Earnings Call Transcript - DSP Q1 2021

Operator, Operator

Hello, everyone and welcome to Viant's First Quarter 2021 Earnings Webinar. My name is Kelsey and I will be your operator today. Before I hand the call over to the Viant team, I would like to go over just a few housekeeping notes for the program. As a reminder, today's webinar is being recorded. After the speakers' remarks, there will be a question-and-answer session.

Nicole Borsje, Executive

Thank you, Kelsey. Good afternoon and welcome to the Viant Technology First Quarter 2021 Financial Results Conference Call. On today's call are Tim Vanderhook, Co-Founder and CEO; Chris Vanderhook, Co-Founder and Chief Operating Officer; and Larry Madden, the company's Chief Financial Officer. I'd like to remind you that we will make forward-looking statements on our call today that are based on assumptions and subject to future events, risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these results except as required by law. For more information about factors that may cause actual results to differ materially from forward-looking statements and our entire Safe Harbor statement, please refer to the news release issued today as well as the risk and uncertainties described in our registration statement on Form S-1 related to our initial public offering and other filings with the SEC. During today's call, we will also present both GAAP and non-GAAP financial measures. Additional disclosures regarding these non-GAAP measures including a reconciliation of GAAP to non-GAAP measures are included in the news release we issued today and in our filings with the SEC. I would now like to turn the call over to Tim Vanderhook. Tim?

Tim Vanderhook, CEO

Thank you, Nicole. Good afternoon, everyone, and thank you for joining us today. We're excited to report strong first quarter results that exceeded our prior guidance across the board. I will briefly discuss our financial performance for the quarter, and since we are still in our first year as a public company and some of you are relatively new to Viant's story and position in the digital advertising market, I will also highlight Viant's strengths and value propositions. This will allow us to discuss current market trends and how we plan to continue driving growth in our business. Here are the financial highlights for the quarter. Revenue in the first quarter totaled $40.1 million, an increase of 5% year-over-year. Adjusted EBITDA grew 51% to $4.9 million. Viant is continuing to see strong connected television growth, with an increase of 66% year-over-year, and customer adaptation is ongoing. Larry will cover the financials in more detail shortly. Viant has a vast and growing addressable market with several secular trends providing us with significant opportunities for growth. We focus primarily on the $259 billion U.S. advertising market, expected to grow at a 12% CAGR through 2025, driven by the increasing emphasis on digital advertising. More specifically, the U.S. programmatic advertising market is growing at a 21% CAGR and is forecasted to represent 48% of total U.S. media spending by 2022. Additionally, the TV industry is experiencing significant disruption as internet-enabled connected television becomes the preferred method for streaming video content. By 2024, 66% of the U.S. population is expected to use Connected TV, leading to a projected CTV ad spend growth of 25% CAGR and a market size of $27 billion by 2025. We believe these trends, combined with our people-based approach, our patented internet-connected household identification, and our expertise in Connected TV, contribute directly to our strong Q1 results. This gives us the confidence to raise our outlook for the full year of 2021. Taking a step back to discuss Viant's story, we have a unique approach to the digital advertising industry as early pioneers of people-based advertising by using real people rather than cookies for targeting and measuring digital advertising. A key theme among all customer segments is the inherent complexity in the ad buying process across these channels, yet brands and agencies are firmly committed to data-driven advertising. They are also pressed to justify their spending and measure their return on investment. Viant's software serves as the solution. Our self-service software, Adelphic, transforms workflows and opens a wealth of omnichannel opportunities where business ROI can be understood and demonstrated. Adelphic includes three key tightly-integrated components: Planning, where marketers create audience segments using one of Adelphic's key advantages, its people-based approach. This provides a deterministic data matching process that delivers insights based on real-world identifiers rather than cookies that do not accurately represent individuals; a buying platform that offers marketers extensive omnichannel advertising inventory across the programmatic landscape; and a data-driven measurement system where Adelphic offers superior return on ad spend measurement in ways that other DSPs cannot. We address the disruption caused by big tech changes, such as cookies and IDFA, with two unique solutions: first, our people-based identification data framework enables marketers to include ecommerce measurement, and unlike other DSPs, they can also measure in-store sales channels, which is a key advantage of our software. Second, our patented process, known as the Viant Household ID, represents a significant competitive edge in a world without cookies. I want to emphasize that we filed for our internet-connected household identification patent long ago, during the same year Facebook went public. We have anticipated the reduced role of cookies for many years and have developed a relevant product and solution for it. The Household ID is a forward-thinking solution that our customers are currently using. Viant’s Household ID distinguishes itself from email-based ID solutions by being anchored at the household level, making it more privacy-friendly and sustainable. Recent changes by Google and Apple further bolster our competitive positioning as they validate the necessity for a people-based approach to programmatic advertising. The entire programmatic advertising ecosystem relies on a standardized framework set by the Interactive Advertising Bureau, which creates industry standards for digital advertising. This framework, referred to as the bidstream, allows publishers and supply-side platforms to monetize their digital ad spaces by sharing standard online identifiers with DSPs like us. Through this bidstream, Adelphic connects with the vast majority of exchanges across millions of sites and apps. The chart on the screen summarizes the prevalence of different digital identifiers based on data from Adelphic's bidstream from May 4 through May 11. As illustrated, Viant's Household ID appears 80% of the time in the bidstream during this period, while cookies are present only 56% of the time, as Google Chrome has not yet phased them out. This figure is expected to drop near zero by year-end, while mobile IDs currently represent 20% of the bidstream. Viant's Household ID is agnostic to browser cookies and device ID shifts, providing significant momentum for Viant. This is why customers and partners increasingly rely on us. Chris will later discuss our future plans for the Household ID and a new partnership with Fox News Media. We see the Household ID as a catalyst for Viant's growth. Viant is not just addressing today's challenges; we have been strategically planning for tomorrow. Our extensive history of developing next-generation advertising technology solutions equips us to support marketers in navigating this rapidly evolving environment. Our expertise is especially evident in connected television. Unlike many companies benefiting from connected TV in the short term, we possess over a decade of streaming and connected TV technology experience. Over ten years ago, we founded Xumo, an ad-supported video-on-demand service that was sold to Comcast last year. During our IPO and previous earnings call, we highlighted the effectiveness of Viant's connected TV solutions for marketers. Our momentum is building. Recent CTV partnerships announced during the quarter, along with our strong technology and product roadmap, reinforce our belief that we are just beginning to explore the potential of CTV. I will now hand the floor to CFO Larry Madden to share more about our market share growth, reflecting the strength of Viant's value proposition.

Larry Madden, CFO

Thanks, Tim, and thank you, everyone, for joining us today. We are certainly encouraged to see our momentum building as we move through the first half of 2021. Today, I'll be discussing some of the highlights of our Q1 performance, as well as some of the key financial and operational drivers during the quarter. I will also be reviewing our current expectations for Q2 and the full year 2021. At a high level, despite some continued COVID-related challenges with certain key customer verticals during the quarter, we remain optimistic as we saw solid growth in Q1 and delivered above the high end of our previously issued guidance across all key metrics. Q2 is also looking very strong, and we are encouraged by a solid increase in spending so far in Q2 across our retail and travel clients. We've increased our full year 2021 guidance across all metrics, and we believe we are poised for an excellent Q2 and strong second half of 2021 as our investments in sales and marketing begin paying dividends and as the economy continues to rebound from the effects of the COVID pandemic. With that, let me discuss some key financial and operational highlights for the quarter. Total spend in the first quarter grew 9% on a year-over-year basis. This growth was primarily driven by continued momentum in Connected TV spend, which grew 66% in Q1 and represented a remarkable 45% of total spending on our platform in the quarter. Overall video-related spending on our platform, which includes CTV, represented over 67% of total spend on our platform in the quarter. We expect CTV to continue to be a strong contributor to our growth going forward as our expertise and industry-leading CTV solution continues to gain market share across this growing and important channel. In terms of customer verticals, as we expected, Q1 continued to be negatively impacted by macroeconomic conditions related to the COVID pandemic. More specifically, our retail, automotive, and travel customers continue to hold back budgets, with total spend across these three important verticals down 25% in the quarter compared to Q1 of last year. As I previously indicated, these three customer verticals represented 43% of total spend on our platform in 2019 pre-COVID. Conversely, across all other customer verticals, platform spend increased 31% during the quarter. As travel, automotive, and retail come back to more normalized levels as we move through 2021, we believe we are poised for accelerated growth in the coming quarters. We are already seeing early signs of recovery in Q2 with solid growth in spend with our retail and travel customers. Automotive remains weak at this point, but we believe as the current industry-wide chip shortage gets resolved, spending in auto will also pick up and contribute to a strong second half of 2021. Now moving to our revenue performance for the quarter. GAAP revenue for the first quarter was $40.1 million, an increase of 5% compared to Q1 of 2020. Revenue ex-TAC, the key metric we focus on in evaluating revenue performance was $26.7 million for the quarter, an increase of 15% year-over-year. As a reminder, revenue ex-TAC represents the net contribution after deducting all third-party media and data costs. As I already mentioned, in Q1, our growth in both GAAP revenue and revenue ex-TAC was largely driven by the significant increase in CTV-related spend on our platform. Additionally, growth across our percentage of spend pricing model continues to outpace growth across our fixed price and subscription price offerings. This highlights Viant's continued strength with its agency customers. As we've indicated, percentage of spend customers also had very high retention rates and typically increase their spend over time as they consolidate budgets on our platform. Another set of metrics that we focus on are the number of active customers and the average revenue ex-TAC per active customer. Customer additions and increased revenue ex-AC within our existing customer base are key metrics that we track to assess the momentum in our business. We define an active customer as any customer generating a minimum of $5,000 of revenue ex-TAC over the prior 12-month period. At the end of Q1, we had 266 active customers compared to 264 at the end of 2020. Average revenue ex-TAC per active customer at the end of Q1 totaled $428,000 versus $400,000 at the end of Q1 last year, an increase of 7%. Since the COVID-related downturn we saw in Q2 of 2020, we have now seen three consecutive quarters of growth in both the number of active customers and the average revenue ex-TAC generated per active customer. Our focus moving forward is to increase the number of active customers using our software while continuing to increase the revenue ex-TAC generated per active customer. As we continue to ramp up our sales investment in 2021 and beyond, we expect further momentum around new customer acquisitions, which ultimately will serve as another engine to fuel growth going forward. Turning now to operating expenses. Given the significant stock-based compensation flowing through our numbers beginning in Q1, we intend to report operating expenses on a non-GAAP basis going forward, excluding the impact of stock-based compensation. Total operating expenses excluding stock-based compensation totaled $37.8 million in the quarter, essentially flat with the prior year period. This is particularly notable given that we have increased our headcount by 17% over that same period. We continue to remain focused on balancing our investment and growth with driving operational efficiencies in the business, ultimately with the goal of driving profitability and revenue growth for many years to come. In a moment, our Co-Founder and Chief Operating Officer Chris Vanderhook will share a little bit more color with you about recent headcount additions, but let me give you some high-level details. At the end of the quarter, we had 321 employees, which represented an increase of roughly 10% since year-end, with a significant number of these new hires coming on the sell side. Our recruiting efforts continue to reap rewards as we are attracting extremely qualified candidates from some of the best tech companies out there. Adjusted EBITDA for the quarter was $4.9 million compared to $3.2 million in Q1 of 2020, representing a year-over-year increase of 51%. Our adjusted EBITDA margin as a percentage of revenue ex-TAC was 18% in the quarter compared to 14% in the same period last year. As we continue to scale the business, our mid to long-term target for adjusted EBITDA margins as a percentage of revenue ex-TAC remains at 35%. In terms of net income, we also intend to report and focus on the metric of non-GAAP net income, which represents net income excluding stock-based compensation. We believe this is a more appropriate metric by which to measure the operating performance of the business. For the quarter, non-GAAP net income totaled $2.2 million versus $329,000 last year, representing an increase of nearly six times on a year-over-year basis. Non-GAAP earnings per share of Class A common stock totaled $0.01 for the quarter. From a cash flow perspective, we generated $14.8 million of net cash from operating activities for the quarter, compared to $3.5 million in Q1 of last year. We ended the quarter with $246.6 million in cash, which includes the $232.5 million of net proceeds generated from our IPO in February. We believe that our growth profile and healthy balance sheet position us extremely well to take advantage of the rapidly growing market opportunity in front of us. Finally, turning now to guidance. As Tim discussed, we feel great about our strong positioning in the market and we are in the early stages of capitalizing on the market opportunity for programmatic advertising in a cookie-less world. As we think about guidance, we recognize that we are still early in the year and there is a fair amount of uncertainty around advertising demand in some of our key end markets, including in our travel, retail, and automotive customer segments. That being said, the early signs of recovery across two of our three COVID-impacted verticals in early Q2 give us increased confidence in our overall 2021 performance. With that background for the second quarter of 2021, we expect GAAP revenue in the range of $45 million to $47 million, which represents year-over-year growth of approximately 48% to 54%. Revenue ex-TAC in the range of $29.5 million to $30.5 million, which represents year-over-year growth of approximately 47% to 52%. Adjusted EBITDA in the range of $3.5 million to $4 million, or a margin as a percentage of revenue ex-TAC of 12% to 15%. For the full year 2021, we are raising our previously issued guidance and we now expect GAAP revenue in the range of $200 million to $205 million, which represents year-over-year growth of approximately 21% to 24%. Revenue ex-TAC in the range of $135 million to $140 million, which represents year-over-year growth of approximately 22% to 27%. Finally, adjusted EBITDA in the range of $24 million to $27 million, or a margin as a percentage of revenue ex-TAC of between 18% and 19%. In summary, we believe we're uniquely positioned to meet the needs of advertisers and their agencies in a post-cookie world as our platform does not rely on browsers and identifiers. Couple that with our continued over-indexing across CTV, our increased sales and marketing investment, and the beginnings of return-to-normal across our retail and travel customers. We expect momentum to continue to build as we move through 2021.

Chris Vanderhook, COO

Thank you, Larry. We are committed to investing in the future, focusing on execution and growth in three main areas: customer adoption, omnichannel partnerships, and technology investment. This marks our third consecutive quarter of increasing customer spending on our software. The second quarter is off to a strong start, and we anticipate this trend will persist throughout the quarter and into the latter half of the year. We aim to accelerate growth further, beginning with investments in our team. Recently, we have made several important hires, including Kendra Angier as Chief People Officer, who will oversee our people strategy and operations, enhancing our employee experience and helping us attract top talent. As Larry mentioned, we've expanded our direct sales presence by bringing in experienced leaders from programmatic software sales, many from major tech firms. For instance, we've appointed David Fahey, a former Google employee, as Head of Agency Partnerships to advance our collaborations with ad agencies. We are enthusiastic about the contributions of our new team members as they settle in. Next, I want to highlight some thrilling product announcements and omnichannel partnerships that we believe will enrich our customers' experiences. Recently, we integrated with DoubleVerify, improving our customers' ability to validate premium content and connected TV. We also integrated with Tru Optik's data marketplace, enabling access to rich connected TV data for targeting, aimed at enhancing return on ad spend. Additionally, today, we are announcing a partnership with TiVo, a technology-agnostic streaming company, providing programming and ad exposure data across millions of U.S. households for improved audience targeting and measurement for both linear and connected television. I am particularly excited about this partnership and eager for our clients to utilize TiVo within our software for their linear and connected TV ad campaigns. Now, let's discuss our recent technology investments. Later this quarter, we will release a significant software update called WWC, or World Without Cookies. Our Household ID has been available to clients to test our people-based approach in environments without cookies, such as connected television. We've seen continued growth in spending from customers who are adapting to our Household ID as cookie-less ad impressions rise. Our scaled Household ID is now becoming the preferred option for many clients. With the introduction of WWC and Adelphic, marketers will gain enhanced capabilities to plan using our Household ID with any data partner, supply channel, site, or app. We have always simplified the purchasing process with our Household ID, but this release will improve our standard measurement reporting to better integrate conversions at the household level, moving away from reliance on cookies. Marketers have reported better campaign performance using our scaled Household ID compared to cookies or new identifiers. Recently, we completed a test with a national pizza chain that utilized our Household ID for connected television purchases. This identification allowed them to assess how many unique households they reached and the frequency of ad exposure. More importantly, our Household ID tracked other household devices that visited the customer's website and placed orders. We demonstrated a true return on ad spend of over 160% in connected television, an accomplishment that competing platforms struggle to match. As a result, this client has increased their budgets by more than 60% in Adelphic. WWC will empower marketers to continue seamlessly when transitioning away from cookies. Our goal has been to provide a platform for marketers and their agencies to verify their return on ad spend, and our WWC release will ensure this for our customers. We are confident that this update will significantly enhance our clients' campaign performance in Adelphic, leading to increased spending in our software. Additionally, this week, we announced the release of our Deals marketplace in Adelphic, allowing customers to easily choose from our extensive integrations with premium content owners across all channels, particularly in connected TV. Marketers can use their own negotiated deals with content owners or have the flexibility to source new deals within our software. We are also announcing a separate partnership with Fox News Media, which will utilize our software for improved audience insights and measurement capabilities, ultimately benefiting their advertisers and monetizing their ad inventory in cookie-less environments. The Viant Household ID will be the foundation for expanding this partnership and others in the future. Finally, as we grow our business, we need to increase our queries per second, which measures total ad impressions our software processes. With ongoing innovation in our mediator product, we are currently achieving more than four times the efficiency in queries per second, an improvement from the three times the efficiency reported last quarter. We are confident that as Viant grows, we will do so with the most cost-effective technical infrastructure in the industry. I am excited about the progress we are making. Now, I will hand it back to Tim.

Tim Vanderhook, CEO

Thanks, Chris. Viant is well-positioned for future growth. There is an increase in consumer spending and trends in their digital consumption habits that are growing at fast rates and within new formats and channels. Alongside this dynamic, we're seeing advertising revenue growth projections increase. Marketers are embracing the ability to reach people in new and much more targeted and strategic ways. Our vision, which we started more than 20 years ago, is finally coming to fruition. Brands and agencies are embracing our competitive advantages. They rely on Viant's people-based approach, Household ID, and our scale and expertise in Connected TV. We take the complexity and most importantly, the anxiety out of advertising and ultimately help brands and agencies maximize their return on investment. We are very pleased with our start to 2021 and are excited to be raising guidance for the year. I want to thank you for your attention today and your interest in Viant. We look forward to building on our momentum in the quarters ahead.

Operator, Operator

And we will take our first question from Laura Martin with Needham. Laura, your line is now open.

Laura Martin, Analyst

Can you guys see and hear me?

Tim Vanderhook, CEO

I can hear you.

Operator, Operator

We can hear you well. Please go ahead.

Laura Martin, Analyst

Fantastic. Great. I'll just ask one and then a follow-up. So, can you talk about universal ID? I understand that your household tech doesn't rely on cookies, but can you talk about whether you think universal ID will be successful and whether people-based solutions will work in the open web? I understand how Household ID is really great for CTV I get that. But it does feel like there are uses for a personal ID in the open Internet that would drive faster growth for you guys outside of CTV. Could you talk about that?

Tim Vanderhook, CEO

Yes, thanks for the question. We'll get to your follow-up question right after that. Our competitors have taken an approach of a hashed email identifier as a replacement for the cookie. We've taken a different approach, which is Household ID in aggregating those users. Going back to the statistics we shared in the slide, this is all about scale. So, if we really look at where UID 2.0 is at today, we're at the ground stages, ground zero. It hasn't really launched with any momentum versus our household ID, which has 80% scale; it's been in the market for many years. Now with CTV coming in such a strong way, this idea is becoming kind of the de facto lead in the way forward because it's delivering on the scale marketers need. One challenge that everyone talks about in this new way forward of a cookie-less world is all around what's going to work for targeting. But there's an important other side of the vehicle which is what works for measurement. Targeting and email theoretically might work in terms of connecting a logged-in user on a website to enable audience segments so data-driven advertising can still happen. I think one of the biggest ways and one of the biggest gaps that we see is, yes, a marketer can buy ads through a unified ID, but can they actually measure the responses that are happening on their website? If you think of broad categories like automotive, many of these transactions aren't taking place online. They're simply key buying activities that are taking place on these marketers' websites. The ability to measure those interactions on the advertisers' website and attribute them to which ad drove that is a key differentiator that the household ID brings relative to UID 2.0. So let me just say this in layman's terms, if I show an ad on CNN and let's say that user is logged in, and I later come to the marketer's website and perform the key buying action; our software will actually report, record and attribute that conversion to the appropriate app. Contrast that to UID 2.0, or any hashed email-based identifier, where if there is not a purchase with an email attached, a marketer loses visibility into that conversion and their ability to decide which publisher, which ad message drove that conversion on the website. So UID 2.0, everyone's focused on the targeting side, but there are equally bigger challenges to the adoption when you look at marketers who would have to adopt this entire framework as well, and a lot of marketers aren't selling the actual product on their website. Relative to a household ID, we are a frictionless system; we don't require publishers to stop and register on a website, and we don't require marketers to include anything. Our system works seamlessly with the same pixel, same ad delivery, same programmatic setup that's currently in place today. We've achieved a scale of 80%, which is now bigger than 55% of cookies across the bidstream. Our household ID has far surpassed what cookies are today in the bidstream, and as more and more marketers understand our solution and the implementation, how it truly is frictionless, we think adoption towards our approach is going to be substantial.

Laura Martin, Analyst

Thank you. Larry, for my follow-up question, I remember that at the time of the IPO, CTV accounted for about 30% of your revenue, and it has now increased to 45% due to a 66% growth. However, the overall revenue growth was just 5%. Can you explain what is happening with the other 70% of the business since the IPO? I'm not asking for details by ad vertical, like autos versus travel, but rather about what's going on in mobile and display. What is decreasing that results in total revenue growing at just 5%, while CTV revenue grows at 65%?

Larry Madden, CFO

Great question, Laura. There are a few points I'd like to make. We are definitely noticing a trend where advertisers are reallocating their budgets to connected TV, moving away from desktop and mobile, mainly because CTV generally offers a better return on investment for marketers. Our platform excels in the CTV space, as we provide both targeting capabilities and accurate measurement, which is driving the significant increase in CTV that you're observing. Furthermore, while I won’t go into specific verticals, clients in sectors like retail, travel, and automotive tend to focus more on direct response, which is typically aimed at mobile and desktop. Consequently, we experienced slight declines in mobile and desktop in these sectors during the first quarter. However, we anticipate that this trend will shift as these industries recover in the upcoming quarters.

Laura Martin, Analyst

Super helpful. Thanks, guys. Thank you very much.

Maria Ripps, Analyst

Yes. Can you hear me?

Tim Vanderhook, CEO

Yes, we can.

Maria Ripps, Analyst

Thanks so much. So congrats on the strong results. And it's good to see you guys sort of raising your guidance, and I appreciate all the color there. But I guess at this point, how much visibility do you have around your full-year outlook? And what are some puts and takes that could potentially impact it? And then, I have a quick follow-up.

Tim Vanderhook, CEO

Larry, do you want to take that?

Larry Madden, CFO

Certainly. For Q2, we currently have good visibility as we approach the middle of May. However, there is still some work to be done. In the latter half of the year, we're observing that the planning cycles among many of our marketers and agencies have become shorter. While we're engaged in discussions and receiving positive feedback and commitments, our long-term visibility is limited. This trend became more apparent after the onset of COVID and continues to affect us, leading to these shorter planning cycles. Nevertheless, various factors, including increased sales investments, the momentum we're experiencing in connected TV, and the recovery of verticals heavily impacted by COVID, particularly in travel and retail, give us confidence as we move through Q2 and into the rest of the year.

Maria Ripps, Analyst

Great. Just to follow up around your guidance, it seems like it implies a pretty strong profitability flow-through. Can you just maybe comment on what's driving that? Obviously, Q1 came in much stronger on profitability, and are there any changes to the pace of investment this year, or is it just driven by revenue upside? And maybe more broadly, can you maybe refresh us on your margin expansion philosophy over the next year or two?

Larry Madden, CFO

Yes, so the first part of that, certainly we've increased the revenue, so that will flow through to EBITDA, hence our higher guidance relative to EBITDA. The other things we're seeing though, in terms of investment, we're on pace with what we thought we were doing in terms of incremental headcount. We expected the large majority of the way through our 2021 hiring plans by the end of Q2. So, we're not pulling back in terms of investment. That's kind of in line with what we had originally expected. But as we've always done, we are very focused on finding efficiencies in the business. Chris talked about the mediator product. That results in huge efficiency and savings for us, and we continue to look at non-personnel areas where we can squeeze money out of our budgets. So, I think it's increased revenue, it's the increased efficiency; it is not a lack of investment. We're continuing to drive forward with investing and growing the team and really getting most of that done by the second half or by the end of Q2, such that we can truly benefit from that investment in the second half. In terms of margin expansion, obviously, that will come with revenue growth. We will continue to invest as we are in 2021, and we will continue to invest to take advantage of the opportunity going forward. But we think in the mid to near term that we can, with investment, get adjusted EBITDA margins as a percentage of revenue ex-TAC up to 35%, which has been our plan since before we went IPO.

Maria Ripps, Analyst

Got it. That's very helpful. Thank you very much.

Operator, Operator

As a reminder to the audience, please raise your hand if you would like to ask a question. You can find the raise your hand feature in the lower part of your menu at the bottom of the screen. We'll move on to Aaron Kessler with Raymond James. Aaron, your line is open.

Aaron Kessler, Analyst

Thanks, everyone. I have a couple of questions, particularly regarding the direct costs as a percentage of revenues. I noticed that those increased slightly in the recent quarter. Could you explain the reasoning behind that? Additionally, how should we approach this trend moving forward? Secondly, with the shift towards a cookieless future, what insights are you gaining from discussions with agencies and direct clients? Are you noticing an increase in the frequency of these conversations as we prepare for a cookieless environment in the coming year? Thank you.

Tim Vanderhook, CEO

Thank you, Aaron. In terms of direct costs, I assume you're looking at platform operations?

Aaron Kessler, Analyst

Yes, direct cost as a percentage. I think it went up to about 33% of the GAAP revenues versus about 31% in Q4?

Tim Vanderhook, CEO

There are a couple of factors to consider. First, we have seen a 17% increase in headcount year-over-year. Furthermore, it's important to note that we incurred over $17 million in stock-based compensation in our operating expenses for Q1. That's why we'll focus on non-GAAP operating expenses, which exclude that figure. When looking at operating expenses without stock-based compensation, they are essentially flat compared to last year, despite making significant investments in additional headcount over the past 12 months. I'm not sure if that fully addresses your question, but I wanted to clarify that point.

Aaron Kessler, Analyst

Yes, I was just looking at the gap between. I think the revenue ex-TAC versus GAAP revenues. It seems that the gap widened a little bit more than we saw in the previous quarter.

Tim Vanderhook, CEO

Yes, part of that $17 million of stock-based comp is included in that number.

Aaron Kessler, Analyst

Okay, got it. Then just maybe if you can comment on the pace of conversations around the cookieless future and what it means for the pipeline?

Larry Madden, CFO

Yes, definitely, the pace of conversations has definitely increased. It's in the news every day, whether it be changes in the ID ecosystem. Whereas six or seven months ago, we were educating clients that this is happening and that they need to start getting ready for this, clients understand they have to be ready for this come next year. So, definitely, the pace is increasing. New sales hires are kick-starting new conversations. One other thing I want to point out, our WWC release, I think is going to help us quite a bit, where we're essentially more effectively embedding everything throughout the platform, really making the Household ID apparent in all those areas and not just in the buying section. I really think that is really going to increase customer adoption towards us come the second half of the year. We did previously say that we think the real payoff is going to be in 2022 when Google does delete cookies. But we are seeing a real interest in testing other solutions. Our agency partners are leaning forward because I know they got to be ready. So, we expect that pace to pick up even more as we go throughout the end of the year.

Aaron Kessler, Analyst

Great. Thank you.

Rocco Strauss, Analyst

All right. Thank you very much. I hope you can hear me. I have two from me. The first is on IDs again. I'm just curious to what extent your household ID is still driven off old Myspace assets and then more generally, around unified ID 2.0 or the commentary that you have given already. Is Viant in any kind of capacity using unified ID or planning to use it or contributing to that? That would be one question. Then the other one was probably more of an educational one here. I guess if I'm using the midpoint of your fiscal year '21 guidance, it seems like you're monetizing at like a 67% take rate, which seems quite high versus peers like retail or the trade desk. So, I guess, it will be helpful if you could walk us through your inventory mix here, owned and operated versus third party as well as any kind of additional services within that revenue that may drive that checkpoint up? Thank you.

Chris Vanderhook, COO

Rocco, thanks for the questions. I'll take the first. I'll leave Larry for the next question. Is the household ID driven off of Myspace data set? That answer is an emphatic no, totally irrelevant from the Myspace data set and not used at all. UID 2.0, Viant plans, when we changed our name to Viant in 2015, we launched people-based and brought it to market under a programmatic platform, really the first one to do that. Our approach at the time was email. So, our ability to accept the hash email identifier from a publisher we've had since 2016. The trade desk is re-architecting their software for that basic concept there. But the issue with email is that publishers simply don't have that data point. So, it's a false premise to say that every publisher available universally is going to be able to capture an email and pass it through. Certainly, if the hashed email identifier comes through a bid stream, we have the ability to bid on that hashed email identifier just like anyone else on the UID 2.0 framework. Prior to it being called UID 2.0, it was called IAB Project Reorg. It was an entire industry-wide effort, but the trade desk has since renamed it to their own UID 2.0. But what is it, if a publisher captures an email address and sends it through, we have no problem bidding and buying off that hashed email identifier. We just don't see it scaling past 20% to 30% of all available ad requests given our history and experience in dealing with this important identifier for the past six years. It simply doesn't scale because publishers don't have the data point required. The head of the internet, the major media companies in connected television will likely be able to authenticate a large portion of their paid subscribers. But we see the better identifier being this household ID approach, which really aggregates all devices in a household and doesn't rely on that device for storage of it or any change that big tech does. So, we believe that the household ID is the scale that all of our competitors will move to over the course of time once they see what's around the corner of the hashed email identifier.

Larry Madden, CFO

Rocco, in terms of the take rate, so Revenue ex-TAC as a percentage of GAAP revenue is not a take rate in our model. Spend is a number that is much higher than GAAP revenue. The reason we show Revenue ex-TAC is because we have different pricing models with different revenue accounting treatment. Our GAAP revenue represents spend on our fixed pricing option, but on our subscription and percentage of spend option, it represents spend after deducting media and data costs. It is not a spend number; it's a GAAP revenue number. But what we focus on is Revenue ex-TAC because that essentially then takes out the media and data costs out of the fixed pricing option such that Revenue ex-TAC normalizes the three different pricing options; it's all net of media and data costs. But it is not a take rate when you do Revenue ex-TAC divided by GAAP revenue, you would have to do that divided by spend, but spend is not a metric that we disclose.

Andrew Boone, Analyst

Hi, guys. Thanks for taking the question. I just wanted to touch base in terms of the Salesforce. And just any progress you guys can share in terms of getting that up and scaled and kind of the client perception as you guys kind of have more feet on the street? Thanks so much.

Chris Vanderhook, COO

First and foremost, let's just talk about the quality of the candidates coming in from the pipeline. Viant really has, post its IPO, the product in the marketplace. I think everyone in the industry is recognizing the scale and accuracy that our ID brings in the frictionless nature that we can use the current ecosystem. When you have that brand halo going on in the market, it attracts a huge level of talent, much higher caliber of individuals coming on board to the team. We mentioned Kendra from a Chief People Officer, David Fahey, head of our agency partnerships came to us from Google. I could go on and on and on about the great companies that these individuals have left to come join the Viant team. Really, it's because the product works and it's scaled today. I think that's what's drawing in the big talent here.

Larry Madden, CFO

As far as the sales hires making headway there, we're well on our way there. We're hopeful that we're going to hire the majority of those really by second half. Our plan is to be well through that hiring plan through the second half. We want to make sure we are hiring the right people, but as Tim said, we're seeing absolutely great candidates across great technology companies coming our way. One other point I want to note, I think, obviously, we are a challenger brand, and I think both from people coming to work here, they understand the opportunity and they want to make an impact. I think commercially moving to the clients, I think clients like the challenger as well. What we hear consistently is they don't want to just see more Google; they don't. A company like us coming, I think, it's been very refreshing for them. We are having great conversations. A lot of times when you're getting great sales hires, you're also providing familiar faces for those clients. So, we've seen that pay some dividends as well. It's still early. We're going to give them time to ramp up, but we're excited about what they're going to contribute in the back half of the year.

Andrew Boone, Analyst

Just to clarify, and this may be more of a Larry question, but this is more of a 2022 event as we start to see that sales capacity fully get up and scaled and running?

Larry Madden, CFO

Certainly, fully ramped, but we do expect and we always had planned it. That's why we were very aggressive in terms of trying to bring as many of them on in the first half of this year so that we get some benefit in the second half of 2021. But clearly, it will have a much more profound effect than in 2022.

Tim Vanderhook, CEO

Yes. Really, just let's talk about which events matter the most. Google deleting the cookie from Chrome is going to be one of the biggest accelerators for our business because as of right now, our competitors can still rely on that cookie to execute their business day-to-day. When Google pulls that rug out and there is no cookie, we really get to see whose ID system really has the scale and the accuracy that marketers are looking for. We've got many, many years of experience in doing this and a clear patented process. So again, we focus all on bringing the team in and hiring. This is all getting ready for 2022 when Google Chrome actually pulls that cookie and the QPS pipe goes from 55% of the cookie down to zero. And then we'll see what our competitors really have behind their software.

Andrew Boone, Analyst

Great, thanks, guys.

Operator, Operator

There are no further questions, Tim, Chris, and Larry. I'll turn it back to you for any closing remarks.

Tim Vanderhook, CEO

Thank you very much for everyone joining us today. Last thing I want to thank is our employees. We wouldn't be here without you, your dedication, effort level, and tremendous level of brainpower that you bring to work each and every day. I just want to say thank you for all of that. We look forward to continuing to build the momentum in the future quarters to come. Thanks, everyone.

Operator, Operator

Thank you so much. And again, this does conclude today's webinar. We thank you all for your participation. You may now disconnect.