IAS - NASDAQ

Thank you, ladies and gentlemen. My name is Michelle, and I will be your operator today. At this time, I would like to welcome everyone to the conference. Jonathan Schaffer, VP investor Relations, IAS, you may now start your conference.

Thank you. Good afternoon, and welcome to the IAS 2022 Second 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 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 in the company's IR site, investor.integralads.com. All financial comparisons, unless noted otherwise, are based on the prior year period. So 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.

Thanks, Jonathan, and welcome, everyone, to our 2022 second quarter earnings call. We delivered strong revenue growth of 34% to $100.3 million with an adjusted EBITDA margin of 31%. We also achieved net income profitability for the second consecutive quarter. I am proud of our team for generating new wins in the quarter, including Red Bull, Tim Hortons, Sherwin-Williams, and WestJet. We're also excited that LinkedIn selected IAS to provide global ad verification services for their paid media marketing campaigns. This smart win came after extensive technology due diligence against a competitor. It also represents the next step in our global strategic partnership with LinkedIn and parent company Microsoft. Lastly, 7stars, a leading independent agency in the U.K., switched from a direct competitor to IAS based on our efficiency tools and engagement plan. While we are revising our full-year outlook to reflect global macroeconomic headwinds, today's results exceeded expectations for the quarter. We continue to launch differentiated products that have accelerated our product roadmap to address marketers' evolving needs in a dynamic and fast-paced market. Our second quarter performance reflects IAS's standing as a leader in digital media quality, including core ad verification measurement of viewability, fraud, and brand safety. We have also successfully broadened our scope beyond verification. We are benefiting from a sizable and increasing contribution from our pre-bid activation and post-bid measurement solutions in programmatic contextual, social media, and CTV. In programmatic, Context Control, our contextual avoidance and targeting solution, represented 45% of programmatic revenue in the second quarter and drove a 51% increase in total programmatic revenue. Context Control is based on our differentiated contextual intelligence technology. Context Control is available in all major DSPs in global markets in 32 languages. 86 of our top 100 accounts now use Context Control for avoidance with continued momentum. In addition to the strong adoption in the U.S., we've also seen significant growth of contextual avoidance in EMEA and APAC, ahead of expectations. In July, we expanded our DSP partnerships for contextual targeting and avoidance with

Thanks Lisa. We delivered strong revenue growth and profitability in the second quarter. As a reminder, IAS partners closely with our advertisers and publishers to build multi-year, minimum impression commitments, as well as fixed fee agreements independent of the media rate. We command premium CPM rates for our solutions including Context Control, video, and CTV products. Total revenue increased 34% to $100.3 million, ahead of our prior guidance of $97 million to $99 million. Coupled with our more recent wins, we benefited from our loyal customer base across key verticals including CPG, Retail, QSR, and Finance. Programmatic revenue for the second quarter grew 51% year-over-year. Programmatic represented 57% of total revenue from advertisers. The strong performance in Programmatic was attributable primarily to continued adoption of Context Control, most notably our contextual avoidance solutions with increased penetration internationally. Context Control represented 45% of total programmatic revenue in the second quarter, up from 41% in the first quarter of 2022. Our Advertiser Direct revenue, which includes open web and social platforms, increased 4% year-over-year. We continue to see impression volumes shift from the open web, where display impressions were lower, to social platforms with increased video adoption. Video commands a pricing premium and accounted for 48% of total Advertiser Direct revenue, up from 45% in the first quarter of 2022. Social accounted for 43% of Advertiser Direct revenue in the period, up from 40% in the first quarter. On a combined basis, total revenue from advertisers, including Advertiser Direct and Programmatic revenue represented 84% of our second quarter revenue. Supply Side revenue from publishers increased to $15.8 million. That includes Publica, which is tracking according to plan. Total Supply Side revenue represented 16% of our second quarter revenue consistent with the 2022 first quarter. We continue to grow our leading global market presence. International revenue increased 7% in the quarter and represented 31% of total revenue. Our current revenue mix between Americas and rest of world reflects results for Publica, which has been U.S. focused to-date. We continue to leverage our successful international go-to-market engine and global presence to expand Publica's reach. While our international markets continued to grow, softer demand in Advertiser Direct also impacted geographic mix for the period. Total revenue for the Americas was $68.7 million, up 51%; EMEA and APAC increased to $23.6 million, and $8 million, respectively. Gross margin was 82% compared to 83% last year and slightly ahead of Q1 gross margin of 81%. Operating expenses excluding stock-based compensation grew 25% versus our top line growth of 34%, reflecting our efficient operating model. Total operating expenses for the second quarter of 2022 reflects increased year-over-year sales and marketing costs as we returned to more normal business activity and continued hiring with 100 new employees added in the period, as well as higher G&A expenses related to public company costs. We will continue to prioritize our recruiting efforts based on our business needs. Stock-based compensation expense for the period was $10.7 million, in line with our prior expectation of $10 million to $11 million. Moving on to profitability and performance metrics. Adjusted EBITDA for the second quarter, which excludes stock-based comp and other one-time items, increased 23% year-over-year to $31.6 million, at a 31% margin. We achieved net income for the quarter of $2 million, or $0.01 per share. This marks our second consecutive quarter of net income profitability. We believe adjusted EBITDA remains the best measure of profitability for the company. Our second quarter net revenue retention, or NRR, was 121%, reflecting continued growth in spend of our top customers. Total advertising customers grew 6% year-over-year to 2,135 advertisers. Our total number of large advertising customers with annual revenue over $200,000 was 173, which reflects several large advertising customers that fell just below the $200,000 trailing 12-month threshold. In terms of our financial condition, we ended the second quarter with cash and equivalents of $77.4 million compared to $73.2 million at December 31st. During the quarter, we reduced our long-term debt by $10 million, lowering our interest expense. As Lisa discussed, we are revising our full-year guidance to reflect macroeconomic headwinds. However, IAS remains well positioned as a growing, profitable industry leader operating at scale. We still expect to maintain adjusted EBITDA margins consistent with our prior outlook, and we expect to exceed the Rule of 50 for the full year. For the third quarter ending September 30, 2022, we expect total revenue in the range of $99 million to $101 million. Adjusted EBITDA for the third quarter is expected in the range of $28 million to $30 million. For the full year 2022, we now expect total revenue in the range of $398 million to $402 million. Adjusted EBITDA for 2022 is now expected in the range of $120 million to $124 million. We continue to expect Publica to represent approximately 8% of our total forecasted revenue for the full year. And we expect the rate of year-over-year revenue growth to decelerate as we move into the fourth quarter. This relates to the cumulative effect of our revised expectations for the third quarter based on the factors Lisa outlined, including softness in brand, marketer spend in some verticals, delayed starts on recent wins and longer sales cycles on prospective new business. A few additional modeling points. Beginning in the second quarter, the impact from foreign currency exchange is now excluded from adjusted EBITDA. In the second quarter, we had a gain of approximately $500,000 related to foreign currency exchange. As global currencies, including the euro and the pound, continue to depreciate against the dollar, we expect a significant negative impact in the coming quarters from foreign exchange based on our international presence. Stock-based compensation expense for the third quarter of 2022 is expected in the range of $13.5 million to $15 million. Full-year stock-based compensation expense is expected in the range of $46 million to $50 million. Based on current expectations, we expect dilution to remain at low single digit levels for the year. Shares outstanding for the third quarter are expected in the range of approximately 156 million to 157 million. We expect full year shares outstanding in the range of 156.5 million to 157.5 million. I would now like to turn the call back over to Lisa.

Thanks Joe. As this is Joe's last call with IAS, let me take this opportunity to once again thank him for all of his contributions to the company and wish him the best, moving forward. We are well underway in our CFO search and look forward to updating you on our progress. In addition, we are delighted to welcome Thomas Joseph to IAS as our Chief Technology Officer. Thomas brings over two decades of tech-industry leadership with Sirius XM and Pandora, as well as with Microsoft. He has extensive experience working in media, advertising and emerging platforms, including gaming. As CTO, Thomas will lead our tech innovation, including our long-term vision for both new and existing products. Joe and I are now ready to take your questions. Operator?

Your first question comes from the line of Brent Thill. Your line is now open.

mostly based on pullbacks that you're seeing right now from advertisers or is it more just based on concerns of things getting worse? It just looks like your guide implies kind of low teens growth for Q4? That's my first question. My second is just around the strength you're seeing in Americas. It looks like third straight quarter of acceleration in that particular market. What's driving such strength there? It looks like you're kind of outgrowing the industry there. So anything on just why you're seeing such strength in Americas compared to the rest of the world? Thanks.

Yeah. Hi, Brent. Thanks for the question. You broke up with the first question. So do you mind repeating the question, please?

Sure. So the first question is just around reasoning for the guide down. Is it what you're seeing right now in the market in terms of pullbacks? Or is it just an assumption that things start to get worse in the back half?

Sure, happy to take it. So in terms of the guide down, there are a few key areas where we've seen softness. We started to see in the back half of Q2 that when we took a look at the trends, we expect this softness to continue into Q4, including lower marketer spend, delayed activation and longer sales cycles. And then, in terms of the, Yes. Sure. Sorry, Brent. And then, in terms of the strength that we are seeing in the U.S., as you know, context control, it's just such an accelerator of our programmatic business, which again, we're seeing growth of over 50% for the quarter. And it's the contextual avoidance adoption in particular, where we're just seeing it continue through the roof and then also seeing nice progress with contextual targeting adoption in the U.S.

Operator, we're ready for the next question, please.

Your next question comes from the line of Andrew Marok with Raymond James. Your line is now open.

Hi, guys. Just kind of piggybacking on that last question. Can you give us a little bit deeper update on the targeting adoption for Context Control? You called the 86 of the top 100 figure for CTV. Is there anything similar that you can give on targeting specifically to get a sense of its scale? And then, I have a second question after.

Sure, great question, Andrew. So yes, again, we're seeing such incredible adoption of Context Control, as you mentioned, 86 of our top 100 accounts are using Context Control for avoidance, that's up from 80 last quarter. And then, also we are starting to see a meaningful uptick in the number of targeting customers. We're actually seeing 25% increase quarter-over-quarter. We're also starting to see nice increase in the size of the deals going into six-figure deals. So again, we're just thrilled with the overall adoption that we're seeing in avoidance, both in the U.S. and in international markets, and we're seeing just increasing demand and adoption with contextual targeting in the U.S. in particular.

And I wanted to drill down a little bit on the decline in the number of large customers. So you called out a couple of factors, including a few that fell just below the $200,000 threshold and the longer sales cycles and things like that. But I guess, is there any way to quantify how much of that decline was due to spend pullbacks as opposed to some of the little shifts in things that - where customers might be close to that large customer threshold? Thank you.

Yes, great question. So actually when we took a look at the data of - it was just a handful of large advertisers that dipped just below the $200,000 threshold and as previously noted, we didn't lose any of the accounts. So just to quantify for you, it was like a couple of thousand dollars per account, not that significant. And then, the other thing that I think is important to point out is that it's a trailing 12-month metric.

Great. Thank you.

Thank you.

Your next question comes from Mark Mahaney with Evercore. Your line is now open.

OK. Thanks. Hey, Lisa, I wondered if you could give us some context about digital advertising and the recession? You've gone through a couple of these cycles. And your thoughts on whether this time it's different, just because digital advertising is so much bigger as a percentage of overall advertising. If you were to step back and say which parts of digital advertising could be most - would be most pressured in a material recession environment and which would be most resilient, how would you answer that? Thank you.

Yes, great question, Mark. And you're almost dating me because I've been through two soft economies prior to IAS. So I have a bit of experience in terms of navigating soft markets and what - how marketers respond. And a couple of things about soft markets and marketers is they care even more about ROI, the quality of media, the transparency and understanding where their investments in advertising is going, right? Every dollar matters even more to marketers. So ROI matters, metrics matter and again, understanding their return on investment, and I'm actually feeling really good about all of the investments we're making in outcomes right now and also things like supply path optimization and transparency with supply path. And then, I would say the second thing that really matters to marketers in soft economies is service. And service is an area where we have invested heavily over the last 12 months to 18 months, in particular, in international markets, and that's why we're seeing really nice growth in the international markets. And then, in terms of verticals and which verticals we're seeing greater impact. As we mentioned in our last quarterly call, it was automotive, a little bit of tech telco in EMEA, in particular. But what we're noticing with some of the vertical softness, it's advertisers within the verticals, depending on what their product offerings are. So again, we're staying really close to the data trends. We're monitoring the data also. I personally spend a lot of time with CMOs, listening to customers, listening to their feedback and also just hearing from them what they're seeing moving forward. So we're monitoring it very closely.

Thank you, Lisa.

Great. Thanks, Mark.

Your next question comes from the line of Mark Kelley with Stifel. Your line is now open.

Okay, great. Thank you. A couple of quick ones, just piggybacking off that last one. You talked about social taking some share from open web as of late, especially video. I think you highlighted that. And if I look at someone like Meta, they're seeing impression growth offset by price declines given the softer macro environment. And given your fixed price business model, I would expect that to be a pretty decent environment for your business. I guess is that something that you take into consideration as we look out for the remainder of the year? Or maybe that's just a trend that you expect to not reverse, but maybe will be less pronounced going forward? That's the first question. And then second, last night, your main competitor talked about some pretty healthy win rates. I would love to get your thoughts on your view of the competitive environment right now? Thank you.

Yes, sure. So, Joe, do you want to take the first question? Thanks, Mark.

Yes. Thanks, Lisa. Hey, Mark. So on social, now, we called out that social is making up 43% of our advertiser, direct up from 40%. So that continues to scale. Marketers continue to seek out the walled gardens, especially or are poised with a higher-priced CPM, consuming this - moving to video from display as well. So there's a lot of opportunities, and you can see, especially with our recent announcements and moving with TikTok and all of the opportunities ahead of us. So we see pricing opportunity, as well as volumes on the social platforms.

Yeah, great. And then, in terms of win rates, so I could not be prouder of the team and the wins that we're putting on the board. I know previously in the call, we called out a few of these iconic brands like Red Bull and LinkedIn, just love seeing those wins. In terms of win rates for the quarter, we are seeing an uptick in win rates from Q1 to Q2. It's now slightly above 80%, and these wins are happening both in the U.S. and internationally. And the other thing I actually think is important to call out is that we are dominating internationally with our win rates. Granted, some of these RFPs and some of the smaller emerging markets, they're smaller RFPs, but the local teams that are on the ground, they're doing a great job competing and winning the RFPs. And then, your second question about the win rate is in terms of what are we seeing in the marketplace in terms of competing and winning these RFPs. So something we are seeing with marketers, and again, I think this is tied to the macroeconomic environment is marketers, they're doing serious due diligence in their RFI, RFP processes. We're seeing both tech diligence and better understanding the service and support, the product capability, functionality. And I would also say just overall global footprint and presence. So, love seeing the diligence that the marketers are doing and the time they're taking to really understand IAS' solutions and capabilities and how we stack up to our competition.

Got it. Thank you, Lisa. Thank you, Joe.

Yeah. Thank you.

Your next question comes from the line of Raimo Lenschow with Barclays. Your line is now open.

Hey, this is Frank on for Raimo. My question, on the macro one, I want to ask, how are you seeing the weakness expand exactly? Is this more current customers with lower volumes on the platform or customers moving to premium products less? And additionally, with the comments on contextual, do you expect Google's decision to delay cookie deprecation to impact the growth path here at all? Thank you.

Yes. Great question, Frank. So I'll take both of them, actually. So in terms of some of the reasons why we are seeing the H2 macroeconomic trends is, as I mentioned before, a few things. Q1, you might remember in our last call, we talked about seeing some softness in EMEA, certain verticals, seeing softness there. And when we really started watching the trends during Q2, toward the end of Q2 is when we started experiencing additional softness in other verticals and also markets related to the macroeconomic environment. In terms of why lower marketer spend, delayed activation and longer sales cycle, and we do expect the slowdown to be more impactful in Q4 as there's a cumulative effect as we move through the year. That combined with voice of the customer, where customer obsess with IAS, and we're in close contact with our brand partners, with the major agencies and listening into what they're seeing and what they're expecting. And it's a combination of both the trends, the voice of the customer. But as we said before, we expect to achieve solid growth and profitability in 2022. And then, we continue to invest in innovation and we position IAS for long-term success. And then the second question, in terms of Google's deferral of the cookie deprecation into second half of 2024, a few things what it means for IAS and our business. First off, it elevates awareness of the shift that's happening, the shift where we're moving away from audience-based targeting to contextual targeting. It also gives marketers and agencies a longer runway to plan for this shift. We're continuing to tell our story of Context Control, I spoke to before, just the incredible adoption we're seeing both with avoidance and now seeing nice uptick with demand for contextual targeting. And then, we are pivoting to targeting. I know I've spoken in the past about our focus on go-to-market and investing in training for our sales team to really be able to tell a super tight narrative around our contextual targeting solution.

Great. Thank you.

Thank you.

Your next question comes from Jason Helfstein with Oppenheimer. Your line is now open.

Hey, so two questions. First, kind of a two-part, so when you think about client renewals and negotiations, Lisa, can you think of any scenario where like clients would push you from lower CPMs upon renewals? And kind of also tying to that, like is the risk as we move into next year that just certain new clients just delay signing, just kind of hurting visibility around next year? And just how you think about that? And then the second, is there any areas where effectively, we - the company wants to be meaningfully bigger, obviously, video, social, but just maybe kind of talk about kind of feet on the ground, how you kind of actually push some of those to be a bigger part of the mix?

Okay, great. Thanks, Jason. So I'll take those questions in order. So let's start first about renewals and lower CPMs. And the good news is that over 90% of our renewals are evergreen. And it's a testament to the stickiness of our business, the loyalty of our customers. And our price has been holding, and we expect that our price will continue to hold. And then, in terms of new clients delaying timing, that's something we don't anticipate right now is signing up new clients and having them activate, especially as we're seeing ongoing adoption of programmatic and that our programmatic revenue continues to grow quarter-over-quarter. You might remember, programmatic revenue, actually, it's a flip of a switch, and it's much easier to activate. Did that answer your questions, Jason?

That answers the first one and then kind of the second, kind of how you're ramping some of the more higher growth aspirational areas?

Oh, got it. Okay, so yes, another thing that we're very focused on is creating new TAMs in the marketplace. So we're thrilled with the announcements in Q2 of some of these strategic partnerships that we announced, several of them are first to market. So in the audio space, if you take a look at podcast advertising in that marketplace, it surpassed $1 billion in the U.S. in 2022, and there's just so much demand for verification within podcast advertising and announcing both our partnership with Spotify, which is a first-ever brand safety solution that we'll be launching. In addition to that, the partnership with Pandora, that creates an entirely new TAM, also extends our verification solutions into a new area that's seeing high, high user engagement, high adoption. And then, the second new TAM for us is the announcement of Anzu, which is a leading in-game advertising leader. Again, it helps advertisers better monitor their in-game media investments. I have to say, as I mentioned before, I spent a lot of time with CMOs and marketers and they were just so excited to see that we're expanding both in gaming and in audio. So we can't wait to launch those solutions, and we're going to continue to listen to our customer feedback and continue to hear from them where are the areas that they want us to expand. And then, in terms of ramping in higher growth, everything that we do at IAS is with an eye on global, repeatable, scalable. As you know, many of our strategic global accounts, they're Fortune 500 blue-chip brands, and they really expect that we're able to offer all of our products and services anywhere globally. So we'll continue to look for new TAMs and new opportunities for our customers and continue to sign exciting partnerships like the ones I just mentioned.

Thank you.

Thanks, Jason.

This concludes the Q&A portion of the call. I'd like - I'd now like to turn the call back to Lisa for any concluding comments.

Okay. Thanks again, everyone, for joining us on today's call. We reported strong Q2 results. And despite the macroeconomic environment, we expect to deliver solid growth and profitability for the full year. Trust is at the core of what we do and marketers look to IAS as an independent provider to ensure the quality of their media and enable targeted outcomes and ROI. We look forward to updating you on our progress.