Earnings Call Transcript - DSP Q3 2022

Operator, Operator

Hello, everyone. And welcome to Viant’s Third Quarter 2022 Earnings Conference Call. My name is Kelsey, and I will be your operator today. Before I hand the call over to the Viant leadership team, I’d like to go over just a few housekeeping notes for the program. As a reminder, this webinar is being recorded. And after the speakers’ remarks, there will be a question-and-answer session. We thank you for your attendance today and I will now turn things over to Sandra Magnus with Viant Technology. Sandra, over to you.

Sandra Magnus, Co-Founder and Chief Executive Officer

Thank you, Kelsey. Good afternoon. And welcome to Viant Technologies third quarter 2022 financial results conference call. On the call today are Tim Vanderhook, Co-Founder and Chief Executive Officer; Chris Vanderhook, Co-Founder and Chief Operating Officer; and Larry Madden, 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 statements, 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 risks and uncertainties described in our registration statement on Form 10-K 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, Chief Executive Officer of Viant. Tim.

Tim Vanderhook, Co-Founder and Chief Executive Officer

Thank you everyone for joining us for our third quarter earnings call. We posted good operating results in the third quarter amidst a challenging environment. Total advertiser spend on our platform grew 19% year-over-year, ahead of market ad spend growth rates as we continue to gain share in the digital advertising market. In the third quarter, revenue was $48.8 million, a decrease of 4% versus the prior year period and contribution ex-TAC was $32.1 million, a decrease of 6% versus the prior year period. Once again, advertiser spend on the platform was up significantly on a year-over-year basis and existing customers continue to transition their spend from fixed price contracts to master services agreements paying based on a percent of spend. This dynamic creates a drag on revenue and contribution ex-TAC in the near-term, but we expect that drag to subside in 2023. Our Adelphic DSP continues to resonate in market as a leading self-service platform to plan, buy and measure digital advertising across channels. We continue to expand customer relationships as many choose to consolidate their ad spend into our platform. Adelphic gives buyers the ability to programmatically access publisher inventory, saving them time and money. We allow buyers to target valued customers based on a variety of criteria and interests that are relevant to the customer. This results in a higher ROI for the buyer. Most importantly, we provide detailed reporting on campaign performance. This helps the buyer to assess the effectiveness of the campaign and make any necessary adjustments. These benefits are even more necessary in challenging economic times as buyers look to boost the return on their advertising investments. Before turning the call over to Chris, I want to take a moment to address what we are seeing across the macroeconomic landscape. While the growth in advertiser spend we saw on our platform in Q3 was strong, we saw a deceleration of advertising spend throughout the quarter and it is continuing into Q4. Specifically, deceleration in bellwether categories like retail has been significant and we will provide more detail on this slowing growth later in the call. Our company is nimble and able to quickly pivot as needed. This has been a crucial benefit during these uncertain times, allowing us to stay ahead of the curve and adapt as necessary. We delivered a 3% reduction in non-GAAP operating expenses in the third quarter compared to the previous quarter and we will continue to make changes to our product priorities so the company is in position to generate positive EBITDA in 2023. While we continue to adjust our costs to be more in line with the economic outlook, we continue to see strong long-term tailwinds. I would like to remind everyone of the three big tailwinds that have Viant poised for future growth. First, people still prefer to watch their favorite movies and TV shows through streaming applications. With large companies like Disney and Netflix releasing even more ad-supported content, we expect the growth rates for connected TV to be significant in the future. Marketers will continue to shift more of their budgets away from traditional TV in favor of streaming. The addressability of connected TV enables marketers to achieve higher ROI than linear television and we see ourselves as a beneficiary of the more than $60 billion still to be shifted to programmatic over the next five years. Next up is emerging channels. We have always focused on emerging channels as they are the green shoots to large future tailwinds. Connected TV used to be an emerging channel for us, but it is now one of our largest channels. The next two big emerging channels are streaming audio and in-game advertising. Streaming audio has become the go-to method for listeners to consume music, books, and podcasts. There is a significant opportunity for marketers to take advantage of programmatic buying in this very fast-growing and important channel. Although streaming audio only makes up 6% of total spend across our platform today, its addressability and measurability are almost identical to connected TV. The growth rates of streaming audio over the past year show that it definitely has the potential to be a game changer in the industry as advertisers better understand how best to incorporate audio into their media plans. As for the in-game advertising opportunity, this sector of the industry is moving quickly with new ad formats and ways to place ads programmatically. Viant recently announced that we are the first DSP to offer our customers programmatic access to buy ads inside of Minecraft, reaching millions of highly engaged users who spend hours in this unique environment. This entertainment form may be relatively new to programmatic advertising, but it has already gathered a large fan base, resulting in many potential future possibilities for the digital advertising industry. Last, our focus on building measurement and performance based ad buying capabilities will deliver strong growth in any type of economy. Our goal is to be the most measurable platform for our advertisers delivering the highest ROI. Viant's long-term view on the opportunity ahead remain as strong as ever, while we must acknowledge the challenging business environment we also believe that rich capabilities and flexible nature of our platform in times of shifting consumer sense makes our offering all the more valuable. I will now turn things over to Chris to discuss some key strategic updates across the business. Chris?

Chris Vanderhook, Co-Founder and Chief Operating Officer

Thanks, Tim. In the third quarter, we continued to expand our capabilities and partnerships, bringing more value to our customers, while building out one of the leading self-service platforms on the market today. We continue to see marketers and our agencies seeking independent omnichannel DSP that is fully self-service, has industry-leading integrations across all channels, and a strong measurement offering that accurately calculates return on ad spend, again, reinforcing our leadership position as a DSP with the strongest measurement capabilities, a point of differentiation that brings strong tailwinds of untapped spending behind it. Over the last year, we have seen strong customer wins with the number of active customers increasing 10% year-over-year. Additionally, spend per active customer increased 18% over the same period. As advertisers experienced strong campaign performance, they continue to consolidate their spending in Adelphic across all channels. The vast majority of buying customers spend through two or more channels with an increasing number spending across more than three channels. In Q3, we saw strong year-over-year growth in advertiser spend across our largest channels. Connected TV growth accelerated from 2% in Q2 to 13% in Q3 and audio grew 51%. Audio now represents 6% of total advertiser spend and is now on a growth trajectory similar to what we saw a few years ago with Connected TV. We also saw strong growth of 25% across mobile and desktop. The fact that we are omnichannel, meaning connected TV, desktop, mobile, audio, digital out-of-home, and in-game is a major benefit to advertisers given the uncertainty in the economy. It means that we can give them greater flexibility to shift budgets that drive the highest ROI, a benefit that is not present in many walled gardens. Open web programmatic platforms that operate across all channels will be the beneficiaries of the spending fallout from walled gardens. I’d also like to comment on the macro environment with respect to spending on our platform. We saw strong growth in the third quarter in categories such as travel and financial services. We recorded record growth in political advertising spend in Q3. Although, I would caveat that by saying this category represents a small percentage of overall advertiser spend on our platform, but gives us confidence to continue to focus on growing this category in future periods. Although we had a strong year-over-year growth in spend of 19% in the quarter, we did experience a slowdown in certain verticals. We continue to see lower than normal spending in verticals like automotive and CPG, but we also saw our fastest growing category, retail, begin to show signs of softness in Q3 that is now extending into Q4. Amid the backdrop of the slowdown in spending, we have been staying close to our customers. We are continuing to see greater focus by clients around measurement, which ultimately means they want performance-based results from their ad spending. These factors are narrowing our product roadmap focus as we move into next year. One of our biggest product priorities will be to continue our industry-leading work in measurement. A substantial number of our customers rely on our unique management capabilities to drive campaign performance. As performance-based buying increases throughout a recession, our platform leadership and measurement will allow us to consolidate more spend. As campaign performance continues to be a top priority for advertisers, we continue to invest in products utilizing machine learning and artificial intelligence that further improve campaign performance in an automated fashion. Our clients are seeing a lot of success in Adelphic with these products. This will not only drive more spending on our software but will save our customers time and money. I have talked previously about our focus on building automation within our software as a core differentiator and this area is an important component of that. On the partnership front, we recently announced an integration with Snowflake that will allow any Snowflake customer to match their customer data with our Household ID. Many advertisers, data companies, and content owners are hosting their data with Snowflake. As less data is available in the midstream, interoperability with companies like Snowflake will offer content owners the opportunity to easily authenticate their users to allow for addressable advertising to be measured. This will be a big win for content owners and advertisers as the industry moves towards responsibly delivering addressable advertising, while eliminating reliance on Apple and Google. Lastly, I am extremely proud of the industry-wide recognition of our category leadership. We are once again named as the leader in demand-side platforms by G2 in their Fall 2022 Grid report. Additionally, this quarter G2 also recognized Viant as a leader in their Enterprise Grid Report for cross-channel advertising. This third-party validation based on the strength of our self-service platform for omnichannel advertising stems directly from the value we provide to customers. The platform advances we are focused on today will help set us up as we move forward for sustainable long-term growth and ongoing market share gains. We are an independent buy-side platform that is well-positioned in the market with a fully self-service solution, industry-leading integrations across all channels, and a leading measurement offering. Let me now turn things over to our CFO, Larry Madden, to discuss our financials.

Larry Madden, Chief Financial Officer

Thanks, Chris, and thank you, everyone, for joining us today. Before I begin, I’d like to remind everyone that we have posted a presentation to our Investor Relations website with supplemental financial information to accompany today’s presentation. As Tim mentioned, we are pleased with the level of advertiser spend across our platform in Q3, especially considering the current state of the economy. Advertiser spend across our platform increased 19% in the quarter over the prior year period, reflecting continued market share gains and both revenue and EBITDA were within our guidance for the quarter. This afternoon, I will be discussing some of the highlights of our Q3 performance, the key financial and operational drivers during the quarter, and our current expectations for Q4. In terms of top-line metrics for the third quarter, as I said, advertiser spend across our platform increased 19% over the prior year period and 1% over the prior quarter. On a year-to-date basis through September, advertiser spend has increased 30% from the prior year. In the third quarter, revenue was $48.8 million, a decrease of 4% versus the prior year and 5% versus the prior quarter. Contribution ex-TAC was $32.1 million, a decrease of 6% versus the prior year period and an increase of 1% over the prior quarter. As a reminder, revenue from our percent of spend pricing option is recorded after deducting traffic acquisition costs or TAC, whereas fixed price revenue is recorded before deducting TAC. Therefore, as the percent of spend pricing option continues to make up a larger part of our advertiser spend mix relative to the prior year period, we will have a near-term drag on our revenue and contribution ex-TAC growth rates. While the impact of this mix shift has negatively impacted revenue and contribution ex-TAC growth rates in 2022 relative to advertiser spend growth rates, we have seen such growth rates begin to converge over the last two quarters and we expect that trend to continue to improve as we move forward and the impact of the mix shift becomes less significant. As we mentioned on our earnings call, beginning mid-Q2, some customers began reducing their normal spending levels due to the adverse macroeconomic environment. This trend continued throughout Q3 with year-over-year growth rates decelerating throughout the quarter. The pullback has been especially pronounced across our fixed price pricing action, which tends to be less resilient during challenging macroeconomic times. Conversely, our percent of spend pricing option has demonstrated much greater resiliency as evidenced by our customers continuing to adopt and increase their spend using this pricing option. The growth in spend on the platform in 2022 continues to be driven by new and existing customers expanding their use of our platform through our percent of spend pricing option. Increasing customer adoption of our percent of spend pricing option has always been our goal as we believe it creates a deeper relationship with our customers and provides for more consistent, predictable long-term value creation. We believe that the lifetime value of a customer using our percent of spend pricing option is significantly greater than that of a fixed price customer. As a percent of spend customers ramp spend over time, they consolidate budgets on our platform, leading to higher retention rates. In Q3, customers using our percent of spend pricing option on average nearly three times that of customers using our fixed price pricing option. Non-GAAP operating expenses, which is defined as the difference between contribution ex-TAC and EBITDA totaled $33.9 million in the quarter, representing a year-over-year increase to 23% and a quarter-over-quarter decrease of 3%. The year-over-year increase is the result of investments we made over the last 18 months to enhance our product capabilities and expand our sales and technology teams. We have been investing to scale the business, accelerate growth and drive market share gains. However, as Tim discussed, given worsening macroeconomic conditions, we significantly slowed the pace of investment in Q3 and reduced non-GAAP operating expenses in the quarter by 3% versus Q2. For the quarter, we generated adjusted EBITDA of negative $1.8 million, which was in line with our expectations. For the quarter, our non-GAAP net loss, which excludes stock-based compensation, totaled negative $4.4 million and non-GAAP loss per diluted share of Class A common stock was negative $0.06 for the quarter. From a liquidity perspective, we ended the quarter with $200 million in cash, $229 million of positive working capital and no debt. With that, I will now turn to our guidance for Q4. Many of our advertisers are navigating a challenging environment with higher inflation and weakening consumer demand, which creates a volatile demand environment. Given this uncertainty, we believe there could be a wider range of outcomes for Q4, which is reflected in our guidance. The pullback in advertiser spend we experienced in Q3 due to the worsening macroeconomic climate is continuing in Q4. Since June, we have seen year-over-year growth rates in advertiser spend decelerate each month with spend across our fixed price pricing option actually declining over that period. As I said, fixed price tends to be less resilient during adverse macroeconomic times compared to percent of spend. Additionally, Q4 is being negatively impacted by a challenging fixed price comp in Q4 of last year. In Q4 2021, we did exceptionally well in the jobs and employment customer vertical across fixed price. These customers spent significantly to close out 2021 in an effort to capitalize on the heightening demand for labor. In 2022, customers across this vertical have significantly reduced spending across the board as the labor market has cooled, with many companies either freezing hiring or announcing layoffs. As Chris mentioned, growth across our largest customer vertical, retail, also slowed significantly in Q3 as a result of the challenging macroeconomic environment. That trend has continued into Q4 and we now expect spend across our retail vertical to decline in Q4. Based on these factors, we expect advertiser spend to decline in Q4 between 11% and 20% year-over-year. On a quarter-over-quarter basis, we expect advertiser spend to increase between 1% and 11% over Q3 levels, which is well below the normal seasonal uptick we typically see in Q4. For Q4, we expect revenue in the range of $52 million to $57 million, which represents a year-over-year decline of 31% to 37%. The pronounced decline in revenues is due to expected declines across our fixed price pricing option due to the factors discussed, partially offset by continued growth across our percent of spend pricing opportunity. The expected year-over-year decline in revenue across our jobs and employment customer vertical is driving half of the total expected revenue decline at the midpoint of our guidance for Q4. The good news is that we do not expect potential continued weakness across jobs and employment verticals to have a material impact on 2023, as spend throughout 2022 across this vertical was minimal due to the challenges in the labor market. Contribution ex-TAC is expected to be in the range of $32 million to $35.5 million for Q4, which represents a year-over-year decline of 27% to 34%. Importantly, in Q4 contribution ex-TAC is expected to decline less than revenue. This is being driven by the increased mix of spend across the percent of spend model versus fixed price compared to the prior year. This is a trend we expect to continue going forward as fixed price becomes a smaller and smaller percentage of total spend. In Q4, we also expect advertiser spend growth rates and contribution ex-TAC growth rates to further converge as fixed price continues to represent a smaller share of the total metrics, another trend we expect to continue as we move into 2023. In terms of non-GAAP operating expenses for Q4, we now expect a range of $33.5 million to $34.5 million, which represents a year-over-year increase of 8% to 11% and a quarter-over-quarter change of negative 1% to positive 2%. As we mentioned, given the ongoing macro uncertainty we intend to rigorously prioritize and aggressively manage costs. For 2023 we intend to align our cost structure such that irrespective of the challenges that the economy may pose we are positioned to deliver positive EBITDA for the year. And finally, we expect EBITDA in the range of negative $1.5 million to positive $1 million in Q4. In closing, while inflation, supply chain shortages, and higher interest rates, among other factors, are contributing to a difficult market and certainly represent a near-term headwind, we remain confident in our ability to deliver long-term topline growth and EBITDA expansion. We believe our points of differentiation will enable us to successfully capitalize on the market opportunity in front of us. We are confident that our strong balance sheet and disciplined cost management during these challenging times will enable us to weather this economic storm and come out the other side even stronger. That concludes our prepared remarks today and with that I will now turn back over to the Operator to open the video to questions.

Operator, Operator

Thank you, Larry. Our first question will come from Laura Martin with Needham & Company. Laura, please go ahead. You're currently muted, so if you could unmute, that would be great.

Laura Martin, Analyst

Right now I got it. Okay. Sorry. Different technology, I am still working on my phone. Okay. I got two. So the first one is, one of the great things about your ID tracking has been it’s been a Household ID. And one of the things we are hearing from D.C. is that what the regulators may go after next is ISP privacy. Would that affect your Household ID or is your Household ID not dependent on ISP data in the home?

Chris Vanderhook, Co-Founder and Chief Operating Officer

Our Household ID is not dependent on ISP data in the home. So I don’t believe it would have any impact.

Laura Martin, Analyst

Fantastic answer. Okay. Great. So the other thing is, I just want to make sure I understand this guidance. So we are going to go from 19% growth in Q3 to negative 11% to negative 20% growth in Q4. Am I reading that right?

Larry Madden, Chief Financial Officer

That’s correct.

Laura Martin, Analyst

So what did they do? They just left and went to Hawaii. How is this kind of deceleration possible in a 90-day period?

Tim Vanderhook, Co-Founder and Chief Executive Officer

Well, as Larry mentioned, we have seen continual deceleration since about June, although every single month as the economy continues to worsen. I think the biggest impacts on ours jobs was a pretty significant contributor, that’s contributing to a large chunk of that spend decline with that industry being in a very different place this year than last year. And the second one I would point you is retail spending, we are expecting to accelerate year-over-year.

Laura Martin, Analyst

Guys are cancelling their ad campaigns is what that means for the fourth quarter.

Tim Vanderhook, Co-Founder and Chief Executive Officer

I think you are just not seeing the usual increase in holiday spending that typically occurs. We are not really experiencing it in the fourth quarter. Retail is the main factor affecting this, and that’s where we have been performing exceptionally well. It has been our fastest-growing category. However, we haven’t observed much of it in the fourth quarter.

Laura Martin, Analyst

Okay. Thanks, guys.

Tim Vanderhook, Co-Founder and Chief Executive Officer

And one point on that, just to be clear, it’s not that we lost any of those customers or anything like that. We just haven’t seen the increase in spending.

Larry Madden, Chief Financial Officer

I would like to add that we are seeing growth primarily on the fixed price side of the business. The percentage of our spending continues to rise, and we expect it to increase in the fourth quarter at a rate faster than the market. This trend is likely to persist moving forward. Currently, the percentage of spending represents the majority of our overall spending. However, the impact on fixed price is notably negative regarding revenue growth and ex-TAC growth.

Laura Martin, Analyst

Thank you.

Tim Vanderhook, Co-Founder and Chief Executive Officer

Thanks, Laura.

Andrew Boone, Analyst

Hi, everyone. Thank you for answering my questions. I wanted to discuss the last point regarding retaining these clients during the downturn. Can you share what steps you are taking to ensure they remain with us, whether it’s in six months, a year, or just a few weeks?

Chris Vanderhook, Co-Founder and Chief Operating Officer

We're definitely noticing a stronger emphasis on performance-based campaigns compared to brand-based ones. There's a shift happening, and we believe we excel in this area. While this trend is particularly evident in retail, it extends beyond that sector. We're seeing significant success. However, I can't predict how long this will continue as most factors are influenced by the broader economy. What I can say is that our open web platform, which supports multiple channels and is omnichannel like we are, enables customers to adjust their spending while using the same company and software to achieve the best ROI. This is crucial because single-channel companies, such as those operating within walled gardens and focusing solely on mobile apps, will redirect their budgets if they see performance in that specific area. Our system is designed for easy spending shifts, and as I mentioned, the majority of our customers are now purchasing across three or more channels, which is remarkable. This flexibility allows them to reach their ROI goals automatically. I'm not concerned about losing these customers. The challenges are largely macroeconomic, and it seems that many businesses are feeling the effects of economic uncertainty and consumer spending fluctuations, which is causing some hesitance among marketers in both retail and other categories.

Andrew Boone, Analyst

Auto and CPG were down 21% year-over-year. We have previously highlighted auto, which is a sector you mentioned around a year and a half ago. Can you elaborate on the process you are undergoing to strengthen the platform for diversification across your advertiser base? You've successfully added more clients, but where do you stand in broadening your exposure to different sectors?

Chris Vanderhook, Co-Founder and Chief Operating Officer

We have significantly invested in our sales force leading up to this point, and they are currently actively seeking out various types of advertisers who are interested in programmatic advertising or a demand-side platform. Most of these advertisers are already using a DSP, and we are consistently engaging in conversations with them. Regarding revenue diversification, do we face any concentration issues?

Larry Madden, Chief Financial Officer

No, retail remains our largest segment, even though it is currently in decline. However, we have organized our verticals broadly, and none of them accounts for more than 18% or 17% of our total spending.

Tim Vanderhook, Co-Founder and Chief Executive Officer

In response to your question about diversification, I want to clarify that regarding jobs and employment, as Larry mentioned, there is no significant impact on our future. We did see a surge in that area towards the end of last year, but it's mostly returned to normal levels. Beyond that, we've consistently explored new advertising categories. Every few years, a new significant category emerges. For instance, we've seen great success in the casino and online gaming sector, which was not prominent just a few years ago. We adapted quickly to that change. As is typical during recessions, some categories decline while new ones arise, and we tend to respond swiftly to these developments.

Andrew Boone, Analyst

One more and then I will pass it on. You guys highlighted EBITDA in 2023. Clearly, you have made significant investments in the salesforce over the last kind of year. Can you just talk about your priorities in terms of investments that you guys want to maintain or continue to focus on as we think about EBITDA profitability for 2023?

Chris Vanderhook, Co-Founder and Chief Operating Officer

Definitely. I think we will stay opportunistic, focusing our priorities on product and engineering. However, I want to emphasize that we won't be excessive in our spending. We plan to be measured, but we recognize that there is exceptional talent in the market, presenting a great opportunity for us. We have a solid product roadmap that we are very confident about. Overall, we will be cautious with our costs next year. Regardless of the economic climate, we are setting ourselves up to achieve positive EBITDA in 2023.

Maria Ripps, Analyst

Yeah. Thank you so much for taking my question. I just wanted to expand on the last question around verticals and my apologies if this was already covered. So we are hearing about very early signs of recovery in the auto vertical. Is that something that you are sort of seeing on your end and could this be sort of an area of upside over the next couple of quarters?

Larry Madden, Chief Financial Officer

As you know, we have talked about it a lot, that vertical has been down probably eight quarters at this point. It represents a relatively small percentage of the total. But we are actually seeing signs in Q4, interestingly enough of that starting to turn positive.

Andrew Marok, Analyst

Great. Thanks for taking my questions. You have spoken towards this point, I think, a little bit previously in the Q&A session. But just to the extent that the reduced spend outlook is the result of companies either shutting down ad spend or pulling back on ad spend more broadly or just kind of consolidating the number of partners that they are working with. Just trying to think of the differences between those two scenarios and how easy it would be to reacquire that business once either spend or the relationships came back?

Chris Vanderhook, Co-Founder and Chief Operating Officer

That's a great question. Thanks, Andrew. In our situation, we haven't lost those customers or their spending entirely. Except for the jobs vertical, we still have those clients. The decrease in spending is mainly due to the current environment, but we remain confident. They are still using our software, and it's more about a slowdown in their spending. We are optimistic that when their spending returns, it will go back to our software.

Tim Vanderhook, Co-Founder and Chief Executive Officer

Yeah. And just to remind everyone, this is the benefit of programmatic advertising. It’s the flexibility to pause budgets when your business needs to pause budgets, but programmatic advertising is the first to turn back on as soon as they are ready to reaccelerate. We have seen this cycle many, many times and I am sure this is just a low, while they are fixing their own business and the programmatic advertising will be the first button that they pushed to turn back on.

Andrew Marok, Analyst

Got it. Thank you. And then one more, if I could, reading through the slide deck, it looks like you are reiterating your intentions for $500 million in revenue by 2025 and 35% EBITDA margins. I guess in light of the tough conditions now and assuming that maybe lasts into early 2023, can you kind of just draw that line for us and how the thinking around the trajectory of that has changed? Thank you.

Tim Vanderhook, Co-Founder and Chief Executive Officer

Yeah. I mean based on when we look at our current customers, the cohorts and the expected growth with the expected new customer acquisition, I think, where that could go arrive if new customer acquisition has a hiccup in the first half of 2023, maybe in the outer cohorts. As we see it, though, we believe we have the customers on the platform and the scaling of those cohorts is continuing as planned. We talked about the percent of spend business model still doing very well and we are winning customers and they are consolidating more spend. So I don’t see any need that puts risk to that 2025 number in my mind. Chris, anything else to add?

Chris Vanderhook, Co-Founder and Chief Operating Officer

No.

Andrew Marok, Analyst

Great. Thank you.

Tim Vanderhook, Co-Founder and Chief Executive Officer

Thank you.

Jason Kreyer, Analyst

Okay. Very well. I want to talk about the cadence of Q3 and Q4 just from a channel perspective, you highlighted in Q3 the reacceleration of CTV and audio. Just as you go into Q4, are you still seeing more resilience there or are there specific categories that are falling off versus others that are holding up better?

Chris Vanderhook, Co-Founder and Chief Operating Officer

We didn’t provide guidance on that, and I would need to follow up with you on the splits. What we are observing is an overall increase compared to Q3. I would expect it to remain fairly consistent with Q3. However, I don’t have specific splits available right now for this quarter, and our guidance was somewhat broader than usual. This is partly because we are experiencing a late planning cycle, similar to the situation we faced after COVID. During the latter part of 2020, we dealt with a late planning cycle, and we are encountering that again now. Based on conversations with some clients, it seems that budgeting is still uncertain even for December, which is unusual at this time of year. Therefore, it's difficult for me to provide a clear assessment, but I would anticipate that things will remain mostly consistent.

Tim Vanderhook, Co-Founder and Chief Executive Officer

But broadly speaking, we have seen brand advertising budgets give way to performance advertising budgets and I think that’s the overarching shift that most advertisers have right now.

Larry Madden, Chief Financial Officer

I was going to get a little bit more specific. It is, in fact, kind of consistent across the channels, with the exception being streaming audio, which continues even in Q4 to grow, albeit a relatively small percentage of the total.

Jason Kreyer, Analyst

Okay. Larry, maybe stick with you just on the pricing models, when a customer that, when an advertiser on the fixed fee model sees some of that pullback, does that give you the opportunity to convert them over to percent spend and that usually lead to more client churn and then the opportunity to get them back on the platform in a quarter or two?

Larry Madden, Chief Financial Officer

I think we are focused on reducing or postponing some budgets. As Tim mentioned, our clients are not leaving; there is always the opportunity, and we consistently encourage clients to switch to a percentage of spend model. It really depends on their stage in the programmatic life cycle, including their trading capabilities. We are continuously discussing this conversion with our fixed-price clients, which remains consistent during both challenging and prosperous times.

Jason Kreyer, Analyst

Thank you.

Chris Kantareg, Analyst

Hi. Can you hear me okay?

Tim Vanderhook, Co-Founder and Chief Executive Officer

Yeah. Go ahead, Chris.

Chris Kantareg, Analyst

Hi, this is Chris standing in for Lloyd. I want to discuss the advertising spend guidance for Q4 and clarify the difference between the projected decline of 11% and 20%. How should we consider the retail aspect in relation to the difference between these two figures? Will we see an increase in the trends that are already slowing down, and are we currently experiencing negative spending in October? I’m interested in understanding how retail specifically factors into this guidance.

Tim Vanderhook, Co-Founder and Chief Executive Officer

Larry, do you want to take that?

Larry Madden, Chief Financial Officer

Sure. To start, regarding our current situation, October was challenging, as we experienced a low single-digit decline that aligns with the trends observed over the past four to five months, particularly since June, where we've noted increased deceleration. This trend has continued into November, which is showing a decline that is more pronounced than in October. The retail sector is significantly affected, particularly since it is our largest area of business, making its impact considerable. As for the range we are providing, due to the substantial uncertainty in the market, we are adopting a more pragmatic approach by offering a wider range than usual, especially at this point in the quarter. While we have a fairly good idea of what to expect, we believe that presenting a broader range is prudent given the heightened uncertainty.

Chris Kantareg, Analyst

Got it. As we consider those Tier 2 and Tier 3 verticals, which represent the long tail for you, is there an assumption in that guidance suggesting that the weakness in a few of these verticals might expand, or should we focus on the fact that retail and jobs are already considered in the forecast?

Larry Madden, Chief Financial Officer

I think that is true. There are certain verticals that are actually performing better despite the challenges we faced with COVID, but retail, jobs, and travel, for example, remain strong even in Q4 to give you a sense.

Tim Vanderhook, Co-Founder and Chief Executive Officer

Again, to answer specifically, certainly it’s baked in to the guide, retail and jobs.

Chris Kantareg, Analyst

Got it. Okay. So further weakness in retail, but not at an accelerating pace of that retail weakness, if that makes sense.

Chris Vanderhook, Co-Founder and Chief Operating Officer

Well, certainly accelerated downward from Q3.

Andrew Marok, Analyst

Okay. Okay. And just maybe stepping back to just thinking about 2023 and the return to profitability, just how should we be thinking about scenarios for you to return to double-digit type of EBITDA margins for next year? What would need to happen for that to play out?

Tim Vanderhook, Co-Founder and Chief Executive Officer

I think as we look at, it will take an acceleration of spend to get back to that double-digit EBITDA. I would just say we slowed the pace of our hiring plans pretty tremendously relative to what we were thinking at the start of the year and we kind of will stay ahead of the curve. In terms of just overall operating expenses, they are very much under management’s control. There’s nothing that we feel like we have to keep spending on to be able to achieve growth in the future. It’s more about just managing through this mid- to near-term hiccup.

Unidentified Analyst, Analyst

Understood. Thank you.

Operator, Operator

That concludes our question-and-answer session for today. Tim, Chris or Larry, do any of you have any closing comments for today?

Chris Vanderhook, Co-Founder and Chief Operating Officer

That’s it. Thanks for joining the call and we will see you next year.

Operator, Operator

Okay. Thank you so much, Chris. Everyone, we thank you for joining us today. Again, this does conclude today’s earnings call. We thank you all for your participation and look forward to seeing you next earnings. Happy holidays everyone.