IAS - NASDAQ

Thank you for standing by and welcome to IAS Third Quarter 2022 Earnings Call. at this time all participants are in listen-only mode. . I would now like to hand over the call over to Jonathan Schaffer, VP investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to the IAS 2022 Third Quarter Financial Results Conference Call. I'm joined today by Lisa Utzschneider, CEO. As announced this afternoon via press release Tania Secor has been appointed as CFO effective December 5. We look forward to Tania joining for our next earnings call. On today's call Lisa will address high level financial results in her comment. In addition we have posted Lisa's prepared remark along with the more detailed financial review on our Investor Relations site investor.integralads.com. Anil Sukumaran our Chief Accounting Officer will also be available with Lisa during the Q&A session on today's call. Please note that today's call and prepared remarks contain forward-looking statements. We refer you to the company's filings with the SEC, which are posted on our Investor Relations site for more details about important risks and uncertainties that could cause actual results to differ materially from our expectations. 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 our Investor Relations site. 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 third quarter earnings call. As mentioned, we posted detailed financial review on our IRS site. But let me start with a few financial highlights. We've reported 28% increase in third quarter revenue year-over-year year-over-year to $101.3 million, which compares favorably to our previously revised outlook of $99 million to $101 million. International represented 31% of third quarter revenue unchanged from the second quarter. Gross profit margin was 81%. Adjusted the EBITDA increased 19% year-over-year to $30.1 million at a 30% margin as we exceeded the rule of 50. We also reached net income profitability for the third consecutive quarter. As a result of our positive Q3 performance and current business trends. We are modestly increasing our previously revised full year revenue outlook. We are also raising the midpoint of our revised full year adjusted EBITDA range. During the quarter, we delivered innovative and differentiated solutions to our customers that drove upsell and cross sell opportunities. The adoption of context control which includes both avoidance and targeting is a great example of how we meet the evolving needs of our customers. Since launching context control in 2020 the business has grown to represent 45% of programmatic revenue in Q3, and more than $80 million in revenue expected in full year 2022. The tremendous growth of context control demonstrates our ability to develop and scale products that become meaningful revenue contributors over time. New context control avoidance wins include Toyota in the U.S. and American Express in Italy. We are committed to providing coverage of context control globally and have expanded to 45 languages. In addition to further penetrating our top 100 customers, we see additional opportunities to grow the avoidance business in the mid market as well as internationally where adoption is increasing. Context control targeting represents a large addressable market. We're activating testing and learning with new customer wins in the U.S. and EMEA across industry verticals, including travel and entertainment, finance, consumer packaged goods and tech telco. In social media, which continues to represent a dynamic and growing opportunity for IAS we are making significant gains with our major platform partners. IAS leads the market with the launch of a full end to end measurement suite and TikTok's live feeds including brand safe, brand suitability, viewability and invalid traffic or IPT detection. In October, we launched a post bid measurement brand safety and suitability solution and TikTok. We are leveraging our 100% Machine Learning multimedia classification technology for video, image, audio and text enhanced by a context acquisition. We can analyze content with greater granularity at the video and frame levels in the live feed, offering both pre-campaign targeting and campaign measurement solutions. With Twitter we plan to roll out our beta for our postpaid brand safety solution in the coming weeks. The reason Netflix announcement further validates IAS's technology leadership and the important CTV market. We were delighted to announce that Netflix has selected IAS as a parents see partner to support their much anticipated ads supportive plans starting in Q1, 2023. Our initial focus will be on viewability and IVT post bid measurement. We've established a leading market presence in CTV. Unlike linear TVs one size fits all approach to advertising, CTV is an addressable and measurable medium and we're building confidence and trust with marketers and publishers. Our Publica business acquired last year is a leading solution to drive yield for streaming publishers. We provide superior technology while maintaining independence from the media selling business. We are focused on maximizing revenue for our publisher clients across device manufacturers, broadcasters, and multichannel video programming distributors including Samsung, AMC, Fox, DirectTV and Philo. We also deliver the best experience for the consumer by incorporating the video recognition technology acquired through the context acquisition. By utilizing context before an ad runs along with our server side ad insertion stitching capabilities in the live stream public ensures that the viewer has a positive experience without having to endure duplicative or repetitive ads, or in some cases offensive or miss targeted ads. For marketers Publica provides insights into which ads have been delivered in what content to what audiences. We also enable buyers to easily activate campaigns programmatically across private marketplaces, connecting them directly to the highest quality CTV inventory. We are focused on delivering CTV solutions to provide content level transparency, fraud detection, targeting of contextually relevant suitable content, and ensuring that ads have been rendered while TV is on. According to a recent study by 17% of impressions delivered through CTV streaming devices are delivered while TV screens are off. Our new on screen completion rate metric addresses this issue and validated if the TV was off while a device continue to stream if an ad was fully rendered on screen and if the app played to completion. Publica is on track to contribute approximately 8% of total revenue for the full year or approximately $32 million. We are also extending our capabilities into the fast growing audio and gaming markets where advertisers are increasingly looking to our solutions. In audio. We are partnering with Spotify to create the industry's first third party brand safety and suitability reporting tool. At advertising week in New York. David Burns, the Director of Global Advertising Brand Safety at Spotify, commented that it's great to have a partner like I am together our responsibilities to make sure that advertisers feel safe, secure and trust what we're bringing to them in the audio space. In Q3 we announced the launch of a postpaid verification product for audibility, and IVT measurement. We're actively working to expand these capabilities to additional audio platforms. In gaming we partner with Israeli based Anzu where we are in market with viewability and IVT measurement solutions. We're looking to extend these capabilities beyond mobile in app to other gaming environments, including consoles, PCs and desktops. We're also testing with other platform providers to expand our coverage within gaming. We are delighted to announce that Kimberly Clark selected IAS as their global ad verification and proactive brand safety prevention solution in a multiyear agreement at the end of the third quarter. This partnership with a major CPG company was secured after a head to head against other providers. We were awarded the opportunity based on the value of our solutions, our high standard of service and global support and our insights as a service approach. I couldn't be prouder of the team for this win. We continue to strengthen our senior leadership team to help guide IAS in our next phase of growth. In May, we appointed Yannis Dosios to the newly created position of Chief Commercial Officer responsible for global sales and marketing. Under his leadership, the Yannis is enhancing our go to market strategy across functions to bring best in class enterprise level sales and activations to our customers globally. International is a key differentiator for IAS as global marketers look to simplify and consolidate verification under one provider. In August we welcome Thomas Joseph or TJ as our Chief Technology Officer. TJ brings a high degree of technical expertise and global enterprise experience with Microsoft. Most recently helped drive the Pandora integration at Sirius XM. TJ is already making an impact aligning the engineering organization to support our product roadmap and long term growth strategy. Today, we are excited to announce another key addition to the senior leadership team. Tania Secor will join IAS as Chief Financial Officer. Based in New York, Tania is a highly accomplished finance leader with 25 years of financial leadership experience and a proven track record of building teams and scaling organizations for growth. Most recently, Tania was global CFO for RGA and Reprise Interpublic group's digital innovation and digital media agencies respectively. Her deep background in FP&A and capital markets, along with the relevant industry experience make Tania a great fit for IAS. We look forward to Tania joining the team on December 5, and to introducing her to everyone. Lastly, we're excited to support marketers efforts to track and reduce their carbon footprint. We recently announced a partnership with a UK based Good-Loop, a purpose led advertising platform that's moving the industry towards positive climate friendly advertising. We are working with Omnicom and Sanofi ventures on pilot testing in Q4 with broader availability in 2023. In closing 2022 is shaping up to be another year of expanding capabilities and delivering revenue growth and profitability that exceed the rule of 50. We continue to focus on driving efficiencies in our business, improving expense management as reflected in our adjusted EBITDA outlook. With the recent additions to our senior leadership team, including today's announced CFO appointment, we are adapting and aligning our execution for the current environment. We are currently in the thick of planning for 2023 and we believe that we are setting the stage for long term durable growth. And with that, we are ready to take your questions. Operator?

Our first question comes from the line of Andrew Marok of Raymond James. Please go ahead.

Thanks for taking my question. First off on the advertiser direct line, in particular, saw a nice little acceleration in 3Q. Is there anything specific to call out there? Is there a drag behind that? And then have a follow up after.

Sure. Hi, Andrew. Great question. So yes, we're pleased with our results in the third quarter and also the fact that we're seeing strong programmatic results and advertiser direct with ad direct in particular, where we saw strength we're in a couple of verticals including CPG, retail and auto and then also we saw a nice uptick in growth from the EMEA market with 14% year-over-year growth. And that was primarily driven by advertiser direct.

Got it? And that actually did kind of dovetail into my next question then in EMEA revenue seem pretty solid in 3Q despite all the bad news that we've heard about energy costs, macro, etc. I guess what is your 4Q guide assume for U.S. versus international growth and anything to look out for macro wise?

Yes. So great question. Again, we saw a nice uptick in growth EMEA as I mentioned before, 14% increase year-over-year for Q3 primarily advertiser direct. We're seeing solid performance in the fourth quarter. We typically don't break out U.S. from international revenue, but we're feeling good about fourth quarter and the trajectory of the business across all of the regions right now.

Great, thank you.

Okay, thanks, Andrew.

Thank you. Our next question comes from Mark Mahaney of Evercore. Please go ahead. Mark Mahaney of Evercore, your line is open.

Okay, I'm here, I couldn't hear my name being called. Sorry about that. Lisa let me ask two questions. First, just on your macro commentary there. I assume you are seeing some softness in end market demands. I assume that's why I know you didn't kind of changed your fourth quarter guidance, but it does imply this pretty material deceleration and growth rate. So I just want to go back to that. Like, to the extent that there's softness in the end markets, where does it show up for IAS? Fewer new advertisers, less spend per advertiser higher churn per advertiser anything? Like what are you seeing so far? And I just want to I just want to go back to you on the macro outlook.

Yes. Sure. So first off, we did exceed guide in third quarter Mark, and we modestly increase our Q4, and full year guide, we're seeing double digit growth on all three revenue lines in the third quarter. And the Q4 guidance increase, we are seeing an uptick in programmatic demand. We're seeing improved performance in advertiser direct as I mentioned before, in particular, verticals like automotive CPG, and in the streaming vertical, and then also I should note, we are seeing strength in CTV and strong performance with Publica.

Okay, okay. And then can I just, can we just double click just on the Netflix relationship or the Netflix deal? And can you put that in context like, how big of a win is this? What are the solution sets that they are purchasing? Is it something where they're just doing a modest amount? And then you can expand it over time? Is this across just their U.S. properties? Or is this a global deal? Just talk about how big the deal is so far and how to think about how it could grow over the next couple of years?

Sure. So we were delighted with the announcement that IAS was selected by Netflix as a transparency partner to support their much anticipated ad supported model. I actually think it's a great initiative for the entire digital industry. And our initial focus, it will be available in Q1 of 2023 will be providing viewability and invalid traffic postpaid measurement to inform both brands and agencies on campaign reach and engagement. Our offering will be rolled out across multiple markets, wherever Netflix is providing advertising, we will be providing our measurement solutions. And again, this is just the first inning of hopefully a very long game with Netflix and really looking forward to the launch of the partnership.

In this segment, last question, Lisa, please. Does the Netflix deployment require a lot of extra work customization on the part of IAS or are they essentially acquiring your off the shelf solutions?

Great question. So it's an integration that we focus on scalability and ensure we have global reach of our solution. And there's not much customization required when you take a look at how fast Netflix is moving to launch their ad supported solution. I think all of us agree the faster we can get an offering out to the marketers, the faster they'll be spending on Netflix and again, I really think it's a win-win-win across the board for the entire industry.

Okay, thank you very much, Lisa.

Thanks. Thanks, Mark.

Thank you. Our next question comes from Brian Fitzgerald of Wells Fargo. Your question please.

Thanks. Maybe a follow on to the Netflix line of question again as we've seen new premium a VOD platforms coming to market and aiming to establish ad businesses niche and pretty high CPMs. Are they in some cases, proactively purchasing viewability and IVT solutions? Or is it more about them enabling these capabilities and advertisers driving the verification revenue opportunity for you guys?

Yes. Great question Fitz. I would say what we're seeing the industry trend is, you take the example of Netflix. Netflix represents premium inventory with this ad supported solution that they're rolling out. And what marketers are asking for is for the independent verification providers to provide viewability and invalid traffic coming out of the gate. They obviously want independent platforms like IAS in the mix coming out of the gate for the launch of their ad supported offering. But I could see later in the game, that marketers would potentially be interested in additional solutions like brand safety and suitability, but coming out of the gate, it's IVT and viewability.

Got it. And maybe one kind of follow on a wrinkle to that. And that's on the advertiser side I want to get a sense of, of advertisers level of concern about viewability and IVT in these new premium environments.

Yes. I would say that, I mean, the marketers, they're cheering wildly over Netflix's announcement. And they want to focus first, especially with premium inventory and non programmatic inventory on viewability and IVT. And they really want independent third party players, like IAS in the mix at the start of the launch just to ensure that there's that independent offering for the marketers.

Got it. Awesome. Thank you, Lisa.

Yes, thanks, Fitz.

Thank you. Our next question comes from Jason Helfstein of Oppenheimer. Please go ahead.

Thanks. Lisa, let me try two. Can you give us a sense of the opportunity as Meta comes on board? I mean, I assume most advertisers probably spend two to three times more in Meta than maybe any other platform besides Google. Is that kind of representative of the opportunity for you, you think on a per client basis? And then one of the things that we've been asked is in case trade desk is putting it out there, like, if UID a potential currency and then it's kind of like, well, if UID could be a currency, why couldn't IAS be a currency? And so maybe just, if you can opine on kind of just how you think about kind of the evolution of currency with over the next period and kind of your role in that as well. Thanks.

Yes. Great questions. So I'll take them in order. Thanks, Jason. So the first is about Meta. And we are following Meta's lead in terms of their plan to open up the live news feed for independent verification badged partners. They have shared that publicly that they do plan to open up the live feed with the badged partners. IAS is one of the badge partners. I believe there are three of us, and we're really looking forward for that to happen. They have shared that they expect it to open and ramp in 2023. As you know, Jason, we don't provide our 2023 outlook. So I'm not at liberty now to share any anticipated contribution with any Meta revenue. But given the massive volume of Meta and how large the entire social platform is, we just can't wait to partner with Meta once they open up the live feed. And then to your second question about IAS as being a potential currency. The reality is, and I know Jason, we've talked about this before, but in macro economic conditions, the reality is marketers care even more deeply about ROI and efficiency and their spend. And that's why they're leaning into our solutions is we're helping marketers identify where higher quality media is. And as we have demonstrated in dozens of case studies that we've shared with our marketers, higher quality media leads to higher ROI. So we do see a future where IAS could potentially be a currency for marketers when it comes to things like attention metrics, or outcomes as marketers need to do more with less especially with the macroeconomic headwinds that marketers are facing today. And we'll see what the headwinds look like in 2023.

Thank you.

Thanks, Jason.

Thank you. Our next question comes from the line of Raimo Lenschow of Barclays. Your question please.

Hi, this is for Raimo. Thanks for taking the question. Are you seeing any uptick in new customer urgency given the ROI arguments of products? And specifically, have you noticed any more greenfield deals?

Yes. Great question. So as I was mentioned before given the current macro economic conditions advertisers are leaning even more into IAS's solutions given both the efficiency of our offering. We're helping marketers identify higher quality media, leading to ROI. So absolutely. And you can see with things like programmatic increasing by 40%, the rapid adoption of our context control, avoidance product, they are absolutely leading into our solutions. And in terms of greenfield opportunities. Yes, we are seeing loads of greenfield opportunities. We don't really disclose RFP win rates. But in terms of greenfield opportunities our emerging markets, we're seeing really nice growth, as I mentioned before, internationally in some of those emerging markets, like Latin America, like Southeast Asia, and then also the big wins like I had mentioned in previously on the call with Kimberly Clark, which is a multi-year, multi-media million dollar, when that was a direct jump ball, doing deep tech diligence us against our competitors and winning fortune 500 brands. I'm just so incredibly proud of our team for that win.

Very helpful. Thank you.

Thank you.

Thank you. Our next question comes from Brent Thill of Jefferies. Your question please.

Just want to take another approach on the macro. And I think last quarter, you took the guy down due to macro concerns. In your commentary, it doesn't sound like you're saying it's getting worse. Maybe stabilized from what you're seeing, are you just saying, hey, we're able to kind of fly through this because we're effectively helping so many different constituencies in the ad market, that we're really not seeing the macro flame out that we're seeing across the rest of that industry. I think everyone's a little confused about your view, and ultimately how you're positioning for the next six months in this environment.

Yes. I would say Brent, thanks for the question. We're actually seeing resilience in our business. We're seeing, as I said before, improvement in certain verticals, auto in particular, also CPG. And as I mentioned before, as we're all living in this macroeconomic headwinds that we're all living in, marketers are seeking out solutions that deliver a higher ROI from them, and they need to just generate as much ROI as possible with every dollar that they invest in digital advertising. And again, that is why they're leaning into the IAS solution. So we're feeling really good about our Q3 results. The fact that we exceeded guide and that we were able to modestly increase our guide for fourth quarter.

Okay. And on Netflix, is it fair to say that a lot of the ads will be up front and that you'll have pretty decent visibility in the revenue stream and I think many are kind of asking what CPMs could look like for the solution.

Yes. So with Netflix again, we're thrilled with the announcement of the Netflix partnership and they had selected IAS. I see the first half of 2023 as a ramp. So get through the integration, marketers, drive adoption and start buying and running the ads on Netflix, and then getting our viewability and IVT solution up and running and ramping and getting the feedback from the marketers. Thank you.

Thank you. Our next question comes from the line of Mark Kelley of Stifel. Your question, please.

Great, thank you very much. I wanted to ask you if retail media is an area we can expect you to maybe focus on in the future. It's been a lot of talk around retail media, commerce media, in the market. Just curious to get your thoughts there. And nice to see the announcement of Tania today. Maybe a better question for her when she gets settled in. But we'd love to get your thoughts on what you think her priorities will be when she joined in December.

Yes, great. Thanks, Mark. So let's start first with retail media. Retail media is a big bet for IAS. We currently have deep partnerships with the major players including Amazon and Wal-Mart. And when you take a look at the retail media TAM the combination of those two players represents close to 80% of the total TAM. And then we also have deep partnerships on the advertiser verification side with players like Waymart, Amazon, Shoplift, Walgreens, CVS, Albertsons, and Home Depot. So we have been investing in retail media. We are partnering with all of the major players, both from a partnership and integration and a verification perspective. And we see a ton of Greenfield opportunity to go get when it comes to expanding our retail media partnerships and presence. And then in terms of Tania we are thrilled with the announcement of Tania Secor as our new CFO. I know we were cheering wildly, right before the call when the announcement went out. But just so excited to bring her on board and given that she has 25 years of financial leadership experience. She has deep experience, both in media and technology and also deep at FP&A experience in terms of priorities she will join is in early December, roll up her sleeves, and we will get going on our annual operating plan. We're in the stick of our 2023 planning now. And we will be partnering with her also spending time with all of you and going out and meeting with our key investors and analysts community and obviously spending time with the team.

All right. Thank you, Lisa.

Thank you.

Thank you. At this time, I'd like to turn the call back over to Chief Executive Officer Lisa Utzschneider for closing remarks. Ma'am?

Sure, thanks, everyone for joining today's call. We're pleased to have delivered on our expectations of profitable growth for Q3 and to increase our full year outlook. We're leading the market with credibility and innovation. And we're excited to partner with major platforms including Netflix and TikTok among others. As we move into 2023, we look forward to anticipating our customers’ needs as a trusted independent provider across platforms, formats and geographies. Thank you.