. So just kind of go back to one of the earlier questions from Mark. How big was Publica in 2021 from a revenue perspective? And then can you just sort of help us in the 2022 revenue guide, what are you assuming total revenue from Publica and from Context just so we can sort of do a waterfall of core business and M&A over that period?

[Joseph Pergola:]

Hi, Brian. For 2021, Publica contributed $10.7 million. And then, for 2022, as we outlined earlier in their prepared remarks, we’re guiding towards a modeling estimate of 8% contribution revenue from Publica. And then for Context Control, we’re about – at the end of the year, we’re at 38% adoption. And for 2022, we’ll see continued acceleration now that we’re adding targeting on top of avoidance. It’s still early innings.

[Brian Nowak:]

Okay. From a Publica perspective, are there any specific products or offerings or features that you’ve now sort of integrated and realized that are actually proven to be better than expected? I think that’s a pretty good Publica number for 2022. So just curious as to what you learn now versus when you acquire the assets that seems to be driving that. That’s pretty good growth there.

[Lisa Utzschneider:]

Yeah, I can take that question, Brian. So the way we think about Publica, we’re thrilled about the acquisition, it gives us access to the promise of connected TV. And we’ll go back to the baseball analogy, it is first inning of a long game with CTV. And the way to think about bringing together the assets of Publica and IAS, it gives us differentiated access to data for publishers, and transparency for marketers. And I personally spend a lot of time with marketers, and when I hear their primary reason why they’re not shifting more linear TV dollars over into programmatic CTV, it’s because they don’t know where their ad ran on CTV. And at the end of fourth quarter, we actually launched a product, which we announced in a press release in January, and we’re now providing transparency for marketers in where their ad is running in programmatic CTV. So we’re now providing transparency like where did the ad run on the device, the app, channel, genre, content category. It’s a first for the industry, all of that data lives within IAS signal. And it’s just one example of leveraging IAS’ data assets with Publica’s assets to provide greater transparency for marketers to encourage marketers to shift more of their linear TV dollars over into programmatic CTV. And it also drives better yield for the video publishers. We can’t wait until we can share more of our CTV roadmap for 2022. But again, the way we’re thinking about CTV, it’s ripe for disruption, and we are poised to continue to drive and launch differentiated products, both for the buy side and the sell side.

[Joseph Pergola:]

And then, Brian, just…

[Brian Nowak:]

Great. That’s helpful – yeah, go ahead, Joe.

[Joseph Pergola:]

I just want to circle back regarding our Context acquisition. So for 2021, we require them at the end of the year at zero revenue contribution and really that acquisition is all about accelerating our capabilities with Context classification, particularly for video and images. So they have a very unique and advanced capability for image and video recognition. And it’s really positions as well for those next-gen solutions. So for our revenue contributions 2022, it’s part and parcel to the overall buy. So it’s immaterial at this time.

[Brian Nowak:]

Got it. Okay. And the last one, I apologize, I want to kind of squeeze in. I want to follow-up with you where you were talking about the new products coming out of the acquired assets. As you sort of think through that 8% contribution, are there new unlaunched products in that number? Just so we know as we kind of watch all the press releases or as we watch new things, is that not included in the current guide from macro perspective?

[Joseph Pergola:]

That’s based on the current course of business of Publica.

[Brian Nowak:]

Got it. Okay, great.

[Joseph Pergola:]

Thank you.

[Lisa Utzschneider:]

Thanks, Brian.

[Operator:]

And our next question coming from the line of Brian Fitzgerald from Wells Fargo. Your line is open.

[Brian Fitzgerald:]

Thanks. A couple of questions. Maybe a follow-up to Brent’s question on the continued outperformance of programmatic versus advertiser direct, open web and walled garden. We’re wondering what you’re seeing with respect to clients adjusting media mix giving the challenges that some of the walled gardens we’re having with iOS. And then in terms of topics, Google’s new cookie replacement effort, a bit of semantics maybe but it seems to me it’s still very early days. It seems to be interest-based targeting. Any thoughts on whether that is competitive with contextual targeting? Alternatively, wondering if there’s anything you can do in partnership with publishers around interest-based advertising, if that’s a different thing, interest-based audience segments maybe. Is that something you can help your partners with where the value prop of your contextual products extend beyond kind of what’s being consumed right now.

[Lisa Utzschneider:]

Okay. Thanks, Fitz. So I’ll take that first question about the shift with programmatic, and open web, and walled garden. So the way our business is trending, it’s similar to the macro trends that we’re seeing in digital advertising. And what I mean by that is IAS, we’re growing faster than overall digital advertising. Our programmatic business is growing faster than global programmatic business. And with those trends, we’re also seeing our programmatic revenue up. Open web is starting to decrease over time as programmatic increases. But the walled garden revenue, social in particular, I’d like to say marketers go where the users are. And especially over the last year, social platform adoption is skyrocketed, right? So that’s an area where we’re definitely doubling down with walled gardens. And in terms of your question around iOS, we don’t see that impacting the trends that I just spoke to. The growth accelerators are programmatic, walled garden and connected TV for our business. And then in terms of your second question tied to cookies, and interest-based targeting versus contextual targeting, we don’t see those 2 types of targeting competing with one another. And the way we think about our contextual targeting product is we continue to receive feedback from our marketers in the types of segments that they are interested in pursuing both in terms of avoidance and in contextual targeting. And again, we’re constantly releasing new segments based on the interests and demands of our marketers, and their vertical, seasonal, topical, audience proxy segments, and will continue to innovate in Context Control for our marketers.

[Brian Fitzgerald:]

Got it. Appreciate it. Thank you.

[Lisa Utzschneider:]

Thanks, Fitz.

[Operator:]

And our next question coming from the line of Mark Kelley with Stifel. Your line is open.

[Mark Kelley:]

Great, thank you very much. I’m going to try to Publica question one more time. I know we got the stub period after Publica was announced, but it would be helpful to have an idea of what the full year would have been if Publica was standalone. That’s the first question. And then the second one is, just on the social integrations, as you see them. I know you talked about Meta, and you don’t really have all the details in there. But, as you prepare for the walled gardens opening up to platforms and technologies such as, IAS, I guess is there anything else you think you need to build or buy in preparation for that. It does sound like the Context acquisition will help, but anything else – any other thoughts would be helpful? Thank you.

[Joseph Pergola:]

Hi, Mark. I’ll take the first question. So for Publica full year, including pre-acquisition, post-acquisition, it would have been a little bit north of $18 million for the full year.

[Mark Kelley:]

Perfect. Thanks.

[Joseph Pergola:]

You have to factor in the acceleration in the business as well as the international expansion for 2022.

[Mark Kelley:]

All right. Great.

[Lisa Utzschneider:]

And then to follow-up on the second question, Mark, regarding the walled gardens and cracking the code in the live feed, when it comes to brand safety and brand suitability. Again, we’re thrilled with our most recent acquisition of Context, which will enhance our multimedia classification within the live feed. We actually have all of the tech that we need to continue to build and launch pre-bid, post-bid solutions within the walled gardens. And everything, like I said before is built to scale, and our 100% machine learning tech is portable, so we can pick it up and port it over to the next social platform.

[Mark Kelley:]

All right. Perfect. Thank you both. I appreciate it.

[Lisa Utzschneider:]

Thank you.

[Operator:]

And our next question coming from the line of Andrew Marok from Raymond James. Your line is open.

[Andrew Marok:]

Hi, thanks for taking my questions. I just had 2. I think you mentioned that over 70 of your top 100 accounts have adopted Context Control. So that’s pretty strong adoption so far. But what gets the last 20 to 30 using the product? Is it an awareness issue? Or is it some type of capability or functionality that that they’re holding out for? And then second with geopolitical tensions ramping up and content around that becoming more prominent. Has that been a catalyst for increased discussions around brand safety and suitability with some of your customers? Thank you.

[Lisa Utzschneider:]

Okay, I can take these things, Andrew. So the first question about the 70 of the top 100 have adopted Context Control. Again, we are thrilled with the adoption levels we’re seeing with Context Control. It’s purely an awareness opportunity for sales teams to continue to share the best practices that marketers are seeing and the results that they’re seeing with the Context Control products. And, again, it’s early innings in the international markets, when it comes to Context Control. So we’ll continue to tell our story and drive adoption of the product, both in the U.S. and internationally. And in terms of geopolitical and whether or not that’s impacting our business, my response to that is that our technology and services have never been more relevant. It’s the relevancy has carried throughout this year, last year, given all of the unprecedented events that we have all experienced. And again, marketers, they continue to lean into our brand safety, brand suitability solutions, especially as we’re seeing that rapid adoption on the social platforms, the dynamic nature of social platforms, and also the unpredictability of the content.

[Andrew Marok:]

Got it. Thank you.

[Lisa Utzschneider:]

Thank you, Andrew. So with that…

[Operator:]

I’m showing no further questions at this time. I’ll turn the call back to you, Lisa Utzschneider, for any closing remarks.

[Lisa Utzschneider:]

Okay, great. So thanks again to everyone for joining us on today’s call. We are excited to enter 2022 with strong business momentum and favorable demand trends. Our focus in 2022 will be on driving sustainable growth with differentiated solutions and expanding our marketing-leading global presence, and we look forward to speaking with you soon.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.