Good day, everyone, and welcome to the Direct Digital Holdings Third Quarter 2024 Earnings Call. At this time, I would like to hand the call over to Mr. Brett Milotte. Please go ahead, sir..

Good afternoon, everyone, and welcome to Direct Digital Holdings third quarter earnings conference call. My name is Brett Milotte, and I'm representing Direct Digital Holdings from ICR. On today's call are Direct Digital Holdings Chairman and Chief Executive Officer, Mark Walker; and Chief Financial Officer, Diana Diaz.

Information discussed today is qualified in its entirety with the Form 10-Q and accompanying earnings release, which will be filed by Direct Digital Holdings, which may be accessed at the SEC's website and DRCT's website. Today's call is also being webcast, and a replay will be posted to DRCT's Investor Relations website.

Immediately following the speakers' presentation, there will be a question-and-answer session. Please note that the statements made during the call, including financial projections or other statements that are not historical in nature may constitute forward-looking statements.

These statements are made on the basis of DRCT's views and assumptions regarding future events and business performance at the time they are made, and we do not undertake any obligation to update these statements.

Forward-looking statements are subject to risks, which could cause DRCT's actual results to differ from its historical results and forecasts, including those risks set forth in DRCT's filings at the SEC, and you should refer to these for more information. This cautionary statement applies to all forward-looking statements made during the call.

During this call, DRCT will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings release that DRCT will file in its Form 10-Q.

I will now hand the call over to Mark Walker, Chief Executive Officer.

Mark?.

Thanks, Brett, and thank you to everyone joining our third quarter earnings call. We are pleased to return to our normal reporting cadence after the submission of our FY 2023 Q1 2024 and Q2 2024 filings last month. It goes without saying that it has been a difficult few quarters for Direct Digital Holdings.

On this call, we believe it would be helpful to provide a quick recap of the past few months, the current status of our company and why we're excited for the path and growth opportunities ahead.

In late March this year, Direct Digital Holdings released its Q4 and full year results of 2023, announcing a top-line revenue guidance target for 2024 of $170 million to $190 million, representing 15% year-over-year growth at the midpoint.

By early May, Direct Digital Holdings supply side platform, Colossus SSP revenues were pacing ahead of the previously stated guidance, and the company was well on its way to record quarterly results.

However, in mid-May 2024, Adalytics Research LLC, a for-profit digital advertising analytics firm run by one individual, published a false and defamatory blog post against Colossus SSP. To be clear, this is a false blog post that we have refuted in both the marketplace and in court filings, and the post has been disproven by top experts.

However, because of the blog post, Direct Digital Holdings had an unexpected business disruption among its partners, advertisers and clients, including a major customer pausing its connection with our supply side platform, Colossus SSP.

The connection has now resumed; however, volumes have not yet returned to pre-pause levels and this has caused a meaningful reduction in our revenues. Adalytics' defamatory statements have impacted the business and caused the need to revise downward guidance for FY 2024.

In May, we filed a defamation lawsuit, which we will continue to vigorously defend in court. However, DDH has been successful in turning on the paused customers and volumes through our sell-side platform, our revenue is continuously increasing.

Throughout these months, we have continued working with our multinational Holdco agencies, our Fortune 500 brand partners, and demand-side partners to resume business, which we already have. While we are confident, we will return the company to normalcy, it will take time to rebuild.

Consequently, the impact was felt in the second and third quarter of 2024. And in Q3, Direct Digital Holdings revenue was $9.1 million, a decrease of $50.4 million or an 85% decline compared to the $59.5 million in the same period of 2023.

Colossus SSP saw revenue fall to $2.2 million for Q3 2024 compared to $51.6 million in the same period of 2023, a 96% decrease year-over-year. On our buy side, we saw revenue of $6.9 million compared to $7.9 million for the same period of 2023, a 12% year-over-year decline.

For the third quarter 2024, gross profit dollars were $3.5 million compared to $11.8 million for the third quarter of 2023, a decrease of 70%. Consolidated operating loss for the quarter was $3.7 million compared to operating income of $4.5 million for the same period, a decrease of $8.2 million or 181% year-over-year.

Despite a dramatic impact to our revenue and incurring non-recurring costs of $1.1 million related to the auditor change, we only saw a decrease in operating income of $8.2 million and a decrease in adjusted EBITDA of $8.3 million in third quarter compared to the same period of 2023.

This is a testament to our cost-saving initiatives and the company's operating structure, which is able to flex and adapt to shocks across our top-line.

In addition, over the past few months, we have also implemented an optimization strategy, diversifying our revenue and conducted a cost savings review, which will result in a more diversified and efficient business model.

As part of the optimization strategy, we announced last month that Direct Digital Holdings entered into a $20 million equity reserve facility with New Circle Principal Investments, an affiliate of New Circle Capital, providing our company access to a fresh source of capital, enhancing our financial liquidity and strengthening our shareholder equity, enabling the expansion of our technology and strategic capabilities, benefiting both publishers and advertisers.

Earlier today, we were pleased to announce the launch of Colossus Connections, an aggressive initiative we were already executing to accelerate our direct integration efforts with leading demand-side platforms.

This initiative will optimize supply path efficiency for advertisers, unlocking access to more potential demand and revenue and will also save them money.

While this has always been a priority of Direct Digital Holdings, in recent months, we have made impressive inroads and are excited to share that we have already signed up two of the leading DSP partners in the marketplace expected to go live later in 2025.

On the demand side, we recently announced the unification of Direct Digital Holdings buy-side divisions, Orange 142 and Huddled Masses.

This will enable the delivery of new capabilities, particularly in helping clients navigate emerging technologies such as artificial intelligence and machine learning as well as emerging high-growth channels, such as marketing-enabled services, connected TV, social media and retail media.

Small and midsized clients will be a key focus for the combined entity as the clients are increasingly shifting advertising budgets to digital and require support to navigate its complexities and optimize their ad spend. Currently, the company serves hundreds of small and midsized clients, enabling over 2,000 campaigns each year.

Before our CFO, Diana Diaz, goes into details on the third quarter, I want to briefly touch on guidance.

As a result of the prior events and the subsequent recalibration of our business, we are providing full year revenue guidance of $60 million to $70 million for FY 2024 and full year revenue guidance of $90 million to $110 million for FY 2025 as we rebuild to previous levels.

With that, I would like to hand over the call to Diana Diaz to discuss our results in more detail.

Diana?.

Thank you, Mark, and thanks, everyone, for joining. For the third quarter of 2024, revenue was $9.1 million, a decrease of $50.4 million or an 85% decline compared to the $59.5 million in the same period of 2023.

As Mark detailed, Colossus SSP saw revenue fall to $2.2 million for quarter three of 2024 compared to $51.6 million in the same period of last year, a 96% decrease year-over-year. On our buy side, Orange 142 saw revenue of $6.9 million compared to $7.9 million in the same period of 2023, which was a 12% year-over-year decline.

For the third quarter of 2024, gross profit dollars were $3.5 million compared to $11.8 million for the third quarter of 2023, a decrease of 70%. Gross margins for the third quarter were approximately 39% compared to 23% in the same period of last year.

Gross margins were notably higher due to our buy side making proportionately more of our business mix this quarter. Operating expenses were $7.2 million in the third quarter of 2024 or a decrease of $100,000 over the $7.3 million of expenses in the third quarter of last year.

Consolidated operating loss for the third quarter was $3.7 million compared to operating income of $4.5 million in the same period of 2023. This is a decrease of $8.2 million or 181% year-over-year.

We also saw a net loss of $6.4 million in the third quarter compared to net income of $3.4 million in the same period of 2023 due to lower operating income. For the third quarter, adjusted EBITDA was a loss of $2.9 million, a 153% decrease from the adjusted EBITDA income of $5.4 million in quarter three of 2023. Now, turning to the balance sheet.

We ended the quarter with cash and cash equivalents of $4.1 million compared to $5.1 million as of the end of December 31, 2023. As Mark mentioned, to accelerate our growth plans, in October, we entered into a $20 million equity reserve facility with New Circle Principal Investments.

Under the agreement, at our sole election, New Circle will purchase from time to time shares of our Class A common stock up to an aggregate of $20 million over a period of 36 months, subject to the conditions in the agreement.

We plan on using proceeds of these sales to reduce debt obligations, strengthen the overall balance sheet and drive key growth initiatives. Turning now to guidance.

As a result of recent events and the subsequent recalibration of our business that Mark mentioned earlier, we are providing full year revenue guidance of $60 million to $70 million for fiscal year 2024 and full year revenue guidance of $90 million to $110 million for fiscal year 2025.

And with that, I'd like to turn it back over to Mark for some closing comments..

Thank you, Diana, and thank you, everyone, for joining us today. We look forward to returning to our normal reporting cadence and continuing to provide long-term value for our shareholders through best-in-class advertising solutions. With that stated, we will now take some questions from the analysts. Operator, please open the line..

Thank you. [Operator Instructions] We'll go first to Dan Kurnos of The Benchmark Company..

Thanks. Good afternoon. Welcome back. Mark, I guess, talk through confidence in the marketplace with you guys right now. Obviously, you went through quite a tumultuous period, the auditor, the Adalytics report. You clearly have defended yourself in court.

A lot of advertisers and publishers are -- can be wary when there's noise, and you guys have gotten past most of it. So, just love to get a sense of how the conversations are going as you kind of rebuild volumes and/or trust in the marketplace..

Yeah, Dan. Hey, number one, great to hear from you. It's been a long time. In regards to confidence in the marketplace, we look at it from two fronts.

One, I think in the financial markets, I think getting BDO as our auditor, quickly and efficiently in getting back to public filings in time for Q3, I have to tip my hat off to our internal team and the level of work that they were able to do along with BDO and being able to get the filings done for us to be able to have this Q3 call.

I think that restores confidence in the marketplace as it relates to us as a company and also in regards to our public filings.

On the second front, actually in the marketplace, the feedback that we received in the marketplace with our major Holdco companies and also with different brands that we work directly with has been very favorable on the buy side as well as the sell side.

In regards to the sell-side business and Colossus business, there was a lot of noise in the marketplace. However, we feel like we've definitely been able to overcome that. We're seeing buying patterns starting to pick up momentum and growth month-over-month.

So, now, it's just really about the rebuild and just continuing to deliver every single day for our clients and for our partners and making sure that we are responding efficiently and effectively to them in 24 to 48 hours whenever there's a request. And so, we're starting to see that type of traction.

Many of our partners who are partners before all of this began are -- have stuck bias and have shown vote of confidence, and we're seeing spend levels starting to creep up incrementally every single month..

Got it. That's a helpful framework. Thank you. And you've talked about a diversification strategy. I remember before all this started, we were talking about kind of a different go-to-market that had resulted in a forecast revenue reduction, but we were talking through IDs. Now you guys are leaning into third-party DSPs a little bit stronger.

You've got two signs so far. Just help us think through -- because the ecosystem is clearly evolved since you've gone through this. So, just help us think through the opportunity sets there.

And relative to where you were before, either how long it takes to get back or what the TAM looks like relative to the marketplace that you were attacking before?.

Yes. I think the TAM looks relatively the same. I don't think the TAM actually changes. I think it's really the mechanism of delivery and that's what we're focused in on. We started the diversification strategy, and I'm going to talk about both sides of our business on our buy side as well as our sell side. I'm going to lean in on the buy side first.

On the buy-side business, we've had a strong leaning into what I would call your education sectors, also your travel and tourism sectors, and then some other ancillary sectors as well.

We're looking at different types of markets that we can go after in that space to increase our customer base, which we're pretty confident about, and we feel like we have a healthy pipeline built up that we'll probably be going into more detail when we get into Q1 of 2025 that we'll be discussing at that point.

As it relates to the sell-side business, we've always had multiple connections. And what we're looking at is expanding those connections even more and working directly with our agency partners and our brand partners to leverage those connections in order to buy the supply and publishers that we actually have access to.

And so, just like we were before, we're focused in on that strategy, and we're just bringing more attention and light to it to show that we're diversifying on the buy side as well as our sell side of our business. And we feel like that's going to be very profound for us to continue to grow the business on the foreseeable future..

And as publishers come back online, Mark, how do you view the hot topic this day and age is audience curation, and it's seemingly more and more done on the sell side. I know that you're just rebuilding your volume. So, it's probably a bit early for me to be asking, but you just talked about different mechanism of delivery.

So, I'm curious how you view that opportunity..

Yeah. As you said, audience curation is definitely a hot topic. And I think you'll -- in probably very short order, you'll start seeing us bring more attention to that, roughly around Q1 of 2024. We believe that, that's a very important segment for us to be a part of and for us to attack.

We think that there are opportunities for us to leverage different partners to help with that curation. And so, I think you'll hear about more on that front in the upcoming future from us..

Perfect. And just so I don't hog, I'll ask one last question just on your optimization within the company. Clearly, rebuilding volume is going to take a while to get back for adjusted EBITDA to turn positive.

How do you think about running a bit leaner, understanding that you also have to lean into growth? When will we get more color on kind of what the cost savings plan ultimately yields?.

Yeah. Actually, for that one, I'm actually going to turn that one over to Diana to answer for you.

Diana, do you want to talk about our cost optimization?.

Sure. We talked about this a bit in our public filings. We looked at our staffing in early July. We made some reductions in staff. We paused hiring, which we had thought we were going to increase our staffing quite a bit. And then, we looked at some other areas that were more discretionary spend to reduce in the short term while we rebuilt.

And we knew we were going to have some additional costs related to compliance during the summer, and we did. We incurred those costs. So, we tried to compensate for that, and we're looking to remain lean as we rebuild over the next year..

And I think if you remember, you look at how we first came out to market, we were able to be one of probably -- one of the most efficient ad tech companies on a revenue per employee. So, we really look to manage to that number.

And I think even at the levels that we gave last year -- for 2024 -- the remainder of this year, but really into 2025, I think you'll see we'll stay back in alignment with those metrics..

Got it. Super helpful. Thank you. And yes, Mark, good to talk with you again in the public light..

Absolutely..

Next, we'll hear from Michael Kupinski, NOBLE Capital Markets..

Thank you, and welcome back again from me as well. A couple of questions here. I was wondering, obviously, you were in the process of building up your infrastructure to scale up, particularly on the sell side. And I was just wondering if you have the ability regarding servers and so forth to scale that down.

I just wanted to know what the fixed cost ramifications might be in terms of the business that you have with them..

Yeah. One of the things that I think made our business model very unique is the ability that we have to scale up and scale down based upon demand and need. I think that's one of the reasons why in comparison to some of the other sell-side platforms that you've seen who have a heavy amount of structured fixed costs.

If you look at ours, we actually are pretty flexible in how we can scale up and down. That gave us the ability in July, August, September timeframe to actually adjust our cost structure so that we can have a lower OpEx for us to get to profitability faster as it relates to the sell-side business.

And so, the way that our CTO structured the business really served us very well, and I think it is one of the reasons why you see us here today, and we're able to grow into 2025, for next year..

Got you. And hopefully, as you kind of build and look towards 2025 and that revenue ramp, hopefully, you can build back better. And I was just wondering if you can give us a sense of that revenue guide.

Is it largely rebuilding the volume with the one client, or are you anticipating that there will be broadening of the revenue outside of that particular client? Just kind of give us a sense of the overall advertising outlook that you're anticipating for 2025?.

Yeah. I think it's actually going to be both. I think diversification on our buy side of our business is important to us. I think you're going to see us being able to continue to grow the buy-side business, which will allow us to drop more EBITDA to the bottom-line and operating cash to the bottom-line.

And then, also on the buy side of our business, you're going to see diversification on that front as well, so that you can see us continue to build that business and growing. So, diversification is the theme of 2025 that we're focusing on.

And I think in some of the initiatives we're going to be announcing after Q1, you'll hear us talking more about how we're achieving those results..

And given the potential mix in revenue as you kind of looked towards 2025, you mentioned about buy side and having better margins, obviously. I was just wondering can you give us a sense of what your thoughts are on the expense side and whether or not you will be adjusted EBITDA positive in 2025.

Can you just kind of give us your general thoughts about that?.

Yeah, I'm going to turn that over to Diana..

Okay. Thanks. So, we'll start to see the EBITDA increasing through the quarters as the revenue builds. I think if you look to 2022 and the revenue structure and the revenue growth pattern, that's kind of what to expect. And we will see the EBITDA increasing from quarter-to-quarter as the volume increases..

Terrific. Okay. Well, that's all I have for now. Good luck with you, guys. Best of luck..

Thanks, Mike..

Thanks, Mike..

[Operator Instructions]. And at this time, there are no further questions..

All right. Thank you very much, and looking forward to talking to everyone later..

And once again, everyone, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect..