Good day, everyone, and welcome to the Direct Digital Holdings Fourth Quarter and Full Year 2023 Earnings Call. Today's call is being recorded. And all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I will now turn the conference over to Brett Milotte, VP of Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to Direct Digital Holdings fourth quarter and full year 2023 earnings conference call. My name is Brett Milotte, and I'm representing Direct Digital Holdings. On today's call, our Direct Digital Holdings Chairman and Chief Executive Officer, Mark Walker; and Chief Financial Officer, Diana Diaz, will be presenting information. Information discussed today is qualified in its entirety by the Form 8-K and accompanying earnings release, which has been filed today by Direct Digital Holdings and 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 this 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 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 on this call. This cautionary statement applies to all forward-looking statements made during this 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 filed in its Form 8-K today. I will now hand over the conference to Mark Walker, Chief Executive Officer.

Thanks, Brett, and thank you to everyone joining our fourth quarter and full year 2023 earnings call. 2023 was an inflection point for our company, and I'm incredibly proud to report our strong financial results and operational performance for the year, as we're now reporting our eighth quarter of double-digit revenue growth. As we discussed in previous earnings calls, we continue to make significant investments in Direct Digital Holdings' technology stack, advertising platform, and operational structure throughout 2023. Our strong technology partnerships and our overarching business strategy have enabled us to meet a growing number of customers' demands and further enhance the capabilities of our technology platforms. As a result, our open marketplace platform continues to benefit as middle-market businesses seek our differentiated and thoughtful approach to advertising solutions. Before we get into more detail about our fourth quarter, I'd like to begin with a quick review of our year. We achieved total full-year revenue of $157.1 million or 76% growth over the $89.4 million achieved in 2022, at 29% above our initial 2023 guidance. We also achieved adjusted EBITDA of $11.3 million, 11% higher than the $10.2 million adjusted EBITDA for the same period in 2022. In 2023, we had a number of achievements, a few of which I wanted to highlight today as we're proud of how our team was able to grow the overall business. Firstly, we announced our new collaboration with Amazon Publisher Services with our Colossus SSP division integrated with Amazon's Transparent Ad Marketplace, or TAM. The integration allowed Colossus SSP's roster of publishers to tap into the benefits of TAM and serve beside header bidding solutions that offer a direct auction approach. We also announced our partnership with HPE GreenLake, providing an edge to cloud platform to build a highly reliable, scalable, and secure production environment across our technology stack. Throughout the year, we had significant growth on the buy side with strategic wins that grew our overall client portfolio by 7% and increased revenue per customer by 10% for the year. We began the transition to a cookie-less environment and saw the integration rollout of our alternative ID solutions. Additionally, we launched our AI yield management tool, which allows us to achieve good efficiency and revenue optimization and we continued the transition of DDH shared services function for increased operational scale and support. While we saw strong growth in Q4 2023 year-over-year with revenue of $41 million, which was 33% higher than the same period last year, we were down sequentially from Q3, as Q4 revenue was shy of our revised guidance due to two primary factors. In the fourth quarter, based upon value chain changes, it became clear that cookie deprecation would begin in Q1 2024. In addition, we noted softer demand compared to our revised guidance. As such, our team proactively began our transition off of cookies for media transactions. As a result, we believe our strategic decision to accelerate our investments has positioned us well for the future and ahead of our peers. In addition, in Q4, we completed our beta testing on our original schedule for several strategic publishers, including Dotdash Meredith, Weather.com, NBCU, and Arete Group, which would have increased the overall pressure count. These strategic publishers have all been launched in Q1 of 2024. We continue to prioritize long-term successes over short-term gains and we are confident that the strategic measures and internal calibrations made in Q4 2023 will position the company to build on the successes of 2023 and continue revenue growth and market share gains in 2024. Our fourth quarter 2023 adjusted EBITDA of $2.3 million was likewise impacted by the revenue challenges during the quarter. Our supply side platform continues to increase publisher partner engagements along with increases in our impression inventory. In the fourth quarter, our sell-side advertising segment processed approximately 400 billion impressions a month, an increase of 201% over the same period of 2022, with close to 1 trillion monthly bid requests for the quarter. Furthermore, the company's sell-side advertising platforms received over 83 billion bid responses in the fourth quarter of 2023, an increase of 367% over the same period of 2022. Our buyers within the platform did see some degradation due to our platform transition, decreasing by about 50% to 84,000 buyers compared to last year's fourth quarter. However, our revenue per buyer increased by 133% to $397 per customer over the same period. On the buy side, these businesses served approximately 234 customers, an increase of 7% compared to the same period of 2022, with buy-side revenue per customer consistent with the same period last year. As it relates to 2024, our industry outlook and point of view is the following. We believe that the middle market in the digital ad tech space remains fragmented and consolidation opportunities exist. We will continue to evaluate those opportunities for accretive platform integration, value creation, and strategic fit. We anticipate cookie deprecation will accelerate market consolidation of opportunistic investments. For our buy-side business, the introduction of AI and complex market dynamics will accelerate the market transition in digital media from traditional media. This transition will continue to present opportunities to expand our footprint and gain market share for tech-enabled services. In addition, alternative IDs will take on more importance in the industry as well as a strong understanding of the impact of the privacy sandbox on campaign performance reporting and delivery. We also believe that the bifurcation in the marketplace between alternative ID, open CPM marketplaces, and wall gardens will continue to exist along with continuing market tension between DSP and SSP relationships. We expect the streamlining of the value chain, aiming to build strategic relationships with a focus on agency and brand partnerships to continue to be the cornerstone of our strategy. Finally, AI tools will continue to proliferate through the value chain, allowing companies to leverage these tools and offer capabilities across both of our business segments, increasing ROI and enhancing performance. For 2024, we're providing revenue guidance for FY 2024 of $170 million to $190 million, representing an increase of 50% over last year's performance at the midpoint. I will now hand things over to our CFO, Diana Diaz, who will walk through some of the financial highlights in further detail.

Thank you, Mark. As Mark stated, our revenue increased to $41 million in the fourth quarter of 2023, an increase of $10.3 million or 33% over the $30.7 million in the same period of last year. We finished the year with total revenue of $157.1 million, which was about 8% below the low point of our guidance range, but was an increase of $67.8 million or 76% growth over the $89.4 million of revenue achieved in 2022. As Mark mentioned, revenue for the fourth quarter of 2023 was lower than anticipated due to lower-than-expected demand, a delay in the release of Tier 1 publishers from beta testing, and proactive efforts by the company during the fourth quarter to accelerate the transition towards a cookie-less advertising platform. Our sell-side advertising segment ended the year with a strong fourth quarter and drove the majority of the increase over the prior year. Colossus SSP grew to $33.4 million for Q4 and contributed $9.8 million of the increase, or 41% over the $23.6 million of sell-side revenue in the same period of last year. For the full year, our sell-side segment achieved $122.4 million in revenue, an increase of $52.4 million, or 104% of growth over the $60 million in sell-side revenue in 2022. For the fourth quarter, our buy-side businesses, Orange142 and Huddled Masses, grew by 7% year-over-year, contributing $500,000 of the overall increase, ending the quarter with $7.6 million in revenue compared to $7.1 million in the same period of 2022. For the full year, our buy-side segment grew to $34.7 million, an increase of $5.3 million or 18% over the $29.3 million of buy-side revenue in 2022. For the fourth quarter of 2023, gross profit dollars were $9.3 million compared to $8.7 million for the fourth quarter of 2022, an increase of about $600,000 due to higher revenue. Gross margins for the fourth quarter of 2023 were approximately 23% compared to 28% in the same period of last year. Gross profit dollars for the year were $37.6 million compared to $29.3 million for 2022, which represents an increase of $8.3 million from higher revenue. Gross margin for 2023 was approximately 24% compared to approximately 33% for 2022. These margin results align with our margin expectations given the accelerated growth in our sell-side advertising segment. Our faster-growing sell-side segment has higher costs of revenue compared to our buy-side segment. We also saw higher sell-side fixed costs related to an increase in server capacity by $1.6 million for 2023 to support our growth. Operating expenses increased to $9.3 million in the fourth quarter of 2023, an increase of $3 million over the $6.3 million of expenses in the fourth quarter of last year. For the full year 2023, operating expenses were $30.9 million compared to $21.3 million in 2022, an increase of $9.6 million. Increases in compensation, taxes, and benefits expenses of $600,000 for the fourth quarter and $3.6 million for the year were primarily driven by headcount additions throughout 2023, mainly in our operations area to support our growth as well as in shared services. The increases in general and administrative costs of $2.5 million for the fourth quarter and $6 million for the year were due to expenses associated with supporting our growth and ongoing marketing initiatives, as well as our continued transition to operating as a public company beginning in February 2022. We expect to continue investing in automation and additional headcount to support sales initiatives. Due to the aforementioned revenue and operating expense impacts, we saw a net loss of $1.2 million in the fourth quarter compared to net income of $1.4 million in the same period of 2022. For the full year, net income was $2 million in 2023 compared to net income of $4.2 million in 2022. For the fourth quarter, adjusted EBITDA was $2.3 million compared to adjusted EBITDA of $3.1 million for the fourth quarter of last year. For the full year, adjusted EBITDA grew to $11.3 million, or 11% higher than the $10.2 million adjusted EBITDA for the full year 2022. Now turning to the balance sheet. We ended the year with cash and cash equivalents of $5.1 million, an increase of $1.1 million over the $4 million we had as of the end of 2022. Total cash plus our accounts receivable balance as of year-end was $42.3 million compared to $30.4 million at the end of 2022. During the fourth quarter of 2023, we retired all outstanding warrants issued in connection with the company's IPO, improving our liquidity by securing a revolving credit facility with a capacity of $10 million and up to $5 million of uncommitted incremental capacity. We expect to continue taking steps in 2024 to improve liquidity in our balance sheet to support our business and facilitate inorganic growth opportunities. Now, let's touch on guidance. Our guidance is subject to various factors that may change over the year. Particularly, it assumes that U.S. economic conditions do not materially deteriorate or that the economy does not otherwise experience significantly reduced advertiser demand. We plan to offer annual guidance and update it throughout the year. Currently, we expect fiscal 2024 revenue to be in the range of $170 million to $190 million, or 15% growth year-over-year at the midpoint. We are off to a good start for 2024. Based on preliminary results through mid-March 2024, we believe sell-side revenue is on pace to grow at a rate of 10% to 20% over the prior year's first quarter. And now I'd like to turn it back over to Mark for some closing comments.

Thank you, Diana, and thank you to everyone for joining. As always, we appreciate your interest in Direct Digital Holdings and are looking forward to your questions. Operator, please open up the line.

Thank you. And we'll take our first question from Darren Aftahi with ROTH.

Hey, everyone. Good afternoon. I appreciate you taking my questions. Mark, regarding the three points you mentioned for the fourth quarter—the reduced demand, the pilots still being in beta for the Tier 1 publishers, and the proactive transition to cookie-less technology—I’m interested to know how these factors affected your quarter compared to your initial guidance shared on November 9. Also, as we head into 2024, I understand that some of those publishers have come out of beta. How have these issues evolved since the fourth quarter? Thanks.

Yeah. Thanks for the question, Darren. I think a couple of things. One, I will say that I think our transition to dealing with cookie deprecation was an important strategic move for us. What we're seeing and what we started to see in Q4 was that cookie deprecation was definitely occurring even after it had been delayed for four years. Switching over a platform to manage and deal with that did take a lot of effort, and we did not anticipate that move until we got into 2024. But once we began seeing the transition in the marketplace and what we started hearing in the industry, we felt like it was prudent to make that transition in Q4 rather than wait until 2024 before we started. Again, looking at long-term benefits versus short-term gains. The second aspect is, if you look at the number of impressions that we delivered between Q3 and Q4 concerning our SSP, it was roughly about 400 billion for each of those quarters. Our historical growth has relied on increasing impressions introduced into the marketplace. Thus, our beta delay was critical to ensure maintaining growth, especially given the transition we were making with cookie deprecation. Q4, despite performing at 33% year-over-year growth, didn't meet expectations mainly due to those two factors, as the impression count is crucial for maintaining growth. In Q1 of 2024, after we began making our move to alternative IDs and our proactive measures for cookie deprecation, we're seeing 10% to 20% growth regarding our SSP in comparison to last year's performance, which we feel is a confirmation that we made the right decision.

Can you provide any insights on the growth trends? I know January tends to be a challenging month for digital advertising, but has there been an improvement since you transitioned to the new platform and started utilizing alternative IDs? Is that contributing to the growth? Are the new publishers graduating from beta playing a role in this? Additionally, you mentioned softer demand; is that demand decrease related to cookie issues or is it something separate?

Yeah. I would say the softer demand was a combination of the transition we saw with switching from cookies due to the platform impact we experienced in Q4. We also noticed it was lighter going into the holiday season. So it was a combination of both as it relates to Q3. We attribute the increase in performance in Q4 to the additional publishers we added that were delayed in getting out of beta in Q4 and were moved to Q1, coupled with the transitions to the alternative IDs, which are impacting the level of transactions being generated.

We also see the benefits of the technology changes that we made in the second half of 2023 as we compare the first quarter to last year.

Yes, that is correct.

We'll take our next question from Dan Kurnos with The Benchmark Company.

Mark, can we discuss that for a moment? The first quarter sell-side guide is lower than the second quarter of last year. It seems like there might be some revenue you've decided won't continue. I don't want to assume your thoughts, but clearly, the third quarter was strong, and we had significant momentum with partner wins and impressive growth. Your guidance for the year suggests an increase in sell-side growth as the year progresses, assuming buy-side growth is around 10%, though that could be incorrect. If you could clarify the buy-side and sell-side guidance for next year, that would be helpful. I'm trying to understand the organic choices you've made in what we might call a reset as we approach cookie deprecation and how much of that volume you expect to return to the platform in the latter half of the year.

Yeah, absolutely. So I'll parse this out by buy-side first, and then I'll go into sell-side. For the buy side, we're still maintaining the anticipated growth of 10% to 20% year-over-year, which has historically been our performance as we enter our third year of being public. Regarding the sell side, we think two factors are influencing our projections or guidance. Firstly, we're expecting the growth curve to remain consistent with our historical trajectory, as it has been for the last four years with Q1 being the lowest and Q4 being the highest outside of last year's anomaly. We're seeing 10% to 20% growth year-over-year in our sell-side platform, attributed to those two factors—the transition off cookies and the addition of new publishers that have made significant contributions to our growth. Lastly, as Diana pointed out, there were the platform changes we made last year, which increased our capacity to handle transactions. Without looking too far into the future, we are anticipating the same level of growth and what we're seeing in Q1 is a 10% to 20% year-over-year increase, aiming to achieve our recommended guidance for the year.

Okay. And how should we think about SHE Media, FreeWheel, and all these other things that you guys have added since we've talked before about getting deeper into video? I know self-service has been on the table but not necessarily where you want to go. How do we think about the new initiatives and some of the announcements you guys have made recently?

We expect to see these impacts in Q2 and Q3, as these new initiatives are being set into stage and moving forward into monetization. Our team is actively getting new publishers on board, specifically with SHE Media, FreeWheel, and others to drive monetization in Q2 and Q3.

One for you, Diana, just to finish up. How should we think about—on this reset, how do we think about margins? Do we expect margin expansion this year? How do we think about fixed leverage versus variable spending to drive growth?

I think we'll be about in the same range on margins by segment. It's just a matter of the mix of sell-side versus buy-side. We had some hosting costs that we saw in the last three quarters of 2023. Those will continue in the first quarter, but should taper off after that.

Should we consider the Q4 margin as representative of the full-year margin for '23, and then obviously adjusting that because the sell side will grow similarly, while historically, the sell side was growing faster?

Right. If you look at the full-year margins by segment, that would be a good indicator of what we'll see in 2024.

Thanks, Dan.

We'll take our next question from Michael Kupinski with NOBLE Capital Markets.

Thank you. Thanks for taking my question. I appreciate that. Going back to the cookies, I understand that you indicated the marketplace is already making moves because of the deprecation of cookies. However, it's understood that Google has only deprecated cookies and 1% of its searches on Chrome in the last quarter. How do you see the market evolving and how might that impact you as we head towards the full implementation of the cookie deprecation later this year?

That's an excellent question. I think cookie deprecation is going to spur significant innovation in the ad tech space. The transition for trading media has become a moment for industry innovation that we haven't seen in the last decade. Even though Google has only deprecated 1% of the cookie, other media types have already seen some level of deprecation—particularly with Apple and CTV. We are already adjusting how we treat various DSPs differently based on these changes, which we think will provide us a competitive edge. Our focus is capturing the innovation occurring in the marketplace now as we approach the full transition.

Thanks, Mark. And I was wondering about the performance metric that these advertisers are getting. Has the ROI on advertising degraded as a result of changes in cookie deprecation?

Different marketplaces report different results. From our conversations with clients, we have not seen a degradation in campaign performance, and we anticipate different workarounds will emerge when cookies completely disappear. Our tech team and partners are already working to ensure that reporting capabilities will maintain campaign quality.

In terms of the most valued publishers you work with, where do you think they are regarding the cookie-less environment and their plans for it?

I believe larger publishers are progressing well in their transition, but smaller to mid-sized publishers are lagging. There will be a bifurcation in the marketplace, distinguishing those with means and capabilities to adjust to alternative IDs versus those who cannot. This presents an opportunity for us to assist mid-tier publishers in managing this transition.

Got you. Thank you. That's all I have.

Thank you.

Thank you. That does conclude today's question-and-answer session. I would like to turn the call back over to Mark Walker for any additional closing remarks.

Thank you very much for joining us for the Q4 and full year 2023 results, and we look forward to talking to you at the end of Q1.

Thank you. That does conclude today's presentation. Thank you for your participation today. And you may now disconnect.