Earnings Call Transcript - DV Q2 2021

Operator, Operator

Greetings and welcome to the DoubleVerify Second Quarter 2021 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tejal Engman. Thank you. The floor is yours.

Tejal Engman, Host

Good afternoon and thank you for joining us to discuss DoubleVerify's second quarter 2021 financial results. With me today is Mark Zagorski, CEO, and Nicola Allais, CFO. Before we begin, I'd like to remind everyone that statements made on this call contain forward-looking statements. These statements are subject to inherent risks, uncertainties and changes and reflect our current expectations and information currently available to us and our actual results could differ materially. For more information, please refer to the risk factors in our recent SEC filings, including our S-1 registration statement. In addition, our discussion today will include references to certain supplemental non-GAAP financial measures and should be considered in addition to and not as a substitute for our GAAP results. Reconciliations to the most comparable GAAP measures are available in today's earnings press release, which is available on our investor relations website at ir.doubleverify.com. With that, I'll turn it over to Mark.

Mark Zagorski, CEO

Thank you, Tejal, and thanks, everyone, for joining us this evening. We're excited to have delivered another quarter of strong top and bottom-line growth, with second quarter revenue growing 44% year-over-year, exceeding our prior guidance and adjusted EBITDA growth coming in at a solid 35% year-over-year. The DoubleVerify story continues to be one of strong revenue growth and profitability, driven by successful product innovation and clear market leadership in a rapidly evolving digital advertising ecosystem. Our accelerated revenue growth is driven by our product success in fast growing sectors such as programmatic, social and CTV and a global expansion strategy that's winning large enterprise clients in a growing number of international markets. Our innovative industry-leading software platform continues to scale rapidly across the global digital advertising ecosystem, driving more data, better analytics and deeper insights, which combine to yield better results for our advertisers. And our growing roster of accreditations and privacy certifications continue to distinguish us in the marketplace. We have raised our full year revenue guidance and are excited about DV's long-term growth trajectory as our platform expands from verifying the quality of media impressions to helping drive ad performance with the objective of maximizing return on ad spend for our clients. Working to drive performance outcomes create stickier relationships with advertiser partners and greater opportunities to generate revenue. Let's take a few minutes to dig into our key revenue growth drivers. Starting with programmatic, revenue from authentic brand safety, or ABS, our market-leading prebid solution, grew 112% year-over-year, driven by wide scale adoption on Google's DV360 platform, where it was launched in the fourth quarter of 2020. ABS continues to roll out on additional programmatic buying platforms around the globe, creating greater opportunities for advertisers to upgrade to this premium solution. In the second quarter, we successfully launched ABS on Adform, which is Europe's largest independent programmatic buying platform, as well as on Quantcast and PulsePoint, with rollout expected on Tremor International in the third quarter. As ABS is a premium-priced alternative to our basic programmatic brand safety offering, a portion of the increase in overall programmatic revenue stems from clients upgrading from standard brand safety to ABS as we successfully upsell this unique solution. We believe the success of ABS is a great example of how our platform and its integrations across the ecosystem are a flywheel for growth. Our software platform leverages established technical integrations across the digital advertising ecosystem to capture and process data at scale, allowing us to successfully build and launch new products. Once these products are built, our in-place ecosystem relationships enable seamless upsell and distribution with compounding revenue streams. This virtuous data, innovation, distribution cycle helps build scale and intelligence that deliver better results and attract new clients, spinning the flywheel even faster. Moving to social. Our clear leadership position in this sector helped grow DoubleVerify's social volume by 100% year-over-year, making up approximately 35% of our direct revenue in the second quarter. DoubleVerify delivers a wide set of MRC-accredited solutions available on the largest social network, Facebook and we continue to expand and deepen social platform integrations with a growing roster of partners. We recently launched our TikTok viewability and fraud solutions in open beta in 14 markets and are excited about the expansion of this relationship and its potential for future growth. Turning to CTV. Our products continue to gain traction in one of the fastest growing segments of the advertising market. eMarketer now forecasts 2021 CTV ad spend to grow by almost 50% year-over-year. DoubleVerify grew second quarter CTV volumes by 89% year-over-year, driven by DV Video Complete, which is currently the only solution that allows brands to effectively block brand suitability and fraud violations on CTV through video filtering. Advertisers using DV video filtering saw a 49% lower brand suitability violation rate than those who have not yet adopted the tool. DV video filtering for CTV recently received MRC accreditation. We also added fully on screen, which is our measure of CTV viewability to our list of CTV metrics to receive the MRC stamp of approval, which coupled with our CTV fraud and invalid traffic accreditation, firmly puts us in a leadership position for quality CTV metrics. Additionally, we have recently launched the industry's only app-level CTV brand suitability solution, which offers advertisers wide brand suitability coverage across all CTV platforms, apps and devices. We are the first verification provider to roll out turnkey brand safety tiers and floor controls in alignment with standards advanced by the 4A's Advertising Protection Bureau and World Federation of Advertisers Global Alliance for Responsible Media. And we have recently rolled out these controls on YouTube as well. Shifting to international growth. We now generate revenue in 94 countries. We grew second quarter APAC revenues by 73% year-over-year and EMEA revenues by 62% year-over-year as we continue to execute our global expansion strategy. We see both extensive white space and competitive opportunities in global regions outside the Americas. We recently won the global business of new enterprise clients, including Diageo, BMW, Philip Morris International, Grupo Bimbo and Bumble. International clients switched to DV based on three key differentiators. The first is the strength of our software platform and its unique ability to seamlessly connect measurement to targeting with our pre- and post-bid capabilities, while servicing insights through a consolidated user interface. Second is the depth and granularity of our product integrations across media buying platforms. And third is the scale at which we measure and analyze transaction data. Combined, these factors produce better analytics which maximize ROI for clients and help us win in head-to-head comparisons with other platforms. DV has won 86% of new or expansion business opportunities over the past five quarters. Direct revenue outside of the Americas grew nearly 66% year-over-year in the second quarter, representing approximately 24% of direct revenue and exemplifying the expanding opportunity for the application of our software in markets around the globe. On top of our global direct and programmatic growth, we continue to renew and expand revenue-generating partnerships with key supply side platforms and publishers, including MoPub, a market-leading mobile sell-side platform and Yahoo! JAPAN, one of the largest digital publishers in the APAC region. Building off our successful acquisition of Ad-Juster in 2019, DoubleVerify is now integrated with 85 of the world's largest publishers enabling us to leverage our data set into accretive solutions across both the buy and sell sides of the digital advertising ecosystem. Let me conclude with an update on our performance solutions and investment in privacy leadership. Our recently launched privacy-friendly performance solutions continue to gain traction, taking advantage of the growing vacuum created by the ongoing deprecation of third-party cookies. Google's announcement to delay cookie deprecation on Chrome gave the industry a brief breather. However, the momentum shifting digital targeting away from cookie-based identifiers is unstoppable as cookie-less venues such as iOS devices and CTV gain increasing advertiser attention. DV custom contextual is a cookie-free and privacy-safe programmatic performance solution that leverages the same best-in-class ontology and semantic science that powers authentic brand safety to maximize the relevance between ads and content. Recently, Vodafone U.K. partnered with us to test DV custom contextual and the results were exceptional. We delivered over twice as many acquisitions per dollar than Vodafone U.K.'s benchmark and over three times as many as a competitor's contextual strategy that was running in parallel. Custom contextual was recently made available on leading DSPs, including The Trade Desk, MediaMath, Adform, Amazon, Verizon Media and Xandr. Advertisers regularly using our solution have more than doubled in the second quarter compared to the first quarter of this year. As global market leaders in a rapidly evolving digital ad ecosystem, privacy is at the core of our business. DV's measurement solutions are cookie-free and we are proud to announce that we are the first in the industry to be awarded privacy certification seals from TrustArc, demonstrating that DV's data protection mechanisms are aligned with core international data protection principles and standards. In summary, Q2 was another strong quarter for DV. We continued to deliver robust growth based on our channel strength in programmatic, social and CTV, as well as our successes on the global new business development front but we are winning share and filling in white space around the world. Our market-leading partnerships and platform innovations position us to take advantage of industry tailwinds. We've made tremendous progress to-date, and we see a strong long-term growth trajectory ahead. With that, let me turn the call over to Nicola.

Nicola Allais, CFO

Thank you, Mark. We're pleased to have delivered $76.5 million of revenue in the second quarter of 2021 as compared to $53 million in the second quarter of 2020. Our 44% year-over-year growth rate in this quarter is even more impressive considering that despite the pandemic, we grew by a robust 22% in the second quarter of 2020. Overall, revenue growth was driven by growth in the volume of Media Transactions Measured, gross revenue retention remaining above 95% for the quarter, while our new enterprise client wins continuing to increase our market share. Second quarter 2021 adjusted EBITDA was $21.2 million, representing a 28% EBITDA margin as compared to $15.6 million or a 30% margin in the second quarter of 2020 as we invest in global operations, including product and engineering to continue to drive long-term growth. A net loss of $12.6 million this quarter was entirely due to $18.9 million of one-time IPO-related transaction costs. Cost of revenue increased by $4.6 million year-over-year in the second quarter, primarily due to higher costs from revenue-sharing arrangements with our programmatic partners as the programmatic revenue grew as a percentage of total revenue, but also due to increased investments in cloud-based hosting solutions to provide the scale and flexibility necessary to support our volume growth. Our second quarter product development costs increased by $4.2 million year-over-year as we extended our first quarter investments in scaling our operations globally and accelerating our product roadmap into new verticals. We are focused on executing our long-term growth strategy and to that end have ramped our investments in hiring talent with a particular focus on sales, engineering and product. Sales, marketing and customer support expenses increased by $6.8 million in the second quarter of 2021 as we expanded our market presence in international markets, including building our newly formed global client and agency partnership team, which is focused on driving growth with DV's largest enterprise customers globally. Approximately half of our new hires in the second quarter were outside of the Americas and we expect these investments to yield strong returns over the mid- to long term. In terms of balance sheet and cash flow, we generated $23 million in cash from operating activities in the second quarter of 2021 compared to $5 million in the second quarter of 2020. We had $330 million of cash at quarter end. We repaid $22 million of outstanding debt in the second quarter and currently have zero debt on the balance sheet. The strength of our balance sheet provides us with an advantage when it comes to expanding our global footprint, investing in our technology roadmap, as well as capitalizing on strategic acquisition opportunities with the potential to further accelerate our long-term growth. Now turning to guidance. We expect third quarter revenue in the range of $81 million to $83 million, which at the mid-point implies growth of 34% year-over-year. We expect third quarter adjusted EBITDA in the range of $22 million to $24 million, which at the midpoint implies an increase of 59% year-over-year, and an adjusted EBITDA margin of 28%. Finally, we expect our third quarter weighted average diluted shares outstanding to range between 166 million and 169 million shares. For the full year 2021 guidance, we expect revenue in the range of $325 million to $330 million, a year-over-year increase of 34% at the midpoint and higher than the prior guidance range of $322 million to $326 million. Our second half 2021 guidance reflects sequential revenue growth rates that return to the seasonal patterns that we achieved in 2019. As we continued to prioritize investing in the business to drive long-term growth, we expect adjusted EBITDA in the range of $103 million to $105 million, a year-over-year increase of 42% and an adjusted EBITDA margin of 32% at the midpoint. In summary, our strong first half 2021 results of 38% revenue growth and 30% EBITDA margins delivered against the rule of 60 and we are executing well against our full year plan. And with that, we will open the line for questions.

Operator, Operator

Our first question comes from Mark Murphy with JPMorgan.

Mark Murphy, Analyst

Yes. Thank you very much and congrats on the strength of results. I wanted to ask about your 2021 Global Insights Report, which showed overall fraud is down 30%. But it seemed to show some different activity in mobile app and connected TV. So two questions on that. First of all, to what do you attribute that overall decline in fraud? And second, how is the nature of fraud changing in the connected TV arena?

Mark Zagorski, CEO

Thank you for the great question, Mark, and for reviewing our report. We appreciate when our analysts engage deeply with our research. To address your first point about fraud, it's important to recognize that while fraud rates have significantly decreased, there is still a considerable volume of fraud present in the marketplace. We've noticed a direct correlation between our prebid fraud avoidance and filtering solutions and declines in post-bid fraud measurement. Essentially, as clients adopt our prebid filtering tools, such as ABS, we see a corresponding reduction in post-bid fraud. This indicates that our strategies are effective—by filtering out impressions before they reach buyers, we can effectively reduce overall fraud rates. Regarding your second question about connected TV (CTV), we've observed that as demand for CTV inventory rises and CPM rates for that inventory increase, it creates ample opportunity for fraudulent activity. The analogy here is that just as people rob banks because that's where the money is, fraud is gravitating toward CTV for the same reason. The first way we've seen fraud emerge in this space is through device spoofing, where a device alters its domain name or device identifier to mimic a CTV. Additionally, we are witnessing domain spoofing, where individuals create a domain name resembling a legitimate brand or application. Another concerning trend is the emergence of fraudulent apps. These apps might appear harmless and may even contain some legitimate content, but in the realm of CTV, they can continue to serve ads in the background, even when not actively being used. This represents an evolution of similar issues we encountered with mobile apps in the past. In summary, while new devices tend to give rise to new types of fraud, we are making significant investments in our fraud lab to combat these issues. The positive takeaway is that our prebid filtering solutions are proving to be effective in reducing post-bid fraud rates.

Mark Murphy, Analyst

Excellent, Mark. Thank you very much for the very clear answer and it is great to see that correlation with what you're trying to do prebid and what's happening post-bid.

Operator, Operator

Our next question comes from Arjun Bhatia with William Blair.

Arjun Bhatia, Analyst

Wonderful. Thank you and congrats on the strong quarter. I heard in the prepared remarks that you established a new client and agency partnership team. I would just love to hear a little bit more about that. How they're going to be working with your largest accounts and maybe how that might change the revenue growth that's coming from your existing customers versus perhaps new accounts that are coming onboard.

Mark Zagorski, CEO

Yes, Arjun, that's a great question. Thank you for highlighting that because it is an important initiative for us. To provide some background on why we formed this team, we've noticed a trend where advertisers are consolidating their verification solutions into a single platform. Our offerings align well with this trend, as we cover viewability, brand safety, suitability, geographic alignment, and fraud prevention. Companies are looking to streamline their operations globally, which means our previous regional and solution-based client approaches were no longer sufficient. We established this team to cater to the broader, global needs of enterprise clients, such as Unilever and Mondelez, with whom we work internationally, as well as to engage potential clients seeking a comprehensive global partnership. Enterprise clients prefer working with a partner that can address their needs anywhere in the world. This also empowers us as we approach new clients because our solution's design and team organization enhance our position. Increasingly, we are looking at deals that span multiple countries instead of being limited to single-country transactions. For example, some of our brands collaborate with us in over 75 markets globally, requiring a global approach to both service and business development. This team's purpose is to leverage the consolidation that clients are pursuing in their platform operations, ensuring we align with their objectives. Regarding our revenue growth, a significant portion, as we've mentioned previously, comes from organic growth or same-store sales. This can result from the consolidation of assets, where we might not possess complete ownership of the business, along with driving global volume and expansion. The team's role also involves increasing usage and upselling products to current clients. The intention behind forming this team was not just to maintain revenue but to accelerate our growth. Though they have only been established for a few months, we are confident that as they align with our clients' goals and transition into 2022, they will significantly contribute to ongoing revenue growth.

Arjun Bhatia, Analyst

Perfect. That sounds very interesting. That's very helpful. And one more, if I could, for Nicola. Obviously, you're seeing strength in your business. It seems that programmatic growth has certainly exceeded expectations this quarter. Can you maybe just talk about your guidance and how you're looking at the back half of the year because it seems like we're keeping second half growth rates relatively constant with the revised full year guidance?

Nicola Allais, CFO

Yes, Arjun, good question. So first, I would just want to spend a moment on second quarter, which was strong at 44% growth. And how we got there was, as you said, programmatic was very strong, ABS continued to drive that part of the growth. But we also saw a return of spend for some of the customers that had paused last year during the pandemic. As you know, our revenue is not tied to CPMs. And so, even last year in the second quarter, we grew 22% in the second quarter of 2020. This year's 44% growth in the second quarter is all that more impressive right because it's just driven by volume. For the second half, we are still seeing an uncertain operating environment related to COVID. And so, our view is to remain prudent. We're not hearing this from our advertisers necessarily that they're looking to pull back. But the general environment feels that we ought to be prudent when we look at the second half of the year. And that's sort of how we put the guidance out there. It is still a 34% growth rate for the year with margins over 30%, which gives you still a rule of 60, which is what we're committed to.

Arjun Bhatia, Analyst

Thank you very much, and congrats on the quarter.

Operator, Operator

Our next question comes from Youssef Squali with Truist Securities.

Youssef Squali, Analyst

Thank you. Congrats on a solid quarter, your second in a row post-IPO. So maybe the first question to Nicola, just a follow-up to the prior question about guidance. So you're obviously up against some tougher comps in Q3 because the growth rate went from 22% up to 36%, so I'm sorry, to 32% last year. I was wondering just if maybe you can peel that onion a little bit, maybe speak to what you're baking in, in terms of advertiser direct versus programmatic for the second half? And then, on the TikTok open beta, congrats. That's a really great news. How long does the beta last, is the U.S. one of the 14 countries where you are? Maybe Mark, you can just provide some additional color, commentary there. Just trying to understand kind of the timing of TikTok potentially becoming a paying client and then how do we go about maybe getting our arms around the possibility for contribution to revenues over time, I guess, in 2022, which you're not guiding to right now, but just kind of qualitatively, if you may.

Nicola Allais, CFO

Yes, Youssef, I'll address the guidance question regarding Q3. We're expecting strong growth from our programmatic efforts, particularly with the adoption of ABS driving this success. We anticipate that the trend of shifting towards programmatic over direct sales will persist in Q3, which means you can expect an increase in programmatic revenue percentage. However, we're not experiencing any decline in direct sales. We've secured significant enterprise wins in the first half of the year that will also support our growth. The trends we've seen in the first and second quarters should continue into the third quarter.

Mark Zagorski, CEO

We are very enthusiastic about the TikTok opportunity as our advertisers are showing strong interest. Earlier this year, we initiated our first client advisory council, with a significant focus on expanding our advertising solutions on TikTok. Advertisers want to ensure they can confidently allocate their advertising budgets to TikTok just as they do on other platforms. We are pleased to be part of the beta program, which includes the U.S. among 14 other markets, all driven by advertiser interest as well as TikTok's growth. We expect to implement this in Q4, though it will be a gradual process. The potential of this opportunity will depend on the ad spend in that space. Our model indicates that once advertisers engage with us, they tend to work with us across all available platforms. Social media has been a key growth sector for us, experiencing 100% year-over-year growth in Q2, and we anticipate continued growth in social ad spending. Therefore, we believe TikTok can significantly enhance our lineup of social partners, which already includes YouTube, Twitter, Facebook, Snap, Pinterest, and Instagram. This inclusion is expected to positively influence our performance in 2022, although it's too soon to determine the exact impact, which will largely depend on advertiser demand, as they are likely to utilize our services for their TikTok ad impressions.

Youssef Squali, Analyst

And just to clarify, Mark, do you know if any of your competitors are also kind of working on similar support of the TikTok platform? Or are you guys the first, at least in the U.S.?

Mark Zagorski, CEO

Yes. I mean, there are other participants in the beta, but we obviously have a unique position with our client base. And that's the nice thing to remember about where we sit is, our current enterprise relationships with the largest brands mean that once we have a new venue to measure against any dollars that they're spending there for the most part immediately get turned on with us.

Operator, Operator

Our next question comes from Michael Graham with Canaccord.

Michael Graham, Analyst

Thank you. Hey, Mark, you mentioned in your prepared remarks, this move from measuring quality to measuring performance which I know you've talked about before. But I wonder if you could just spend a second kind of talking about two things. One, does that move you into a different set of competitors in the business? And then, the second thing is, could you just talk about what sort of scale of development it takes to kind of move you firmly into that performance measurement area, I mean, more firmly than you already are? And then as a quick follow-up to the guidance, Nicola, could you just remind us on revenue visibility? Is that evolving in sort of like are there things that could happen that could surprise you to the upside, I guess, as we get through the rest of the year?

Mark Zagorski, CEO

I'll handle the first part, and Nicola can address the second. Regarding our shift from protection to performance, it's noteworthy that the gap between these two areas is narrower than it might seem. Core verification—such as removing fraud, eliminating non-viewable impressions, and filtering out impressions that don’t meet geographic or brand safety standards—is the initial step toward improving performance. By cutting out underperforming inventory, we enhance performance right away. Our evolution in this space is an extension of our current efforts; we are transitioning from a broad reduction of inventory to a more precise approach, identifying high-quality elements within what remains that can significantly boost performance. From a development standpoint, we utilize the same core data set across our solutions. This is the essence of our business model. We often mention our flywheel effect, where data gathered on context, behavior, and geography is reintegrated into performance solutions. Whether it's contextual targeting, authentic attention, or our future offerings, we are repurposing our existing data assets into new applications. This excites us about the flywheel concept, as our verification business generates more data, which fuels new solutions. These solutions enable us to engage with a broader range of advertisers, which in turn provides us with additional data, accelerating the flywheel further. Concerning development expenses, our foundational data is already established, and these initiatives are expansions of existing applications. We consistently prioritize product and engineering development, and importantly, every investment is connected back to our core. Regarding your question about competition, I don't believe our advancements radically change competition; rather, they allow us to engage with companies that have previously explored verification. We're all aiming to enhance performance, but our perspective is rooted in the advantage of scale and comprehensive data. Most performance-oriented applications focus narrowly on campaign-level optimizations. However, we analyze every possible interaction throughout the entire transaction process, which provides us the breadth needed for optimization that surpasses companies focused solely on individual campaigns. In summary, this shift introduces a new tier of competitors, but many of them remain limited to point solutions focused on campaign optimization and lack our data scale. This allows us to leverage our extensive data to drive performance from a position of strength.

Nicola Allais, CFO

Michael, regarding the positive surprises, I would focus primarily on the fourth quarter. We have been clear that we are being cautious, especially in the fourth quarter, which is typically our strongest quarter in a typical year. The surprises may stem from a full return to a normal operating environment, which is not entirely certain yet. As we have consistently stated, we are being careful in the fourth quarter, so any improvements would primarily come from volume. Our focus would be on volume driven by measured transactions rather than pricing. Additionally, benefits could arise from increased activity levels among our existing customers if they exceed our current expectations. There are also potential positives related to increasing volumes with our partners in social media and connected TV, though these remain uncertain. However, I believe that the greatest potential upside would come from normalized volume from our existing customers, which we are approaching cautiously.

Operator, Operator

Our next question comes from Matt Hedberg with RBC Capital Markets.

Matt Hedberg, Analyst

Hey, Mark. Obviously, really strong growth this year off of the COVID year or the COVID quarter last year. I'm curious, when you look at some of these customers that obviously faced a lot of stress last year, have you noticed any difference in how they're leveraging your platform today maybe than versus pre-COVID? In other words, are they leaning into digital advertising more or different? Just wondering because I would imagine there could be some interesting trends coming out of some of those customers.

Mark Zagorski, CEO

That's a great question, Matt. We observe that advertisers are increasingly focusing on specific sectors compared to the past, particularly CTV and social media. These changes reflect both shifts in advertiser behavior and consumer engagement. Following COVID, we noticed changes in behavior, such as drive time shifting to home time, which led to increased screen usage. Notably, we have seen more investment in CTV and social media. Last year, social media was experiencing significant upheaval due to various social movements, leading advertisers to reconsider their presence on these platforms. Advertisers wanted to ensure they were engaging with social media in the right way, which contributed to our impressive year-over-year revenue growth in that area. While it may not indicate a behavioral change among advertisers, there has certainly been an evolution over the past year. On the CTV side, we are witnessing a lasting behavioral shift. The surge in over-the-top content, including ad-supported options, marks a significant change. Advertisers are now more comfortable purchasing CTV inventory, which has positively impacted our business. As a result, we are heavily investing in not only developing new CTV solutions and enhancing our existing offerings but also in ensuring these solutions are accredited to build confidence. If there is a behavioral shift, we see these two sectors benefiting from it in terms of advertiser spending.

Matt Hedberg, Analyst

No, that makes a ton of sense. And just it feels like with all the structural changes that I think we're all expecting you guys to benefit from, it feels like what you suggested should certainly pay one.

Operator, Operator

Our next question comes from Andrew Boone with JMP Securities.

Andrew Boone, Analyst

I got two please. So the doubling of adoption of advertisers for custom contextual this quarter was impressive. Can you talk about how you move advertisers from kind of testing the product to being an always-on tool and returns that they're seeing? Additionally, can you talk about the impact of pricing that the move to performance has and how we think about that moving through the model? And then I've got a follow-up.

Mark Zagorski, CEO

Certainly. We're pleased with the adoption of custom contextual offerings. It's a strong example of leveraging our core asset to enhance performance while maintaining a premium price point. The transition for clients into custom contextual is facilitated through our Pinnacle software platform, which provides an excellent embed solution. This enables clients to utilize the same data for measurement and integrate it into their custom contextual targeting. Much of the upsell in contextual involves collaborating with our existing core clients, utilizing the data and assets they already employ for post-bid measurement and their DSP integrations. This underpins our model, where distribution is established, and core data is available. The goal is to channel that data into distribution cycles through new products like custom contextual. This has proven to be a strong example of future product introductions. We see significant potential in custom contextual, with its success largely dependent on timing. Given the challenges posed by the decline of cookies and other performance solutions reliant on audience data or PII, context is becoming increasingly important for advertisers focused on performance optimization. Regarding your second question on pricing and performance solutions, we find ourselves in a favorable position. The idea of pricing is similar to paying for a car and its seatbelt; the seatbelt is essential and consistently used, while the engine, which drives performance, commands a premium price. Our performance solutions are priced similarly, and as they expand, we have the opportunity to enhance our average fee structure. These solutions are relatively new, so we're not incorporating them into individual forecasts for the next year. However, as they gain traction and represent a larger segment of our overall revenue, they could potentially elevate our overall rate.

Andrew Boone, Analyst

That makes a lot of sense. And then, on CTV, I think viewability and video filtering are relatively new features. I guess just taking a step back, can you talk about your position competitively and where you think DV is differentiated today? And is this really kind of a spear in terms of new account wins at all or how is CTV going into your go-to-market and sales pitch?

Mark Zagorski, CEO

CTV continues to grow as a significant part of our overall video revenue, now representing over 30% of our direct business. It remains a crucial factor for us. From a competitive standpoint, I believe our toolset is unmatched in terms of brand safety, viewability, and fraud prevention. We were the first to offer CTV solutions and are currently the only provider with brand suitability tiers for CTV. This gives us a strong advantage. As CTV becomes a key focus for many advertisers, our unique solutions, including app-level brand safety and partnerships with Roku, Hulu, and Amazon, become essential talking points in client discussions. Our leadership in accreditation, functionality, and partnerships sets us apart. We recognized the potential of CTV early and have established a strong leadership position in that space.

Operator, Operator

Our next question comes from Yun Kim with Loop Capital Markets.

Yun Kim, Analyst

Congrats on a solid quarter. Just on the international growth, which again was very strong, very impressive, are you seeing the same growth dynamics that you're seeing in the U.S. for the international market? Is that driven just like the U.S. social, connected TV channels and also adoption of ABS?

Mark Zagorski, CEO

Yes, that's a great question. Thank you for asking. There are definitely different dynamics outside of the U.S. For instance, connected TV is not as much of a factor in most global markets as it is in the U.S. The situation is quite different. However, it’s interesting to note the significant role that social media plays outside the U.S. Social media is a major driver in these markets for several reasons; in many areas, it’s not only the primary engagement tool but also one of the safest. Particularly in the Asia-Pacific region, it's a mobile-first market, where social and mobile are closely linked. Growth in that region is being spurred more by social media compared to other parts of the world. Overall, our growth outside the U.S. is significant, with APAC at 73%, EMEA at 62%, and a growth rate over 60% outside of the Americas. This growth comes not only from organic increases in those markets but also from the substantial opportunities we have to expand further. That’s why, when discussing our investments in people for the year, we noted that 56% of those investments in the second quarter were outside the U.S. We are seeing excellent enterprise growth with our current clients in those regions, and there remains plenty of opportunity for growth. Each of these markets has distinct characteristics; many are social-first and mobile-first. The advantageous part for us is our ability to remain platform-agnostic. Our business focuses on verifying across all platforms, regardless of the market or the type of inventory being traded, whether it’s social media, connected TV, or traditional display ads. Our solutions cater to those diverse needs. It's essential for us to have a solution that addresses various market demands, and we're capitalizing on that opportunity.

Yun Kim, Analyst

Okay, great. That's very helpful. I have a question for Nicola. So with the company, obviously, you guys are getting scale. Customers are spending more on your platform. Are you beginning to see some of your larger customers looking to do maybe annual contracts where they can commit to a certain volume upfront for a discount?

Nicola Allais, CFO

That's a great question, Yun. We are experimenting with volume tiering in our pricing approach with our customers. Our strategy focuses on volume-based expansion to validate new verticals and geographies. This strategy has proven successful and is well-received by our customers, as we have implemented volume tiering at various impression levels. That has been our approach thus far.

Operator, Operator

Our next question comes from Justin Patterson with KeyBanc.

Justin Patterson, Analyst

Mark, could you talk about which inning you are in with respect to getting more inventory, more volumes, running through social and CTV. Is it more of the case the platforms just need to grant you more access to that inventory? Or are there some additional investments you need to make there? And then for Nicola, a follow-up on commentary you made around volumes. It is a very strong digital advertising year, but it's also one being led more by price than impression volume. How are you thinking about those dynamics into the second half since it'll likely be the case that price inflation may even get worse and available impressions remain fairly light?

Mark Zagorski, CEO

Really good questions, Justin. Thanks for those. So you mentioned social and CTV. And the interesting thing about those two venues is the expansion of business there are on two opposite fronts. On the CTV side, we have really good broad coverage, but I think the opportunity there is getting deeper. On the brand safety front and a lot of the other things that are becoming increasingly important to advertisers, getting show-level or program-level data, I think, is the next step for us to continue to create more transparency within CTV. So I think from a broad perspective, we cover a great deal of CTV through some of the partnerships that we have and we're really happy with those. The next step of growth there, I think, from a verification perspective and a performance perspective is getting deeper. And I think that will eventually come. On the social side, that is a great case of getting broader and broader within certain channels. And I think there was some public; there was an article recently that was published in the advertising trades around Facebook and other platforms opening up to third-party measurement and third-party verification solutions and when that would happen and how that would happen. I think the industry is ready for that. I think we are all certainly interested in helping to drive greater transparency and help drive more confidence and more ad dollars to social. And to do so, it's really about opening up more inventory there. So I think that is very different than the CTV opportunity where we're going for depth. It's a little bit of breadth. I think that there are still longer tail social networks that continue to ebb and flow with their interest from an advertiser perspective. But the interesting real opportunity here is as more social networks start to open up more of their direct news feed or their direct core feed opportunities to third parties, I think that's where we see some real light and our advertisers would be really excited to see it as well.

Nicola Allais, CFO

Yes. And Justin, on your question around price inflation, I think I'll go back to our second quarter results with 44% growth, which was volume driven. We were not subject to the swings in CPMs that would have driven our revenue maybe higher. But we have a very steady, repeatable business model that's based on volume. We're going to remain committed to that as our strategy at this point, which is the volume-based expansion is what's going to drive our business for now. We do continue to evaluate whether we should adjust MTF based on the quality of the type of the media. We don't see that as an immediate exposure. I think for the second half of the year, which was your more direct question, the volumes are returning to a more normalized pattern. We're being prudent, but they are returning to normalized pattern. So we don't see that as a real risk for the second half of the year seeing volumes coming down.

Operator, Operator

Our next question goes to Raimo Lenschow with Barclays.

Raimo Lenschow, Analyst

Thanks for squeezing me in, and congrats as well from my side. The two questions, one for Mark. We talked a little bit about the international performance and you had some comments in the slides. Just talk a little bit about the organizational build out there. Like how comfortable are you with kind of where you are? The growth rates are clearly impressive but like, obviously, you're starting from a lower base. Like talk a little bit about more where you are as an organization. And then, the second question is for Nicola. Like you beat revenue but, obviously, on EBITDA, you are more in line, which suggests kind of more reinvestment in the business. Can you just talk a little bit about how you kind of run that kind of revenue performance versus reinvestment into growth?

Mark Zagorski, CEO

Thank you, Raimo. It was great how those questions connected. Nicola and I will certainly work together on this. Regarding our international efforts, I want to be open about the fact that we're slightly catching up with our investments in personnel in those markets. We largely did not establish sales operations outside of the Americas until 2018. We have been focusing on expanding those teams and resources over the past few quarters. As I previously mentioned, more than half of our headcount growth in the second quarter came from outside the Americas, as we see substantial opportunities there. One key advantage we've developed involves our tent pole model, where we enter a specific market with a global or enterprise client and then expand our team based on that client, while also reaching out to local clients. For example, we did this in Japan with Yahoo! JAPAN, which helped us secure clients such as Sony and Fujifilm. Similarly, in India, we partnered with Mondelez, allowing us to acquire many local clients. The good news is we have refined our model and strengthened our capabilities, and now we are enhancing those capabilities with additional resources. We're making significant progress. I believe we are in a strong position currently. I don't anticipate needing to invest as heavily in the coming quarters compared to this quarter, as we are reaching a level of parity in those markets. However, considering our growth potential and identified opportunities, it has been a worthwhile investment. As I mentioned earlier, this effort extends beyond just acquiring clients in Germany or Southeast Asia; it's also about supporting enterprise clients who are seeking a single partner to assist in their global business. Notably, the clients we secured this quarter, such as Diageo and BMW, are global enterprises requiring worldwide support. We are well-positioned to provide that support and to continue our progress.

Nicola Allais, CFO

And Raimo, I think Mark almost answered already the question. What I would say in terms of reinvestment versus growth, I think Q2 is a good example of that. We were able to close large enterprise clients that are not in the U.S. We achieved a 44% revenue growth. Rest of the world is growing 66%. That's a good trigger for us to say we can accelerate the investments. And the overall margin is still at 28%. That's a number that we can dial up or down as Mark said, we accelerated a little bit in Q2. We don't have to do that in every next quarter. But the math is pretty simple, if you're growing 66% outside of the U.S. and you see an opportunity to accelerate some of the investments in those markets, we will definitely be committed to do that.

Operator, Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mark Zagorski for closing remarks.

Mark Zagorski, CEO

I want to thank everyone for their questions. In closing, we continue to deliver strong revenue growth and profitability, driven by successful product innovation in fast growing sectors such as programmatic, social and CTV, as well as a global expansion strategy that's winning large enterprise clients in a growing number of international markets. In addition, we continue to cement our leadership in a global market that's benefiting from a secular shift to digital advertising. We appreciate your time and attention today. We look forward to updating you on success in our future calls.

Operator, Operator

Ladies and gentlemen, this concludes today’s webcast, you may now disconnect your lines at this time. Thank you for your participation and have a great day.