Earnings Call Transcript - DV Q2 2022

Operator, Operator

Hello, and welcome to the DoubleVerify's Second Quarter 2022 Financial Results Conference Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Tejal Engman, Investor Relations. Please go ahead.

Tejal Engman, Investor Relations

Good afternoon, and welcome to DoubleVerify's Second Quarter 2022 Earnings Conference Call. With us today are Mark Zagorski, CEO; and Nicola Allais, CFO. Today's press release and this call may contain forward-looking statements that are subject to inherent risks, uncertainties and changes and reflect our current expectations and the 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 Form 10-Q and our annual report on Form 10-K. 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. Also, during the call today, we'll be referring to the slide deck posted on our website. With that, I'll turn it over to Mark.

Mark Zagorski, CEO

Thanks, Tejal, and thanks, everyone, for joining us this evening. We're excited to have delivered outstanding second quarter and first half results. Building on solid organic growth we achieved in the first quarter, we delivered 43% revenue growth at 31% adjusted EBITDA margins in the second quarter, significantly exceeding our guidance. All three of our revenue lines delivered double-digit growth as we continue to upsell premium products to existing clients, drive activations by new clients, expand across geographies, and launch on new media platforms. Additionally, our continued focus on innovation powered further moves into the gaming and retail media sectors, both fast-growing new areas of marketer spend. Our first half results exceeded our expectations and enabled us to raise our full year revenue and adjusted EBITDA guidance for the second time this year. We remain confident in our ability to deepen our engagement with blue-chip brand partners who provide a solid foundation from which we can further expand into new sectors and geographies. We continue to closely monitor ongoing macroeconomic and geopolitical uncertainty and engage regularly with our advertisers to stay apprised of evolving ad spend patterns. I've highlighted the resilience of our business on prior calls, but given the current macroeconomic climate, let me reiterate the business attributes that distinguish DoubleVerify from most ad-supported tech companies. First, we are confident in our continued ability to win new customers and expand our relationship with current customers as the essential nature of our products protect brand equity and optimize media efficiency by reducing waste, thereby driving better outcomes and improving ROI on every dollar spent. Next, our fixed transaction fee business model insulates our revenues from CPM volatility, while our verify everywhere product strategy diversifies our revenue across platforms and verticals, making DoubleVerify largely agnostic to shifts in ad spend. Our well-diversified customer base comprises the world's largest and most trusted brands, with no single vertical driving more than 20% of revenue last year. Finally, we remain in the early stages of global market penetration with a vast and untapped total addressable market to sustain our long-term growth. I'd like to take a few minutes to discuss our second quarter growth drivers and catalysts for future momentum within the context of DoubleVerify's three key differentiators: our rapidly growing scale, our focus on market-defining innovation, and the deep level of trust we have built with our customers as an unbiased and independent partner. Beginning with scale, our drive to verify everywhere is providing substantial market momentum as our ubiquitous platform and partner integrations provide opportunities for future expansion and upsell, particularly for our activation business. On a year-over-year basis, second quarter revenue from our two premium activation products, Authentic Brand Suitability and Custom Contextual, grew 52% and over 200%, respectively, and combined represented approximately 52% of our programmatic activation revenue. Both products are unique to DoubleVerify, providing dynamic, identifier-independent solutions for marketers that ensure brand alignment and drive better advertising outcomes. As we've highlighted in prior quarters, our top 100 customers continue to activate Authentic Brand Suitability across new geographies. Banco Santander, Dell, Amazon, John Lewis, Vodafone, and Mondelez recently launched Authentic Brand Suitability in incremental international markets, including Brazil, Japan, the U.K., Germany, and France. Custom Contextual was activated in the second quarter by some of our large performance marketing advertisers such as Comcast as well as by mid-market, digitally native brands such as Canva. Success in activation and measurement go hand in hand, and our measurement data fuels a virtuous cycle in which post-campaign insights inform continuous optimization opportunities that can be acted upon in pre-bid applications. By using a consistent measurement currency for pre- and post-campaign solutions, we drive better results for advertisers across everywhere they invest their ad dollars. When we engage a client, we immediately introduce them to the performance opportunities embedded in this process, expanding our relationship with them across new geographies and new solutions that feed the cycle. In the second quarter, we closed multiple cross-sell, upsell, and new logo opportunities, including British Airways, Taco Bell, Universal Parks, Roshfrans, Asda, Califia Farms, Infiniti, and Smile Direct. Notably, 64% of our top 500 customers utilized DoubleVerify for both measurement and activation in the second quarter, up from 58% a year ago. Our scale across key social media environments continues to grow in a sector that remains highly attractive to marketers. According to MAGNA Global, advertisers are expected to spend approximately 57% of their digital ad budgets, excluding search, on social media in 2022. The demand for closer, safer consumer connections is driving a broad-based push for brand safety and suitability verification within social media's dynamic news feed environments, creating a meaningful growth opportunity for DoubleVerify. To support growing ad investments in social media platforms, we have developed news feed content classification technology that is highly scalable across different user-generated social feed environments. DoubleVerify's recently launched unified social pipeline technology substantially decreases per-platform engineering efforts and shortens the development timeline to integrate brand safety and suitability solutions in news feed environments. In the second quarter, our unified social pipeline technology helped us secure an exclusive partnership with Reddit, one of the most visited websites in the United States, comprising over 100,000 active communities and a highly dynamic user-led environment. We are excited to be Reddit's first full suite verification partner, ensuring that ad campaigns meet quality criteria while maximizing impact in performance for advertisers. The unified social pipeline will also support development across the LinkedIn Audience Network. We are excited to announce today that we just signed a platform-wide agreement to provide brand safety and fraud prevention for all LinkedIn native ads across desktop, mobile web, and in-app. This integration uses DoubleVerify's technology and data to ensure that all campaigns activated to the LinkedIn Audience Network are brand-safe and fraud-free. In addition to these partnerships, we continue to build momentum on TikTok. The number of global advertisers using our brand safety solution on TikTok has grown by approximately 42% year-over-year, and we continue to develop end-to-end in-feed solutions in conjunction with the TikTok team. Finally, we remain on schedule for a summer launch of brand safety and suitability measurement for Twitter's news feed known as the timeline. As we seek to scale our solutions into new sectors, we're excited to announce today a significant expansion into the gaming sector. In the second quarter, DoubleVerify began working with Twitch Ads on a solution to identify contextually brand-safe and suitable live-streamed content for clients on Twitch, an interactive live-streaming service and global gaming community. The solution is currently in a closed beta. And finally, we're continuing to scale on retail media networks, which are fast becoming the advertising venue of choice for outcome-driven brands. Today, DoubleVerify partners with some of the largest retail media networks in the world, including Amazon, Walmart, Target, Macy's, Best Buy, and Kroger. In the second quarter, we have sold pre-bid viewability products to the Walmart Media Group and launched our solutions with Asda, a leading supermarket chain with over 600 locations in the U.K. In the first half of 2022, we grew revenue from retail media networks by 160% year-over-year with the growth spread across all three revenue lines: activation, measurement, and supply side. Based on their increasing appeal to marketers, we expect the success of retail media networks to drive further volume increases across our solutions. Turning to DoubleVerify's market-leading innovation, our solutions continue to evolve, delivering true ROI for advertisers throughout the media transaction from pre-campaign activation to post-campaign measurement. A great example is our new suite of pre-campaign social media activation tools powered by OpenSlate's brand suitability and contextual analysis engine. In the second quarter, 36 more brands adopted this new capability, providing early validation of the growth opportunity we identified when we acquired the OpenSlate technology late last year. Cross-selling pre-campaign social activation solutions to our existing post-campaign social measurement clients creates an optimization loop within walled gardens that is similar to the optimization loop we have created for the open Internet with Authentic Brand Suitability and post-bid measurement. The combination drives better outcomes for advertisers and more opportunities for growth for DoubleVerify. Moving on to innovations in measurement. We are announcing today that we have launched a closed beta for DoubleVerify's campaign automator solution and expect this product to be generally available by the end of this year. By fully automating advertising trafficking workflow, DoubleVerify's campaign automator streamlines campaign verification management across leading ad servers. This capability lowers tag implementation costs for our clients and provides significant benefits relative to first-generation tagging tools. Designed to improve operational efficiency and minimize human error, DoubleVerify's campaign automator will allow already stretched ad operations teams to dedicate more of their time and resources to campaign activation strategy and optimization. Continuing with our measurement suite, our new freemium preview of authentic attention, named the DoubleVerify Authentic Attention Snapshot, will launch later this month and allow DoubleVerify clients to dynamically review high-level attention insights across their multi-platform campaigns. The DoubleVerify Authentic Attention Snapshot empowers clients to hone in on top and bottom performing campaigns; benchmark performance against their specific industries by media type, ad size, ad duration, and device; and identify strategic campaign optimization opportunities, all in real time. Attention is rapidly emerging as a key measurement metric. According to eMarketer, 98% of marketers believe that deeper attention metrics would help improve campaign performance and advertising outcomes. An example of the Authentic Attention power to drive outcomes can be found in a recent trial with Vodafone Germany. Vodafone used DoubleVerify Authentic Attention to measure and optimize the performance of their digital ad campaigns with the goal of increasing purchase intent. By implementing Authentic Attention, Vodafone identified in real time which ads were doing the heavy lifting to achieve their core KPIs. They then excluded underperforming sites and optimized creative and device type in real time. As a result, Vodafone found that high engagement ads drove over 2.5 times higher qualified traffic and sales conversion rates compared to low engagement ads. Another industry-leading measurement innovation launched last quarter was our exclusive partnership with Scope3 to provide advertisers with a detailed picture of how their digital campaigns contribute to CO2 emissions. Concerns regarding the environmental impact of digital advertising are increasingly becoming top of mind for leading global brands. Our new campaign-based solution powered by Scope3 aims to assess the environmental impact of the extensive computing power involved in delivering programmatic ads. Through this exclusive partnership, DoubleVerify will be the only company providing carbon emissions data alongside foundational ad performance criteria. To conclude on innovation, in addition to the exciting products I have just detailed, we have a robust pipeline of unique solutions and strategic partnerships that are focused on creating customer value, including an optimized DoubleVerify Pinnacle user experience, the addition of cost data through DoubleVerify Investment Metrics, and Custom Contextual support for CTV. This brings me to our final differentiator, trust, which is core to the value we deliver to our customers and underpins our important role in the digital advertising ecosystem at large. We continue to focus solely on providing measurement and verification solutions to our customers, not selling ads, cloud services, or other solutions, which may create bias in our engagements. We believe our independence and accreditations are key drivers of our nearly 80% win rate of recent opportunities. In the second quarter, 60% of our wins were greenfield, and 40% were competitive takeaways as advertisers opted to work with the verification company with the strongest and most accredited product suite and zero conflicts of interest. Advertisers' trust in DoubleVerify is also evidenced by our gross retention rate of over 95% and the strong growth in our average revenue per customer. We grew the total number of customers generating more than $200,000 of revenue by 38% year-over-year on a trailing 12-month basis. In a digital advertising environment that increasingly seeks stability and transparency, DoubleVerify's unmatched roster of accreditations and independent perspective has set us apart in the verification space and supported long-term client relationships that continue to grow. To conclude, we've had a strong first half of the year and remain confident that our growing global scale, market-defining innovation, and the legacy of trust will continue to solidify our client relationships and fuel steady growth that will outperform our competitors and the broader digital ad industry in 2022 and beyond. With that, let me turn the call over to Nicola.

Nicola Allais, CFO

Thank you, Mark, and good afternoon, everyone. We're pleased to have delivered strong revenue growth and profitability in the second quarter and first half of the year. While we have good visibility for the third quarter and are raising our full year revenue outlook by the magnitude of our outperformance in the second quarter, we continue to closely monitor the current macroeconomic and geopolitical uncertainty and engage in regular dialogue with our advertisers. Total revenue growth of 43% was driven by 60% growth in activation revenue, 23% growth in measurement revenue, and 49% growth in supply side revenue. Advertiser revenue, which includes activation and measurement, grew 43% year-over-year and continues to be volume-led. In Q2 2022, MTMs were up 24% year-over-year. MTFs grew 10% year-over-year, primarily driven by improved premium product mix, followed by the impact of the programmatic display and video price bifurcation, which we initiated on our standard programmatic products in the first quarter of this year. Activation revenue was led by our premium-priced Authentic Brand Suitability product, which delivered 52% revenue growth due to continued upsells to an international expansion with existing Authentic Brand Suitability users. In addition, we continue to successfully sell Authentic Brand Suitability to new clients at the outset of their relationship with DoubleVerify and drove a 20% year-over-year increase in the number of advertisers using the solution. Growth in non-Authentic Brand Suitability product revenue was the second-largest contributor to activation revenue growth, followed by the impact of the price bifurcation of programmatic display and video impressions that was implemented during the first quarter. Similar to last quarter, our social activation solutions through OpenSlate performed in line with expectations. Turning to measurement, revenue grew 23%, primarily driven by the ramping of new enterprise customers that were signed and highlighted last year in the first quarter of 2022, including Diageo, Norwegian Cruise Lines, and Philip Morris. CTV and social measurement volumes grew 56% and 26%, respectively. CTV volumes continue to grow as we scale our industry-leading products such as our pioneering Fully-On Screen certification offering, an MRC-accredited attention measurement solution launched in 2020 that tests and evaluates leading CTV devices and apps to ensure ads are only displayed 100% on screen and when the TV screen is turned on. With regards to social measurement, DoubleVerify's volume growth was particularly strong in the first half of 2021, driven by two of the world's largest CPG advertisers activating and expanding their geographic usage on our social solutions. As Mark mentioned, our long-term growth opportunities in social remain significant with new avenues for product expansion and coverage on platforms such as TikTok, Twitter, Reddit, and LinkedIn. International measurement revenue grew 18% year-over-year with EMEA growth of 14% and APAC growth of 25%. In the second quarter, international measurement revenue growth was particularly impacted by the relative strength of the U.S. dollar. International represented only 26% of our full year 2021 measurement revenue, and we continue to see it as an opportunity for future growth. Supply side revenue grew 49%, driven by the ramping of new platform clients that were signed last year such as Yahoo! Japan, Amazon, the recently signed Twitch deal, as well as new wins and expansion deals with publishers. Year-over-year growth also includes the impact of publisher and platform revenue from OpenSlate and from Meetrics. Overall, the acquisition of OpenSlate continues to perform in line with expectations of generating between $15 million to $18 million in revenue this year with a seasonality similar to our overall business. As Mark described, we are building our cross-sell momentum of our social activation solutions, which are expected to contribute more meaningfully in 2023. Shifting to expenses, the cost of revenue increased by $6.5 million, primarily driven by a revenue sharing arrangement with programmatic partners as activation revenue grew as a percentage of total revenue. Non-GAAP operating expenses for product development, sales, marketing, customer support, and G&A, which excludes stock-based compensation expenses and other items for comparability, grew 32% versus our top line growth of 43%, reflecting the efficiency of our operating model as we scale. This was further supported by faster-than-expected integration of acquisitions and our overall cost discipline in the second quarter. As a result, adjusted EBITDA of $34 million and adjusted EBITDA margin of 31% exceeded the top end of our Q2 guidance. We continue to manage our operating expenses in line with our expected revenue growth. Most of our operating expense growth is due to increased headcount costs. In the second quarter, we added 122 employees on a year-over-year basis. Our expense management is agile, and we plan to react swiftly should we see any significant changes in our operating environment. Finally, we delivered approximately $10 million of net income, a reflection of the attractive economics of our high-growth and high-margin software solutions. In the second quarter, we generated approximately $29 million of net cash from operating activities and ended the quarter with approximately $224 million of cash on hand with zero long-term debt. The strength of the balance sheet remains an advantage for DoubleVerify as rising interest rates negatively impact more leveraged companies and decreasing valuations provide opportunities to accelerate long-term growth through strategic investments, including M&A, that will advance our product and technology roadmap, open up adjacencies such as gaming and audio, and expand our global footprint. We remain disciplined with regards to our capital allocation and believe the investment climate is likely to become more favorable over time. Now turning to guidance, we expect third quarter revenue in the range of $108 million to $110 million, which implies year-over-year growth of 31% at the midpoint. We expect third quarter adjusted EBITDA in the range of $32 million to $34 million, which implies a year-over-year increase of 25% and an adjusted EBITDA margin of 30% at the midpoint. For the third quarter, we expect stock-based compensation to range between $10 million and $11 million and weighted average diluted shares outstanding to range between 170 million and 172 million shares. For full year guidance, we expect revenue in the range of $448 million to $450 million, which implies a year-over-year growth of 35% at the midpoint. We expect adjusted EBITDA in the range of $136 million to $140 million, which implies a year-over-year increase of 26% and an adjusted EBITDA margin of 31% at the midpoint. Our guidance for the second half of the year reflects the potential impact of a pullback in digital ad spend and general prudence regarding macroeconomic uncertainty. As I mentioned earlier, we have raised our full year revenue guidance by the magnitude of our second quarter performance. Given our expectations of strong revenue growth this year, we intend to capitalize on a more favorable hiring environment in tech to add engineering and sales talent and continue our consistent investments in enhancing our machine learning capabilities and further building out the IT infrastructure to support our growth. As previously disclosed, we expect capital expenditures to range between $25 million to $35 million in 2022, including investments in office space around the world as we return to office with a significantly larger employee base. Based on the timing of spending on office renovations and relocations, we expect to incur most of our full year capital expenditures by the end of the third quarter. To close, we delivered a strong second quarter and first half, which reflects the resilience of our business. In this uncertain macroeconomic and geopolitical environment, we continue to engage with our clients regularly to ascertain their commercial outlook and spend as we successfully execute our plan for continued growth for the rest of the year.

Operator, Operator

Our first question today is coming from Arjun Bhatia from William Blair.

Arjun Bhatia, Analyst

Perfect. Congrats on a great quarter, guys. Mark, maybe I just want to start with you. It seems like you've obviously been talking to your customers. I'm curious, what are they saying about their outlook on ad spend in the back half of the year? And have you seen any change in that tone? And maybe for Nicola, along those lines, how do you think about the visibility that you have just into your second half guidance? We're obviously in August here, so just a few more months to go, but would love to hear any further details that you can share there.

Mark Zagorski, CEO

Thank you for the question, Arjun. We were anticipating some discussion about the macroeconomic environment given the current discourse. We have experienced an exceptionally strong first half and continue to see strong momentum heading into the second half, which is why we remain optimistic about our Q3 guidance. We have a clear view of the upcoming quarter, and we feel confident about it. However, as we've mentioned, while we are resilient, we are not entirely immune to potential slowdowns in the market. This is why we've accounted for a higher likelihood of a moderate pullback because of the macroeconomic conditions. We are in regular dialogue with our advertisers to understand their spending intentions. Fortunately, our wide-ranging diversification across sectors and platforms positions us well; if there's a decline in one area, such as social or premium CTV, our strong presence in ROI-driven platforms like programmatic and mobile helps us maintain stability. We are prepared to navigate challenges like other companies in the industry, but we believe our extensive relationships and diverse offerings put us in a solid position. Nicola, do you have anything else to add?

Nicola Allais, CFO

Yes. The only thing I would say, Arjun, is obviously things can move very quickly, but we're guiding based on what we're seeing today. And I would qualify this as saying it's an assumption of a moderate slowdown. But things can move very quickly, and we could react to something that's steeper than what we have in the number. It's still a 35% growth rate for the year, which is a strong performance.

Arjun Bhatia, Analyst

Got it. That's very helpful. I have another question about the product pipeline, Mark. It appears there is a lot of innovation happening. You have several new products either launching soon or expected in the latter half of this year and into 2023. How do you keep your customer-facing teams and customers informed about all the upcoming offerings? It's a good issue to face. Are there specific capabilities you're focusing on when discussing with your customers that could promote growth and expansion for the latter half of this year and into 2023?

Mark Zagorski, CEO

Yes, that's a great question. You raise an important point about our expanding range of products, which adds complexity to our advertiser relationships but also presents significant opportunities. This growing range includes new solutions, such as attention metrics, and broader coverage of emerging sectors like gaming, where we continue to innovate. Entering new sectors allows us to leverage core solutions and extend our reach, which tends to be an easier sell for advertisers. However, launching new products also introduces challenges as advertisers need to consider additional options. We're finding success in bundling and creating straightforward packages that focus on delivering better outcomes for advertisers. For instance, our growth in Authentic Brand Suitability and effective measurement packaging demonstrates this approach. We believe there are further opportunities to enhance how our products work together.

Youssef Squali, Analyst

Excellent. And yes, you guys seem to definitely be bucking the trend here, which is great to see. So maybe a two-part question for me. First, just on the visibility that you guys are seeing. Nicola, I think you mentioned this, but how much visibility do you typically have into the spend? Can you quantify that? Is it like 60 days, 90 days, 120 days? Any kind of quantification would be helpful and the linearity that you've seen throughout the quarter? And second, it seems like the outperformance was mostly from your core products, Authentic Brand Suitability and Custom Contextual. Can you maybe discuss demand trends for your newer products, like the pre-bid solutions in particular, and your traction you're seeing upselling and cross-selling those?

Nicola Allais, CFO

Yes. Youssef, I'll take the first part of the question. As we've said in the past, we have greater visibility on the measurement side of the business. And that's about three months out based on blueprint information that our customers are providing to us so that we can actually tag and follow the campaign. So the visibility that we have into Q3 is really based on what we know the campaign flights are for our customers on the measurement side. Activation is obviously a lot more transactional. And so that's what we're basing our visibility on. The second part of your question was within the quarters, I mean, we basically are now six months into the year, and we have two quarters at 43% growth each quarter. The intramonth variability actually didn't impact the total top-line revenue growth. So it's actually been fairly consistent.

Mark Zagorski, CEO

Yes. And maybe I'll pick up on the kind of new product adoption. And look, I think we've got some really nice momentum with our new solutions as we mentioned in the latter part of our conversation and certainly around Custom Contextual's growth year-over-year of about 200% off a relatively small base but still the kind of growth that we want to see there. I think attention continues to gain traction. I mean, we measured 250 campaigns in Q2 alone, and we continue to measure about 50 billion impressions each month on attention. We've done that, and we're now benchmarking across 12 different verticals. So attention is getting there. As we've always noted, it's going to take time. When we look at solutions like Custom Contextual, that's taking a core competency in a market that is comfortable with that, with contextual targeting. And it's a little bit easier of a launch. It's also an activation or a pre-bid product, so it's a little more seamless. With something like attention, we're building an entirely new category, which is super exciting and I think can be really big for us. It just takes a longer time, but we're super confident on attention. We are the leaders in that space. We like the kind of interest that we're getting from advertisers on it. And I think although the dollars are small and the days are early, it shows a huge amount of potential for us.

Laura Martin, Analyst

Can you hear me okay, you guys?

Mark Zagorski, CEO

Yes.

Laura Martin, Analyst

Fantastic. So I have ten, I'll ask two. The first one is I want to talk about CTV. So I heard you say that CTV grew 52% or 56%, fabulous. But I'm questioning how big it is in the quarter. Are we up to 20% of revenue, or is it smaller than that? Let's start with that question.

Nicola Allais, CFO

Yes, Laura, it represents a single-digit share of revenue, which is still very small. The overall digital advertising share in CTV is around 10% to 13%, and we are currently below that.

Laura Martin, Analyst

Okay. So that sets up the B part of my question better, which is we held a measurement conference, as you guys know. And iSpot.tv came out and said they're doing $100 million in verification for CTV measurement. So my question is, are you guys getting outflanked in the connected television business by a private guy who's got exclusives on LG's CTV data, plus he's got VIZIO data? So can you talk about your competitive position going forward in CTV, please?

Mark Zagorski, CEO

Yes. First off, I'd probably question how much of that $100 million is to measurement versus actual verification. But beyond that, I think the core value proposition here to DoubleVerify, and we've always said this, is a single verification currency across multiple platforms, right? And so when we work with advertisers, they want to verify across social, across display, across mobile, across CTV. So we look at this as it's a small part of our business but a big asset, and the fact that it's the ability for us to have one measurement metric, one verification metric across all platforms, which I don't think single-point solutions have. Whether if you're in the CTV measurement or verification business, that's all you got, right? And I think advertisers are looking for something that's more broad-based, that can allow them to verify everywhere. And I think we're in a good spot to do that.

Laura Martin, Analyst

Great answer, Mark. I have another question about cookies. Google has postponed the deprecation of cookies until the second half of 2024. How does this impact you? Is it beneficial or detrimental? Additionally, looking beyond just DoubleVerify, what are your thoughts on this situation? Does it positively or negatively affect the ecosystem? I'm curious to hear your overall perspective on cookies as they relate to the entire open Internet.

Mark Zagorski, CEO

We've addressed this question before, and we believe the deprecation of cookies is neutral to positive for us. Our system operates effectively without cookie identifiers, so their removal won't impact our operations. In fact, it might enhance solutions like Custom Contextual targeting and other metrics that don't depend on individual trackers. Delaying this change doesn't significantly hurt our business, as it will eventually happen. Ultimately, whether through government actions or commercial shifts, identifiers and trackers will vanish from user interactions. From a broader perspective, many advertisers are already preparing for this transition and have been developing systems around clean rooms and first-party data, focusing on alternative metrics. They see this as a delay of an inevitable shift away from cookie-based retargeting and audience targeting towards methods that are more privacy-friendly. While I believe people will continue to use cookies for as long as they can, a lot of groundwork has already been established to function without them, and many are beginning to adapt appropriately.

Michael Graham, Analyst

Congrats on the quarter, everyone. I just wanted to ask two. The first is on Authentic Brand Suitability. I know you mentioned that a lot of the expansion in MTF was due to that product applying to some of your international customers. And I just wonder if you could update us on sort of where we are in the arc of Authentic Brand Suitability penetration in your overall business. And kind of second but related, your activation revenue grew three times as fast as measurement. And that's kind of unusual for that kind of growth rate disparity to stay so high after activation has become the bigger part of your revenue mix. I'm just wondering if you could share any thoughts on how long you expect activation revenue to grow so much faster than the measurement.

Mark Zagorski, CEO

Yes. So look, I think we continue to love Authentic Brand Suitability as the little engine that keeps on driving growth. We are excited about the fact that although we look at over 90% of our top 100 customers are using Authentic Brand Suitability and measurement, we still have a huge amount of opportunity in the next 100 plus. Sixty-four percent of our top 500 customers use activation and measurement, up from 58% a year ago. That still leaves a big chunk of advertisers in that 100-plus customer base to go after. I think we've seen a significant amount of growth in there. And I think one of the things that we really loved about Authentic Brand Suitability is initially, we thought this was a premium product for big brands who are incredibly sophisticated. Once we tap that out, we'll start to see that slow. However, we are starting to see this product being an awesome solution for mid-sized advertisers, and it's growing globally as advertisers move dollars around the world and expand their usage. So we still see a good amount of runway with Authentic Brand Suitability for growth to come. So we certainly are not looking to consider activation as a one-trick pony because we've got other things in activation that will continue to grow, like Custom Contextual and other things in the pipeline. But I think with Authentic Brand Suitability, we still have a good amount of room there.

Nicola Allais, CFO

The other thing I would say, Michael, is the wall garden measurement part of the business, we are still underpenetrated there, right? There is a large total addressable market there that still needs to be measured if you think about TikTok just starting or opportunities on Meta. So I think we obviously follow where the dollars are going from our advertising perspective, but I think there's quite a bit still untapped on the measurement side.

Andrew Boone, Analyst

I'd like to start off with just performance products. With Custom Contextual ramping and Authentic Attention to begin testing, it sounds like, later this month, can you talk about how this widens your opportunity? Is this already bringing in clients with more lower funnel ad objectives? Or how do we think about that potential going forward? And then secondly, on international, you guys made significant personnel investments last year. Understood FX was a headwind this quarter. Can you talk about the progress in international? Is that helping you to take share? Or how do we think about the return on those investments today?

Mark Zagorski, CEO

Sure. So on the performance tools, it's interesting because it actually plays in two different ways for us. It's definitely allowed us to attract some new clients, particularly around Authentic Attention and Custom Contextual, in which some folks that we haven't talked to before, who are looking to drive more, as you noted, lower funnel results, and are looking to find different ways to qualify content and placements to drive outcomes. And I think as we've always talked about, we've got this evolution of our business moving from protection to performance. And tools like Authentic Brand Suitability are really good protective tools, as they ultimately drive performance by getting the clutter out of the system. But things like Custom Contextual and Authentic Attention really look to refine what's left and optimize the spend against what works. By going further down the funnel, we are attracting a new type of advertiser who is concerned not just with how safe their brand is, but also with how well their ads perform overall and using our tools to do so. So the cool part about that is it not only attracts new types of advertisers, but it also allows us to sell all of our other offerings to them as well, which is great. Additionally, we look at these as add-on solutions for our core advertisers. Those who may be less focused on the lower funnel, but still are looking to optimize performance. So brand suitability and brand safety may still be their number one goal and may be driving brand. However, if they can continue to refine the performance of those campaigns by using this tool, it's a great addition for them.

Nicola Allais, CFO

Yes. The only other thing I would add on the international is yes, there are headwinds in the second quarter related to FX, which are not particular to us. But if you think longer term, our view is that over 50% of spend is outside of the U.S., excluding search. And outside of the U.S., our revenues last year were only 26% of measurement, so there's a gap there that we see as an opportunity. As Mark said, the investments are made, and it remains a very large opportunity for us.

Vasily Karasyov, Analyst

I wanted to ask a couple of questions about the new relationship with the Walmart Media Group. First, do I understand correctly that this relationship falls into the measurement category? If that's not accurate, could you please clarify the nature of the relationship? Second, regarding retail media, you mentioned the significant growth opportunity it represents for you. One of your partners, The Trade Desk, is actively working with Walmart Media on programmatic shopper marketing. Is that also an opportunity you see, and how do you perceive it in terms of your positioning and prospects?

Mark Zagorski, CEO

The Walmart Media Group expansion is included in our activation revenue, which involves some pre-bid viewability solutions we are providing. What is interesting about our retail media network relationships is that they cover all three of our revenue lines. Some of these are platform relationships where we offer solutions directly for the retail media network used by buyers. Others are directly with the retailers to ensure their spending on retargeting clients is safe and secure. Additionally, we have legitimate measurement deals. Our wide-ranging capabilities enable us to meet the varied needs of those in the retail media space, whether they are buyers, sellers, or platforms. This comprehensive solution set is why we are enthusiastic about this area. Regarding our partnership with The Trade Desk, all of our solutions integrate well with the activation or programmatic tools available. Our capability to implement data in programmatic platforms either as an independent solution or as a measurement metric across retail media networks gives us considerable flexibility in collaborating with each advertiser.

Mark Murphy, Analyst

This is Arti on for Mark Murphy. Congrats on the quarter. First question, when we look across the macro environment, we've heard from a lot of other software companies that they're experiencing some headwinds with new logo acquisition. Are you guys seeing any change in the structure between the land-and-expand motion?

Mark Zagorski, CEO

It's a great question. When entering potentially difficult times, acquiring new clients becomes more challenging than upselling existing ones. The key is to expand while balancing the value of that expansion against the challenges of acquiring new clients. Customers tend to be less adventurous, which benefits us if we have established relationships, as they are more inclined to purchase our proven solutions rather than try something completely new. Having strong relationships with over 1,000 well-known global brands helps us resist customer switching, especially during tough times. This makes it a bit tougher to sell to new customers, but the essential factor is whether we can leverage our expansions to outweigh any declines in new client acquisition. I believe we are well-positioned to do that. We've seen significant recurring revenue growth in the first half of the year, and we continue to grow with our current customers by upselling activation solutions to a greater percentage of them year-over-year. Therefore, we are in a good position to capitalize on any heightened caution among advertisers regarding switching solutions and to encourage them to stick with a single platform where they can continue to expand.

Nicola Allais, CFO

So far, we've observed a recovery from very low points in the consumer packaged goods and travel sectors. These areas are performing better for us compared to the low points we experienced last year, which were still affected by COVID. The automotive industry, however, is not experiencing as significant a recovery; it is growing, but not as quickly as the other sectors. Overall, no single industry accounts for more than 20% of our revenue, so there's no significant concentration in one area. To answer your question, the automotive sector appears to be the slowest in terms of growth.

Eric Sheridan, Analyst

Maybe two, if I can. If you were to continue to put up this kind of revenue outperformance between now and the end of the year, can you help us better understand how you think philosophically about allowing money to drop to the bottom line versus finding it in real-time ways to like invest it back in the business as we look out over the next couple of quarters? And then zooming out, how should we be thinking about the decision process for either organically investing in the business in '23 and beyond versus the comments you made about maybe inorganically doing some M&A that could speed up some of your longer-term agendas as we move out of this year and into next?

Nicola Allais, CFO

Yes. So Eric, I'll start. We haven't changed our point of view that we are still in a very growth mode. And so the first priority will be to reinvest into the business. We do feel strongly that the results we are showing this year are in part due to the investments that we made the year before and the year before. Even through COVID, we continued to invest. So falling to the bottom line is certainly not our priority in terms of additional revenue growth. It is more about investing. The investments change, but they remain consistent in terms of dollars. We do keep our eye on a 30% margin, and it feels like it gives us enough leeway if things were to change quickly to change trajectory. But we are looking to continue to invest. In terms of M&A versus operational investments, yes, of course, we keep looking at it. We have, as you know, over $220 million of cash. It does feel like the market is going to become a more favorable environment for acquisitions, but we're going to remain very disciplined regarding which acquisition we go after because the organic growth is so strong and it gives us such an opportunity to continue to grow.

Mark Zagorski, CEO

Yes. So just to add, one little bit of color there is I think the key word Nicola mentioned is scale. And we're going to continue to lean into this opportunity to scale the business. I think we've mentioned before that scale drives a virtuous cycle where as we grow bigger as a company, we get smarter. As we get smarter, we're able to deliver better results for our advertisers. As we deliver better results, we're able to retain and grow the advertiser base, which drives scale. And I think that virtuous cycle is something we're going to continue to feed, and we'll do so on a pragmatic basis. But we're certainly not going to stop that wheel from spinning. So I think scale is really important to us. We drive scale through acquiring new customers and by being innovative in covering new sectors, and those are investments that we'll continue to make as long as they make sense for us. And so right now, it's for the foreseeable future.

Mark Kelley, Analyst

My first question was just on some of the newer channels that you're starting to accommodate. I guess what do you think moves the dial near term, whether it's gaming, audio, etc.? And then the second question is on the Authentic Attention Snapshot that you talked about at the beginning. Is that something that you plan on offering indefinitely, that premium product? Or is it something that you'll do near to medium term just to get some folks interested in that product and then not really offer that?

Mark Zagorski, CEO

Thank you for the great questions, Mark. On the first point, it's interesting to note that in-game advertising and audio advertising represent similar billion-dollar opportunities. We believe that the overall impact of our solutions across these sectors is greater than any single component. Our comprehensive coverage, including gaming, audio, CTV, social, mobile, and desktop, enhances the value proposition of our solution. We do not focus on the revenue potential of individual segments but rather on the bigger value they collectively provide. As we expand our verification capabilities, our solution becomes increasingly valuable and strengthens our relationships with clients. We are enthusiastic about our prospects in gaming and audio. Though CTV currently contributes a smaller share, it remains crucial. Without CTV and gaming, securing deals and retaining customers becomes challenging, making comprehensive coverage essential for us. Each channel contributes to our overall revenue growth, but we do not see any one channel as valuable in isolation. This perspective leads us to view point solutions that focus solely on one sector as short-lived. If a company only measures CTV or social verification, their longevity in this space is likely limited. Our focus is on building sticky relationships by covering all areas. Regarding Snapshot, we plan to roll it out and anticipate uptake. This will serve as an upsell opportunity as it becomes more standardized. There may be a chance to enhance Snapshot and transition it from a freemium to a paid solution in the future. For now, we see it as a marketing investment to present attention metrics to our customers and ultimately sell them the complete premium product later.

Justin Patterson, Analyst

Great. First, regarding market volatility, I’m interested in how you perceive the changes in the M&A pipeline. I assume some companies might be more inclined to pursue acquisitions at more appealing multiples these days. Secondly, I’d like to learn more about the campaign automator. I understand it’s currently in closed beta, but it appears to be a comprehensive offering that provides significant efficiencies for advertisers and could strengthen your relationships with them. I’m curious about your perspective on this in relation to the number of transactions going through to customers and the potential sales opportunities that may arise over time.

Mark Zagorski, CEO

Yes. I mean, I'll talk a little bit about the M&A front. And Nicola, please chime in. But I think obviously, choppy markets make great opportunities for buyers. And particularly when we're looking at what we call kind of roadmap accelerators, these may be little technical tuck-ins that aren't really businesses but are really cool features or things that we want to do to accelerate our move into a certain sector. A lot of those tend to be overvalued because they don't make a lot of money, but they're really essential in a larger platform. And in markets like this, their expectations of value fall rapidly because they run out of funding since they don't typically generate much revenue. So I think in that sector, it provides a really interesting opportunity. And as I noted earlier in another question, which is like single-point solutions allow us to extend our entire basket of goods that become increasingly challenging for an advertiser to just buy multiple ones of. If there's one thing that happens in choppy markets is that advertisers look to reduce overhead, and managing multiple solutions incurs overhead. So if you are a point solution and advertisers are looking at, "Hey, I have to manage six things or I can manage three," you're going to get cut. So our ability to bundle those point solutions into our package and make it easier for them to manage, I think, is a big advantage for us and also puts those point solutions in a challenging position, which actually dovetails into the second part of your question, which is campaign automator. We think there's no better time for us to be launching this solution because it is all about creating a more low overhead implementation of tags across ad servers so that really, it's much more of a self-service proposition. It not only lowers the advertiser's engagement, but it actually lowers our cost, too, because the amount of handholding we have to do with tag creation and tag management goes down. The amount of troubleshooting goes down. So I think this is a win for everybody. It's a win for the advertisers to streamline workflow, give them more self-service tools, and it's a win for us because it takes less management to do so. So we're excited about it. Like I said, it's early, but we're hoping for a general launch in the second half of this year or later in the second half of this year. But we're really optimistic about its ability to lower the overhead costs and streamline the implementation process of our measurement tags. Nicola, anything to add on the M&A front?

Nicola Allais, CFO

No. I think Mark captured it. I think it is obviously going to be a better environment. The key for us is to remain just focused on the right solutions that are going to just accelerate our roadmap.

Mark Zagorski, CEO

Thank you. I just want to thank everyone for joining us today. We are super excited about our results in the first half of the year and looking forward to performance in the second half of the year as well. We'll talk to you all soon. Thank you.

Operator, Operator

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.