Welcome to the Direct Digital Holdings First Quarter 2022 Earnings Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to your host Brett Milotte, Senior Vice President, Investor Relations, ICR. Mr. Milotte, you may begin.

Good afternoon, everyone, and welcome to Direct Digital Holdings' first quarter 2022 earnings conference call. My name is Brett Milotte, and I'm representing Direct Digital Holdings' Investor Relations from ICR. On today's call are Mark Walker, Chief Executive Officer; and Susan Echard, Chief Financial Officer. The information discussed today is qualified in its entirety by the Form 8-K and accompanying earnings release that’s been filed today by Direct Digital Holdings, which may be accessed through 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'll be a question-and-answer session. Please note the statements made during this call, including financial projections or other statements that are not historical in nature, they constitute forward-looking statements. Such 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 the DRCT's actual results to differ from its historical results and forecasts, including those risks set forth in DRCT's filings with the SEC. You should refer to and carefully consider those for more information. This cautionary statement applies to all forward-looking statements made during this call. Do not place undue reliance on any forward-looking statements. During this call, DRCT is referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most recently comparable GAAP measures is available in the earnings release DRCT filed with its Form 8-K today. I'll now hand over the call to Mark Walker, Chief Executive Officer. Mark?

Thanks, Brett, and good afternoon, everyone. This is our second earnings call as a public company. And I'm incredibly proud to report record financial performance for the first quarter. Before I go into details, I want to provide a brief overview for those of you joining us for the first time. Direct Digital Holdings is a company that leverages technology to assist clients in driving ROI through the buying and selling of media. Our technology platform meets the demands of the underserved middle market and provides access to general multicultural market publishers through our proprietary sell-side platform, Colossus SSP. Our company's business was founded in 2018 through the initial acquisition of Huddled Masses and Colossus SSP, which was the genesis of our end-to-end programmatic platform. Colossus is our sell-side platform technology that enables publishers to sell media to buyers, while Huddled Masses, along with Orange142, is our buy-side platform which enables middle market businesses across the United States to purchase media that drive ROI. In 2020, we acquired Orange142 to further develop and grow our buy-side platform and to expand our industry offerings into education, travel and tourism, financial services, and other verticals. I will begin the call by providing a brief overview of our business strategy and main highlights for the quarter. Finally, I will turn it over to Susan Echard, our CFO, who will share detailed financial results and will reiterate guidance for the full year of 2022. We will be happy to answer your questions at that time. In the first quarter, we continued to capitalize on the significant growth opportunities we're seeing in the market, driven primarily by industry inefficiencies and under-optimized customer opportunities. As digital media has grown and emerging marketing channels continue to gain adoption, including along multicultural lines, media targeting has become more granular. A growing and increasing segment of those audiences is the multicultural audience who has been traditionally underserved in the industry. Both advertisers and publishers face the same challenge, notably seeking new avenues and opportunities to connect with multicultural and general market audiences in the highly engaged media environments, while publishers are producing unique content to attract loyal consumers. The advantage will go to those innovative companies able to directly connect both sides to those audiences and leverage the insights flowing from those connections. We believe being able to go into a programmatic platform and target general market and multicultural audiences at scale across all digital inventory is a major competitive advantage for Direct Digital Holdings. We're happy to report that the success of this strategy is apparent in our first quarter 2022 results. For the first quarter, we generated $11.4 million of revenue, an increase of $5.7 million or 100% higher than the same period in 2021. This was primarily driven by our sell-side advertising segment and the continued increase in buyers, publishers, and impression inventory. We saw steady accelerated growth, and during the first quarter, our SSP platform processed an average of over 90 billion monthly impressions, which is an increase of 93% over the same period last year, and served approximately 69,000 buyers, which is an increase of 87% over last year's performance. Our buy-side customer count grew by over 41% year-over-year, increasing the number of customers we serve from roughly 91 to 128 for the quarter. Our recent growth in the supply-side platform has been driven by a variety of factors, including an increase in buyer-side impressions, which has fueled our unprecedented growth. For the first quarter, we processed approximately 3 billion bid requests, increasing our overall media properties to over 13,000 for the quarter. For the first quarter, we delivered an adjusted EBITDA of $1.1 million, up 113% year-over-year. I'll now hand things over to Susan Echard, our CFO, who's going to walk you through some of our strategic highlights for the quarter.

Thank you, Mark. Moving right into our financial results. As Mark stated, our revenue doubled to $11.4 million in the first quarter of '22, an increase of $5.7 million or 100% over the $5.7 million in the same period of '21. Our sales-side advertising segment grew to $5.5 million for Q1 '22 and contributed $4.7 million of the increase or 540% over the $0.9 million in the same period of '21. This was driven by our continued increase in publishers and impression inventory. Our buy-side advertising segment grew to $5.8 million and contributed $1 million of the increase or 21% over the $4.8 million in the same period of '21. This increase was driven primarily by our land and expand customer spend as well as the addition of net new customers. Gross margins for the first quarter of '22 were approximately 42% compared to around 53% in the same period of '21. These margin results are in line with our margin expectations when the sell-side advertising segment increases the mix of its revenue concentration in certain quarters. Due to the operating leverage of this programmatic business, the higher revenue results in a higher dollar EBITDA contribution by the sell-side segment. Operating income increased to $0.6 million for the first quarter of '22, compared to a loss of approximately $26,000 in the same period of '21. Operating expenses increased to $4.2 million in the first quarter of '22, an increase of $1.2 million over the $3 million of expense in the first quarter of '21. This increase is due to our strategic addition of revenue-generating headcount added to our operating businesses since Q1 of '21, as well as costs associated with being a public company. With our IPO transaction in February, we continue to invest in our infrastructure and public company requirements and we estimate these costs incurred were approximately $500,000 in the quarter related to higher insurance and professional fees. We expect these costs to continue as we build out our infrastructure, improve our systems, and prepare for growth. Net loss for the first quarter was $0.7 million, compared to $0.8 million in the same period of '21, primarily driven by the loss on redemption of the preferred B units of $0.6 million. Adjusted EBITDA increased 113% to $1.1 million for the first quarter, compared to $0.5 million in the first quarter of '21. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $4.4 million, with over $5.9 million in available liquidity. As mentioned earlier, we went public in February, and we raised approximately $15.4 million from our IPO proceeds from the issuance of 2.8 million shares, which represents around a 20% public float, and used these proceeds to pay for transaction costs, as well as the necessary redemption of equity units held by the former owner of Orange142 to take the company public. Now to touch on our guidance. In our last call, we indicated that we expected our full year 2022 revenue to be in the range of $48 million to $52 million or a 31% growth year-over-year at the midpoint. We continue to maintain that growth projection and we'll revisit that guidance as we move further into our year. With our transition to a publicly listed company, we look forward to executing our growth plan with a keen focus on enhancing shareholder value. Additionally, we anticipate continuing to invest in our core business and infrastructure to further support our rapid organic growth and our inorganic growth strategies. We continue to focus on our top-line growth, and we also remain disciplined in our goal of increasing adjusted EBITDA and positive cash flow. Now I'd like to turn it back over to Mark for some closing comments.

Thank you, Susan, and thank you everyone for joining. We sincerely appreciate your interest in Direct Digital Holdings and the fast-growing business we're continuing to build here.

We are now going to move on to some questions.

First question comes from Daniel Kurnos from Benchmark.

Obviously nice start to the year here. Maybe just starting on the buy-side, obviously, you guys had some surprising traction, maybe not to you, but to us in terms of both Q4, now Q1 growing over 20%. I am curious in sort of what's going on out there right now? It feels like local is actually doing very well and experiential, and it feels like that was a tailwind for you guys before. Just curious, if part of that, beyond even Pigeon Forge, is what's driving kind of the results and what you're seeing out there? And maybe just some higher-level thoughts on how buy-side might perform in the coming quarters?

Yes, absolutely. Hey, thanks, Dan, for the question. What we're seeing in the marketplace is actually some of those tailwinds continue through Q1. The DMO space or destination marketing space, because of what we're seeing in the overall marketplace as it relates to travel, we are seeing positive results with our clients making investments to try to drive some of the local and regional travel vacationers into their regions. The fact that we have 55 different DMOs that we work with directly, we are seeing that those tailwinds are helping us with our business, and we're looking forward to continue to work with them in the immediate future.

And then, just on the sell-side, I mean how much more to stay as far as just in terms of the growth rate, continued momentum, I mean Q1 not being that far off from Q4, given seasonality is pretty impressive. We've seen some nice traction, and frankly, even some nice leverage, I think, even looking at COGS. So if we can just kind of get a sense for the momentum there, we still think we've set a new floor here. I know there's going to be some noise in the marketplace, especially as we move. The entire marketplace is still kind of trying to figure out how to move towards contextual given all the uncertainty around privacy. So just any incremental thoughts on: A, the flow-through benefit that you saw, I think Susan called it out a little bit in the quarter; and then B, just kind of where you are from sort of publisher conversations, and how we should think that momentum might continue to bounce here?

Yes. The momentum we observed from the end of last year to the first quarter of this year in our sell-side business is driven by our straightforward strategy. Firstly, we have a strong leadership team in place. Our strategy is simple: we aim to increase the number of publishers and the buyers engaging with our marketplace. We have received a positive response from buyers for a few reasons. One reason is that our technology ranks in the top five according to the media MAPS source scorecard, which fosters trust within the marketplace and among those who work directly with us. Additionally, our high concentration of multicultural publishers gives us leverage, representing around 7 billion impressions in this space, which allows buyers to access both general and multicultural audiences in one place. Finally, we are making significant investments, including transitioning our servers to HPE GreenLake, which we believe will yield future benefits. We are confident that we have the right strategy and team to continue growing this segment of our business, and we are very optimistic about the results we've achieved so far.

If I could just press you just a little bit more on the publisher comment, I think that's probably still an area of low-hanging fruit and given where you guys have a pretty good track record there, any updated thoughts on how quickly or any timing, any events or anything that we can think about around publisher growth here?

Yes. One thing that we've seen in the past is when we add new publishers into our ecosystem or to our marketplace, we definitely have seen growth occur from that. And we are very excited to continue adding more publishers into our marketplace over the course of this year. And so we're going to maintain that strategy and continue to add those publishers into our marketplace over the next year.

Our next question comes from Darren Aftahi from ROTH Capital Partners.

I was going to ask, what you've kind of seen quarter to date in your sell-side business. Has that momentum continued? And in the backdrop of the sort of unique macro that we're in right now, have you seen any kind of headwinds impact that business? And I guess as a sub-bullet to that question, can you kind of speak to the Q1 performance in terms of growth? And then how we can bridge that to 31% growth, I think, at the midpoint of the year, and just is that more conservatism, kind of line of sight? Just any sort of color would be helpful.

Yes, definitely. Regarding our current observations, we won’t provide forward guidance for the upcoming quarters. However, what we experienced in Q1 and Q4 shows a positive trend based on our established model, which involves integrating new publishers, buyers, and DSPs. We will maintain this strategy as the marketplace has been favorable to us. Publishers are eager to collaborate directly with us due to the buying community we've built, and buyers are drawn to our strong relationships with various publishers, particularly in multicultural audiences, along with the trust in our technology stack to deliver quality inventory. We have been following this strategy and believe it has been effective so far, and we intend to carry it through the rest of the year. Concerning Q1 and our sell-side platform, we see the same benefits from our efforts so far. Typically, Q1 is our slowest quarter, aligned with general digital marketing trends, and we expect that to continue this year.

Just a couple more if I may. I know seasonally the buy-side picks up in Q2 with your DMOs. You had a pretty strong Q2 last year. I was kind of curious about any kind of general thoughts relative to last year's performance in that business?

Yes, on the buy-side of our business when it comes to Q1 to Q2, usually on our buy-side because of the way media comes in specifically in the DMO space, which we have a good representation there, it's really kind of spread out between Q2 and Q3. I would say what you saw last year where we had a high concentration in Q2, you could see that same level, and the way we look at our business, it really spans over Q2 and Q3. And that really just depends on what's going on in the marketplace within those specific regions and the relationships there. So we look at it holistically between Q2 and Q3, and we see no reason for us to veer from that perspective for this year, in 2022.

Sorry, one more. So in terms of the step up in costs in the quarter, I know you guys went public inter-quarter in Q1. So two things there. In terms of hiring the plan year-to-date, kind of where do you stand? And then two, maybe one for Susan, how much of a step up in costs are we going to see on a normalized basis as a result of you guys being public for a full quarter in Q2 versus half in Q1?

Yes, Darren. We're still evaluating that. As you know, we had a little bit higher cost in Q1 over Q1 of the prior year. A lot of that is, of course, legal audit fees of being a public company. From a hiring perspective, we have hired quite a few people since Q1, which translated into our results for the quarter. We, of course, still have hiring to do this year, that will set us up nicely for 2023 targets. So all in all, we can expect to have higher costs. I'll quantify those as we get on these calls to help you understand an apples-to-apples comparison. But right now, it's probably going to be in a similar range as we move through the year and continue to invest in additional software platforms, professional fees and just general overall normal costs of being a public company doing these calls and filings.

And at this time, there appears to be no further questions.

Alright. Well, thank you very much for your time, and we look forward to speaking to you next quarter. Thank you.

This concludes today's conference call. Thank you for attending.