Thank you for standing by. Welcome to the Direct Digital Holdings fourth quarter and full year 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, think to press the store, followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the store one again. Thank you. I would now like to turn the conference over to Brett Malott, Investor Relations. You may be

Good afternoon, everyone, and welcome to Direct Digital Holdings' fourth quarter and full year 2024 earnings conference call. My name is Brett Malotte, 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 8K and accompanying earnings release, which is filed today 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 usually following the speaker's presentation there'll be a question and answer session please note that the statements made during the call including any 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 obligations update these statements forward looking statements are subject to risks which which would cause DRCT's actual results to differ from historic results and forecasts, including those risks set forth in DRCT's findings of the SEC, and you should refer to those for more information. This cautionary statement applies to all four 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, the most directly comparable GAAP measures, is available in the earnings release that DRCT filed in its Form 8K today. I'll now hand the call over to Mark Walker.

Chief Executive Officer. Mark. Thanks, Brett, and thank you to everyone joining our fourth quarter and full year of 2024 earnings call. For the full year, I'm pleased that we delivered revenue in line with our significantly revised guidance. 2024 proved to be a challenging year for the company to say the least, but I'm incredibly proud of the team for responding quickly, initiating a clear strategy and mobilizing to execute against that strategy today direct digital is rescaling with a significantly strengthened business model for customers partners and shareholders alike just to remind everyone at this time last year direct digital holdings released its q4 and full year results for 2023 announcing a top-line revenue guidance target of 170 million to 190 million representing 15 percent year-over-year growth at the midpoint by early may director to holding supply side platform colossus ssp had achieved revenues far ahead of the previously stated guidance and the company was well on its way to a record quarterly result at that time we were fighting what we believed was an ongoing short attack since december of 2023 and believed that the worst was behind us. Unfortunately, there was a secondary attack. A second false and defamatory blog post against our supply-side platform, Colossus SSP, in mid-May 2024, caused an unexpected business disruption amongst our partners, advertisers, and clients due to a major customer pausing its connection with Colossus. The connection with this major customer who is an intermediary in the digital ecosystem has resumed. However, volumes have not yet returned to pre-pause levels and this caused a meaningful reduction in our FY 2024 revenues and is also expected to impact 2025. That said, despite the challenges faced this past year, we delivered fourth quarter results in line with our revised revenue guidance range. We have been working diligently with our multinational whole co-agency partners, our Fortune 500 brand partners, and demand side partners to resume business, which many already have. Starting last year, we initiated a plan to, one, further expand our sources of our revenue to create a more diversified business throughout all segments, and two, conduct a cost savings review which has resulted in significant operating expense reduction sequentially when compared to the first half of the year concerning our diversification strategy in the third quarter of 2024 we announced the launch of colossus connections an aggressive initiative to accelerate our direct integration efforts with leading demand side platforms and we have already signed up two of the leading partners in the marketplace this initiative will optimize supply path efficiency for our advertising clients through direct connections with top demand side platforms ultimately providing advertisers with improved access to demand and cost savings in addition we are pursuing alternative intermediaries and pathways to send buyer spend to our publishers we've seen sequential improvement from existing direct connections and we're expecting to see greater revenue impacts as we move through 2025 as alternative pathways are solidified and as integrations are completed in the second half of 2025. As part of our continuing sell-side strategy, we have worked diligently with our partners to keep our key sell-side relationships intact while building back ad spend in previous levels. This plan will continue to take shape over time through 2025 as we focus on diversifying, optimizing, and future-proofing our sell-side platform. On the vibe side, since we unified our two divisions, Orange 142 and Huddle masses, we have been keenly focused on small and mid-sized clients who are increasingly shifting advertising budgets to digital and require support to navigate its complexities and optimize their ad spin. Further, we see that small and mid-sized brands are looking for a more high-touch and tailored client by side relationship these clients are a key focus for our newly combined by side operation we are now better equipped to deliver this level of premium service to our clients as they navigate emerging technologies and high growth channels such as ai connected tv and retail media we have already brought on clients and new verticals which are expected to generate additional incremental revenue of $5 million to $10 million in 2025, with full impact starting in the second quarter of 2025. With that, I will discuss some high-level points related to the fourth quarter, with Diana providing further details about the quarter later in the call. Revenue for the fourth quarter was down as expected compared to the prior year due to continuing negative impact on sell-side revenue resulting from business disruption in May of 2024 and continued impact on the buy side from certain customer spend declines partially offset by new buy side customer growth and non-recurrent political spin on the south side despite the overall decline in revenue gross margin increased from 23 percent in the prior year to 32 percent in the fourth quarter of 2024 due to a higher mix of five-side revenue in the current quarter we realized cost savings and operating expenses of 2.1 million in the fourth quarter of 2024 reflecting the flexibility in our cost structure in addition to our focus on building back our timeline and as mentioned on our call last quarter we have undertaken a series of cost savings and operational optimization strategies which have resulted in a more diversified efficient business model positioning us for success in the coming years we were able to withstand the dramatic impact to our revenue through improved gross margin and operating cost savings which is a testament to our robust business model and the success of our cost saving initiatives looking forward into 2025 we're encouraged by the growth we are seeing in segments of the ad tech arena specifically around curation and data enrichment we are reiterating revenue guidance of 90 million to 110 million for fiscal 2025 underscoring our confidence in our ability to scale up both our buy side and sell side businesses in particular we expect the second half of the year to deliver strong gains as we experience the full effect of new direct sell side partners coming online while our first quarter tends to be slower than the fourth quarter related to seasonality in our sell side business we are seeing sequential improvement in the first quarter of 2025 over November and December 2024 we believe our streamlined approach will continue to enable us to capture market share and strengthen our leading advertising marketing technology offering I will now hand things over to Diana Diaz, our Chief Financial Officer, who will walk through some of the financial highlights in further detail.

Thank you, Mark. I'll start with a few more details related to the fourth quarter 2024 results. Related to revenue, our fourth quarter 2024 revenue was $9.1 million, a decrease of $31.9 million over the $41 million in the same period of 2023. Sell-side revenue fell to $2.7 million for the fourth quarter compared to $33.4 million in the same period of 2023. As stated before, the key driver for this reduction was the suspension by one of our large customers following the defamatory article against the company. This customer, which is an intermediary, in the DSP marketplace has since restored its connection and is continuing to scale, making up about 11% of the fourth quarter's sell-side revenue in 2024. We were pleased to see a one-time positive bump in sell-side revenue in the fourth quarter of 2024 of about $600,000 driven by outsized political spend in October. However, we'd like to emphasize that while this was a welcome boost, it is not representative of our repositioned business. While this was a non-recurring revenue impact, it demonstrates the opportunistic and dynamic nature of our business model, which was able to move and adapt when opportunities arise. On our buy side for the fourth quarter, we saw revenue decrease to $6.4 million dollars compared to 7.6 million dollars in the same period of 2023. The 1.2 million dollar decrease in buy-side revenue for the quarter was due to a 1.7 million dollar decrease in spending from customers no longer actively purchasing from the company, including about 600,000 dollars from completion of certain one-time campaigns in 2023, partially offset by growth from existing and new customers of 8%. Due to the decrease in revenue, gross profit dollars decreased to $2.9 million in the fourth quarter from $9.3 million in the prior year. However, because of the change in mix of buy-side and sell-side business, gross margin for the fourth quarter improved from 23% in 2023 to 32% in 2024. Related to operating expenses, our fourth quarter 2024 operating expenses were $7.7 million, a decrease of $10.4 million over the $18.1 million in the same period of 2023. Operating expenses for the fourth quarter were negatively impacted in 2023 by an unusual charge for $8.8 million related to payments to a few publishers and in 2024 by about $400,000 in cost to regain compliance with respect to delinquent SEC filings. Excluding these unusual items, adjusted operating expenses were $7.2 million in the of 2024, a decrease of $2.1 million, or 23%, over $9.3 million in the same period of 2023. Adjusted operating expenses, which excludes the unusual compliance costs, for the second half of 2024 of $13.5 million, decreased by $1.9 million, or 12% from $15.4 million for the first half of 2024. Operating loss for the fourth quarter was $4.3 million, compared to an operating loss of $8.8 million in the same period of 2023. The unusual operating expense items contributed $400,000 of operating loss for the fourth quarter of 2024 and $8.8 million of impact to operating income in the same period of 2023. Adjusted EBITDA for the fourth quarter of 2024 was a loss of $3.4 million compared to an adjusted EBITDA loss of $6.6 million in the same period of of 2023. Excluding the unusual operating expense items, adjusted EBITDA loss for the fourth quarter was $3 million in 2024 compared to adjusted EBITDA income of $2.2 million in the same period of 2023. Turning to the balance sheet, we ended the year with cash and cash equivalents of $1.4 million compared to $5.1 million as of the end of 2023. Total cash plus our accounts receivable balance as of year-end was $6.4 million compared to $42.3 million as of the end of 2023. We are actively advancing multiple funding and equity financing pathways with the goal that these efforts will restore NASDAQ compliance, strengthen the company's financial position, and support key growth initiatives. Now to touch on our guidance. Our guidance assumes that the U.S. economy does not have any major economic conditions to deteriorate or otherwise significantly reduce advertiser demand. We plan to offer annual guidance and update it throughout the year. With our visibility today, we are reiterating our fiscal year 2025 revenue guidance in the range of $90 million to $110 million, underscoring our confidence and our ability to scale up both the buy-side and sell-side businesses. And as Mark said, we expect the second half of the year to deliver strong gains as we experience the full effect of new direct sell-side partners coming online. As we continue to refocus the company, our lower cost structure, optimized performance, and focus on driving efficiencies across the business are key to our accelerated path to return to profitability. We continue to be judicious in adding any new costs, and we remain confident in our business to deliver strong performance for our shareholders this year. And I'd like to turn it back over to Mark for some closing comments.

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

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press store 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, please store 1 again. And with that, our first question comes from the line of Dan Kernis with the Benchmark Company. Please go ahead.

yeah thanks uh good afternoon um mark just maybe i have several let's just start kind of high level number one just in q4 we know there was a lot of noise in kind of the dv plus arena obviously heard from trade desk magnate pubmatic everybody uh you know political was kind of a plus you guys are recovering from obviously the attacks which you successfully defended against But, you know, it takes a while to scale back. So I'm just trying to understand kind of how we should think about the cadence. I know you've said strong growth in the back half of this year, but how much was Q4 impacted by kind of post-election malaise, which we sort of heard about? And how should we think about these clients? This client's been coming back to you in kind of Q1 and then ramping.

Yeah, no, good question, Dan, and good to hear from you as well.

So, yeah, I would say, you know, for the first time, especially this cycle, political represented more of a percentage than it historically has. Typically, it had been 10 to 15 percent. This time, it represented probably in the 50 to 60 percent range of spin that came through. And I think, as you know, based upon what you probably heard from your other peers, political was very strong all the way through November. December was softer than what we would anticipate for Q4, and so we were a little bit surprised by that. But what we are seeing, and we're kind of in a different cycle right now since the last four years, we've had steady growth consistently occurring. We're seeing sequential growth month over month in regards to our overall performance. But for us and how we rebuild back, it's really about – it's not about our buyer intent. It's not about our publisher. It's not about our publisher inventory, which, as you've seen by the stats, the numbers are there. It's really about us for pathways. And so we've been working on developing new pathways to connect our buyers and sellers, and that's through the direct connection piece, which, you know, we're anticipating to see that come to fruition, the back half of the year, based upon the contracts that we have signed and the other ones that we are currently negotiating. And then we're also anticipating having alternative pathways for our buyers to actually purchase the inventory that we represent, leveraging different deals and PMPs that we already have established. So for us, we don't see it as more of an if. It comes back. It's more about when and timing and the quarter. And so we're seeing us getting back to a good, healthy run rate

for the last half of the year. Got it. That's helpful. So let's talk about some of those initiatives, right? You know, obviously a lot of change has happened. We're seeing Google pull back on the SSP side as they deal with all the remedy stuff. So the marketplace is kind of in flux. PMAC is kind of a mess. You guys doing the direct connect thing makes a ton of sense. We're seeing a bunch of other folks do that. You talked about top DSPs. I wonder, given your inventory and kind of who you represent on the publisher side if there's not some kind of niche or middle market guys that you could kind of attack. And then so maybe kind of talk through how we should think about how aggressive you stay on the connection side. And I would also love to hear about how you're thinking about, you know, kind of curation. It's sort of, it's very topical, but, you know, we're not seeing a ton of money figure it out in the marketplace yet. So maybe hit those

two topics for us? Yeah, absolutely. So for us, we actually see the opportunity. One, you know, we have excellent hold code partnership relationships. And those buyer dollars, we think we're always going to have access to those dollars coming through our pipes. And so we definitely will continue to nurture and manage those relationships as we see fit. But the opportunity that we also see is really in the middle market, the middle market dollars flowing through our pipes, if you will, or our SSP, we think that that's actually an opportunity to expand and grow. I think you've seen some DSPs and SSPs really focus on what they call the premium partnerships. We think that there's a ripe opportunity in the middle market, and that's really kind of how we've managed the business for the last four years. So actually, on the buyer side and also on the sell side, we see that as our sweet spot, and we're planning on doubling down into that marketplace. We think it provides us two benefits. One, diversification, where there's lack of concentration of dollars. We think that that's a major benefit for us and focus on the middle market. But then also we think it's ripe for additional opportunity. And from what we've seen, that middle market has been a little bit slower to actually transition over to the digital space so we see it as real greenfield for us um in growing and being able to fuel our um our overall growth strategy and also the the repeated kegger that we've been able to perform over the

last five six years and the curation piece mark sorry i know it was a long question yeah yeah no

no no no good good call hey as it relates to curation we do think that there's an opportunity for curation and it's something that we're um exploring with many of our partners um right now So we think that there is an opportunity, but we're still working through figuring out what's the best way for us to apply that to our partners. And what we are seeing, at least off the onset, it's a case-by-case basis. So that's kind of the strategy that we're looking at curation. We'll be talking about that more so in the future. But the other opportunity that we also see as a relation to curation is really with our buy-side partners. We work with about 250 different, 225 to 250 different buy-side partners. We think there's a curation opportunity with the middle market, and we think what sets us unique and what also makes us have a competitive advantage in serving the middle market is the fact that our buy-side employees and our sell-side employees talk and have the capability of actually leveraging curation as a competitive advantage that we actually take to the marketplace to interact with our buy-side clients. So we think that gives us a unique value proposition and selling point. And so you'll see us talking more specifically about curation in the middle market to our buy-side partners as well as on the sell-side capabilities that we have.

Super helpful. Last one, I promise, just thoughts on attacking video. I know it's not been a huge component historically. Then we started talking about the whole CTP market's kind of very top-heavy at the moment. The bottom side has been challenged, but still a great opportunity for programmatic execution. So just curious how you're thinking about attacking, you know, kind of that landscape, if that's part of the strategy here.

Yeah, it actually is. What we're seeing specifically on the sell-side platform, if people are looking for lower-cost CPMs as it relates to the CTP, OTT video space, And from what we have seen in the marketplace, there seems to be a demand for lower cost CPMs that are on the mid to lower end of the spectrum. And we think that there's opportunity for Colossus SSP and direct digital to be able to fulfill that demand in the marketplace. And so many of the things that we're working to do is really to focus in on that and provide CTV partners and video partners and OTT partners to actually fit in that end of the space. And we think that we can have a competitive advantage there.

Got it. No, thank you for all the color. And I apologize for asking so many questions. I apparently blew up your phone, but I will get back in the queue. No, it's all good. Thank you.

And your next question comes from the line of Michael Kapinski with Noble Capital Markets.

Please go ahead. Good afternoon, everyone. A couple of questions. Mark, you indicated that some of the revenue initiatives appear to be at least on the buy side of your business. And I was wondering if this represents a shift or maybe a rebalancing on your focus on growing your

sell-side business? Yeah, no, good question. Yeah, we definitely have, and this has been our strategy for the last two years, we've been focused on bringing on the buy side of our business and really looking at expanding it. We made some internal investments as it relates to our sales processes in the marketplace. And so what we're starting to see is some of the fruition of that come to bear. Last year, we put all of our sales teams on specific CRM system and made that a lot more uniform, but then also put different sales processes in place in order to try to increase demand into our buy side business. And so I think part of what you're seeing right now is the work to actually go after and continue to grow that piece of the business, especially because it's at a higher margin. And we think that in the long run, especially with some of the cost-saving measures we've taken in place, it will help us get back to profitability, but also expand profitability once we get the top line higher as it relates to the buy and the sell side business. So it's not really a recalibration, but it's been a two-year focus for us and we're starting to see fruits come from it. Gotcha. And then on the cost side,

I was wondering if you obviously said that you've taken out some costs. Can you give us a sense of how much the cost savings will be on an annualized basis? And just trying to get a sense of the amount of fixed costs that you've taken out and if you're including variable costs in your

expectation for 2025. Yeah, what I'm going to do is I'm going to give you kind of our overall comprehensive strategy, and I'm going to turn it over to Diana to actually get more into the details. But the way that we built our business model, and I think you probably have seen it by looking at our balance sheet and our income statement, we have very little CapEx as it relates. And part of the way that we built it, knowing that the ability to scale without increasing your fixed costs was important to us. And so part of the reason that we've been able to absorb and defend against some of the attacks that we have been, it's just because of the variability that we've been able to build inside of our structure and our overall business. So, we were able to take cost out without, you know, cutting what I would say muscle and bone, but cutting a little bit of fat as it relates to the end of last year. And we're going to see benefit of that going through 2025 as well in the way that we've operating our, the way that we set up our operating structure. So, I'm going to turn over to Diana to give you some more details around that and she can tell you kind of what that model looks like on the go forward. Sure. We focused

in the earnings release and the script on operating expenses because, you know, we wanted you to be able to calibrate there. We had some costs that will be non-recurring, $1.7 million dollars of compliance costs related to getting our filings complete. And then we had the first half versus the second half reduction in cost that we wanted to point out. So I would expect there could be another one and a half to two million of savings that we would see on a full year basis for 2025. So that's what we're looking at. Thank you for the caller. And then

And based on your revenue trajectory and your revenue guidance for 2025 and focus on higher margin buy side, can you kind of give us a sense when do you anticipate you might swing towards positive cash flow?

As we look at the real gains coming in in the second half of the year, that's really where we see us getting back to our more normal cadence, third and fourth quarter.

All right. Good luck. That sounds great. Thank you. Thank you.

And I'm showing no further questions at this time. I would like to turn it back to our CEO, Mark Walker, for closing remarks.

There's no more questions. Then we will see you next quarter.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.