Hello, everyone, and welcome to PubMatic's Second Quarter 2021 Earnings Call. My name is Cara, and I will be your operator today. Before I hand the call over to the PubMatic team, I would like to go over a few housekeeping notes. As a reminder, this webinar is being recorded. Thank you for your attendance today. And I will now turn the call over to Stacie Clements.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on PubMatic's earnings call for the second quarter ended June 30, 2021. Joining me on the call are Rajeev Goel, Co-Founder and CEO; and Steve Pantelick, CFO. Today's prepared remarks have been recorded, after which Rajeev and Steve will host live Q&A. A copy of our press release can be found on our website at investors.pubmatic.com. Before we start, I would like to remind participants that during this call, management will make forward-looking statements, including, without limitation, statements regarding our future performance, growth strategy and financial outlook. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. These forward-looking statements are subject to inherent risks, uncertainties and changes in circumstances that are difficult to predict. You can find more information about these risks, uncertainties and other factors in our reports filed from time to time with the Securities and Exchange Commission, including our most recent Form 10-K and any subsequent filings on Forms 10-Q or 8-K, which are on file with the Securities and Exchange Commission and are available at investors.pubmatic.com. Additional information will be set forth in our quarterly report on Form 10-Q for the quarter ended June 30, 2021. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. All information discussed today is as of August 10, 2021, and we do not intend and undertake no obligation to update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. In addition, today's discussion will include references to certain non-GAAP financial measures. These non-GAAP measures are presented for supplemental information purposes only and should not be considered as substitute for financial information presented in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our press release. And now, I will turn the call over to Rajeev.

Thank you, and welcome, everyone. We delivered another great quarter with performance well above our guidance as we benefited from a differentiated business model, multiple growth drivers, prior period investments, and accelerated digital ad spend. Revenue in the second quarter grew 88% year-over-year to $49.7 million. Our overperformance on revenue contributed to increased profitability as well. Net income in the quarter was $9.9 million or 20% of revenue, and adjusted EBITDA was $18.6 million or 37% of revenue. As we head into the second half of the year, we are well ahead of where we expected to be in terms of organic market share gains and revenue run rate. Our strong execution and improving revenue visibility give us the confidence to raise our expectations. We now expect full year 2021 revenue growth of approximately 38% to 40%, and adjusted EBITDA margin of approximately 30% to 32%. This momentum, coupled with the success we're seeing from growth initiatives, such as our rapid acceleration in CTV and the runway in front of us with supply path optimization, gives us confidence in our 2022 revenue growth expectations of 25%, consistent with where we see our longer-term trajectory. The digital advertising industry is constantly evolving, creating significant opportunities for accelerated growth. Disparities are widening between the independent omnichannel scale leaders like PubMatic and others who are conflicted because of media ownership or lacking an omnichannel scale. Additionally, the market continues to consolidate driven by supply path optimization, regulatory and privacy requirements, and expectations for high-quality inventory. The need to stay ahead of the market has never been greater and requires meaningful capital investment in product innovation and global infrastructure. Our profitable business model ensures that we can continue to innovate, expand capacity, and increase our value proposition to better serve our customers and capture market share. We maintain the belief that the pandemic has pulled forward multiple years of consumer behavioral change. Digital ad spend is rapidly increasing and gaining share of the total advertising pie. At the same time, media consumption is in a high degree of flux between mobile, desktop, and connected TV devices. As the economic reopening continues to evolve globally, with some markets opening up, while others continue or return to lockdown, we are in a strong position to be physically present with the consumer, however, they are interacting with media and advertising, given our omnichannel and unitary platform, making us increasingly relevant for both our publisher and buy-side customers. To take advantage of these trends, we are making significant investments given the multitude of growth opportunities in front of us. In the last 6 months, we have increased our headcount by nearly 14%, with a focus on driving revenues and platform innovation. To further support our growth, we have increased our impression capacity by 19% since January of this year. With greater momentum and visibility into top-line growth, we plan to further invest for the remainder of 2021 and into next year, significantly increasing headcount and impression capacity. As a leading sell-side platform, we continue to outpace market growth across the board in connected TV, mobile app, mobile web, and online video, with revenue growth sharply ahead of the market. The foundational element driving our market share gains is our infrastructure-driven approach to digital advertising. This infrastructure-driven approach serves as a flywheel that allows us to grow top-line revenue, leverage our largely fixed cost structure to drive profitability, and reinvest in innovation on behalf of our customers to again drive top-line revenue. Importantly, our omnichannel platform is a single unified platform, which allows us to be extremely nimble with respect to innovation. On top of our unique infrastructure advantage, there are 3 key areas of market share gains that we are executing against. We continue to be a strong beneficiary of supply path optimization due to the efficiency and transparency that our platform provides. We are growing rapidly in the fastest-growing segments of digital advertising. In Q2, combined mobile and omnichannel video revenues grew by 108% year-over-year and represented a greater proportion of the total business. Our CTV business accelerated even further, which I will detail shortly. And the multiyear investments we have made and continue to make in audience addressability are paying off. Let me dive a bit deeper into each of these 3 areas. A growing portion of our business comes from supply path optimization or SPO agreements. In the second quarter, 23.6% of our total company ad spend was via these SPO agreements. For PubMatic, SPO serves as a competitive moat, with the opportunity to shift meaningful market share to us over time. As buyers consolidate ad budgets onto fewer sell-side platforms, they gain greater efficiency, innovation, inventory quality, and transparency, which in turn allows them to achieve greater return on their advertising investments. As buyers commit an increased share of their ad spend to our platform, we gain greater visibility into future revenue and our publishers see increased revenue from PubMatic. As a result, we benefit from a high net dollar-based retention rate. In the second quarter, this metric grew to 150% on a trailing 12-month basis. We believe we have a distinct advantage in closing and ramping SPO deals because we own and operate our own infrastructure and we have a single unified platform. This results in our ability to rapidly and efficiently innovate at omnichannel and global scale. In Q2, we partnered with leading advertisers and agencies, including Dentsu's global accredited partner program and IPG Matterkind Australia, resulting in greater spend from these agencies on our platform. Omnicom Media Group in the Netherlands also recently consolidated spend on PubMatic to help advance innovation across the agency. Last year, we launched our OTT/CTV solution. We built this solution for not only where the market is today, but where we believe the market is heading, transparent and efficient option-based ad transactions. Although the market shift from linear TV to OTT and CTV formats is still early days, we're very pleased with the rapid innovation and results we're seeing. Our solution supports biddable and fixed-price private marketplace deals as well as open-market transactions, and our growth metrics speak to the traction we are seeing in market. As a reminder, OTT refers to over-the-top streaming content, which can be streamed to connected TV or CTV devices, mobile devices, and laptop or desktop devices. In the second quarter, OTT revenue, inclusive of CTV, grew by more than 100% over Q1, a significant increase over the 55% sequential growth we saw from Q4 2020 to Q1 2021. As of the end of the second quarter, we are monetizing inventory from 114 publishers, up from 80-plus just a quarter ago. We now work with a wide variety of CTV and OTT partners like original equipment manufacturer, Xiaomi, and virtual multichannel distributor, Firework. Critically, leading CTV ad buyers, such as The Trade Desk, are expanding their activity on our platform via programmatic transactions, consistent with our vision of the future of CTV, where advertisers can realize greater ROI via data-driven precision. Similarly, we have completed an integration with Google that enables PubMatic CTV inventory to be accessed on demand in the DV360 TV marketplace. These partnerships validate our approach to the rapidly growing CTV market, and together, they provide our publishers with scaled CTV demand from our 2 largest demand-side platforms. Innovation is a key component of PubMatic's DNA. Early on, we made the strategic decision to invest in a portfolio of solutions to lead the industry transition of audience addressability amid the open Internet. Several years on, I couldn't be happier with where we are today in terms of the breadth of our solutions, partnerships, and market adoption. We have over 250 publishers using our Identity Hub solution, which allows them to seamlessly manage multiple e-mail-based or other identifiers and eliminates the need for publishers to build and maintain integrations on their own. We also offer key reporting insights, where publishers can test and learn the effectiveness of each ID solution. 9GAG, a popular social media platform in Hong Kong with a global audience of over 150 million users, used Identity Hub to quickly and efficiently adopt multiple alternative IDs via our solution. As a result, 9GAG drove increased programmatic revenue with Identity Hub, with alternative IDs helping them achieve a 10x lift in monetization on non-cookie traffic. This case study illustrates how our Identity Hub solution is moving the open Internet forward for our customers and at the same time, is leading to increased utilization of our infrastructure, regardless of cookie deprecation timelines. We continue to expand the impact of Identity Hub by adding identifiers. With up to 13 identity solutions now integrated, publishers can easily support multiple ID partners to ensure buyers can recognize the publisher's audience and bid accordingly. We have also continued to scale our Audience Encore solution, where publishers and data partners can upload their first-party audience data to our platform for ad buyers to access. We currently have 30 data partners, including Nielsen, CarGurus, Semasio, and Hyp Technology APAC, to name a few, and over 32,000 customer segments and inventory packages available for ad buyers to access. Importantly, we expanded our platform to include one of the largest data owners in the ecosystem, Google Audiences, in Q2. For example, using our broad ecosystem of data partners, combined with hundreds of billions of daily ad impressions, Dentsu was able to reach a niche audience like tech enthusiasts at scale with data-enriched inventory. In the end, Audience Encore delivered on their volume needs with a viewability rate of over 70%, well above their 50% benchmark. Last month, over 2,000 people registered to join our virtual conference, Envision, where over 120 leaders from around the globe discussed what's next for addressability. The consensus was clear. We need to look beyond solutions that replicate the cookie and instead focus on addressing the fundamental opportunity for a more transparent Internet, which will require a portfolio of solutions that protect consumer privacy and enable the safe data-driven advertising of the future. We continue to invest in this area and believe we are well positioned to help our customers achieve their business goals in a post-cookie and post-IDFA advertising environment. I want to close by highlighting how proud I am of our entire team. We recently were awarded Best Supply-Side Platform by Adweek Readers' Choice Best of Tech Partners. We have been recognized as a Top 100 Small & Medium Workplace in Asia by the Great Place to Work Institute. And we have partnered with Havas Media UK to power the supply in their sustainability marketplace, which is focused on furthering environmental, social and economic causes. These achievements underscore our focus on our culture and our customers. Our differentiated and profitable business model, combined with our growing revenue visibility, affords us the ability to invest deeply in a variety of growth opportunities. As a result, we are growing our market share across formats and devices and are well-positioned to take advantage of the acceleration in digital ad spend in a fast-evolving market. Let me now turn the call over to Steve.

Thank you, Rajeev, and welcome, everyone. PubMatic achieved another outstanding quarter, with revenue and adjusted EBITDA above guidance, propelled by organic revenue growth more than double the rate of the overall digital ad market. Revenue in the second quarter was $49.7 million, an increase of 88% over Q2 last year. Net income was $9.9 million, more than 10x higher than the prior year. Adjusted EBITDA was $18.6 million, nearly 3x higher. These exceptional top and bottom-line results reflect our success in delivering value to our customers and the strength of our business model, with its high profit flow-through to adjusted EBITDA and GAAP net income. Underpinning our success is our long-term ability to innovate and invest for future growth. We are investing in solutions across devices and ad formats, adding new customers, increasing our infrastructure capacity, and expanding our engineering and go-to-market teams. We believe these investments, combined with our proven ability to operate efficiently, give us a powerful network effect with more revenue visibility and operational scale, which benefits our customers and us. As a result, we are raising our full-year 2021 guidance. Given the strong momentum across our global business and progress with rapidly scaling growth initiatives, including our supply path optimization relationships and our OTT/CTV business, we expect 2022 year-over-year revenue growth to be 25%, consistent with where we see our longer-term growth trajectory. In conjunction with our higher revenue expectations, we will continue investing for growth. Inclusive of these investments, we remain confident that we can deliver annual adjusted EBITDA margins of 30-plus percent for this year and next. I'll provide more color on this in a few minutes. Our five key financial drivers give us confidence we can sustain revenue, adjusted EBITDA, GAAP net income growth. First, we are one of the few scaled global businesses in our highly fragmented industry that offers an omnichannel solution for publishers and buyers. Our specialized cloud infrastructure and local go-to-market presence is geographically distributed in all the major ad markets apart from China. This framework allows us to continue expanding across the world with existing and new customers, both effectively and efficiently. Second, the combination of our usage-based model and our ability to retain and grow revenues from existing customers provides a high degree of revenue stickiness and corresponding visibility. Third, we have built a business that consistently delivers high gross margins. Fourth, our business is embedded with durable structural advantages, emanating from our owned-and-operated infrastructure and offshore R&D that enables us to cost-effectively invest in technological innovation. And lastly, we generate consistent cash flow through rigorous working capital management and efficient capital expenditures. Now turning to the highlights for Q2. Our revenue growth was driven by broad strength across our omnichannel platform and diverse set of advertising verticals. Except for political advertising, spending for every vertical was up significantly over Q2 2020, with the top 10 verticals in aggregate growing 100%. Ad spending was particularly strong for our mobile and omnichannel video businesses, with combined revenues growing over 100% year-over-year. As a reminder, omnichannel video is the sum of online digital video plus OTT/CTV. In aggregate, our mobile plus omnichannel video revenues represented approximately 65% of total revenues in the second quarter. Looking at just the OTT/CTV category, revenues from this business increased over 100% sequentially from Q1 2021, with 114 publishers monetizing inventory via these formats in the second quarter up significantly from Q1. We launched our OTT/CTV solution mid-2020, and next quarter, we'll be able to provide you year-over-year growth rates. In Q2, Apple released the latest iOS software eliminating IDFA. Thus far, the percentage of consumers who have decided not to be tracked for advertising is lower than anticipated, and overall, the impact on our business has been minimal. Further, our omnichannel platform positions us well to offset any impact as advertisers shift to alternative high ROI formats and channels. In the second quarter, we also saw a continued recovery in our desktop business, with revenue growth of 72% over Q2 of last year. Our Verizon Media Group revenues grew over 50% year-over-year and represented approximately 17% of our total revenues in the second quarter. This concentration level is down considerably from 2019, when VMG represented 28% of revenue. We continue to benefit in the quarter from strong existing customer revenues. For the 12 months ended Q2 2021, net dollar-based retention was 150%, significantly up over the comparable period a year ago. It should be noted that this most recent trailing 12-month period excludes the pandemic effect in Q2 2020. The calendar year 2021 net dollar-based retention will naturally come down from this level as we lap our high second half growth. Another important long-term growth driver continues to be our supply path optimization deals with advertisers and agencies. We have seen these relationships serve as a catalyst for buyers to consolidate ad dollars onto our platform, with the percentage of spending coming via SPO deals more than doubling since the beginning of 2020. To rapidly scale and take advantage of these growth opportunities, we have significantly increased platform capacity. With these investments, we processed over 20 trillion impressions in the second quarter, double what we processed for the same period last year. Our long-term strategy of owning and optimizing our purpose-built infrastructure enables us to reduce our unit cost and sets us apart from other companies that rely on public cloud infrastructure. Illustrating this point, we successfully reduced our cost of revenue per million impressions processed by 27% year-over-year. In Q2, we delivered a 74% gross margin compared to 65% in the prior year. Exceeding our revenue targets in the quarter enabled us to achieve high marginal profitability. Once we have implemented our targeted capacity expansion at a point in time, we achieve leverage because our platform costs are largely fixed in the near term, typically a quarter out. With respect to our Q2 operating expenses, the combination of increased headcount for growth, incremental public company costs, and stock-based compensation resulted in operating expenses of $26.4 million, up 61% year-over-year. Since the beginning of 2021, in pursuit of our growth goals, we successfully increased our global team by approximately 40%, with key hires in technology and go-to-market. The combination of rapid revenue growth, operational efficiencies, and ongoing benefits from investments in our business resulted in net income in the second quarter of $9.9 million or 20% of revenue, up significantly from the 2% net margin a year ago. Q2 diluted EPS was $0.18. Adjusted EBITDA in Q2 was $18.6 million or 37% of revenue compared to 19% of revenue in the prior year, primarily due to the high flow-through from strong revenue ahead of plan and the cost leverage we achieved on our platform. To summarize, our strong quarterly P&L performance was a result of several factors: acceleration of mobile and omnichannel video driven by an increase in open Internet activity globally; rapidly growing OTT/CTV business; strong spending across nearly all ad verticals; increased revenues from existing customers, supported by supply path optimization agreements signed in 2019, 2020, and '21; and our targeted investments in people and platform capacity. Turning to our cash flow, we generated net cash from operating activities of $21.1 million for Q2. We ended the quarter with cash, cash equivalents, and marketable securities of $122 million, up over $10 million from the prior quarter. Now on to our Q3 and full-year 2021 guidance. Given our strong first half performance and our increased visibility for the balance of the year, we are increasing our full-year guidance for revenue and adjusted EBITDA. Before turning to the specifics, I want to provide some context. In light of uncertainty caused by emerging COVID variants, we remain prudent and keep a slightly conservative stance in our full-year guidance due to the combination of uneven macroeconomic conditions and the reality that some parts of the world are still suffering from the worst effects of the pandemic. Nevertheless, we are seeing the preliminary stages of an economic reopening in the U.S. and in selected major ad markets around the world, and we believe this trend will benefit PubMatic and its customers. Of course, it remains to be seen when the pandemic will end. At a minimum, we anticipate recovery and reopening trends will vary by region, creating a degree of uncertainty. With this backdrop, it is worth noting that PubMatic's omnichannel platform and broad global presence gives us confidence that our business is resilient and well positioned for growth this year and beyond. In terms of our investments for future growth, with our strong first half profit performance, the confidence we have in our efficient omnichannel platform and our proven ability to operate profitably for the remainder of 2021, we plan to accelerate hiring well ahead of our original 2021 plans. Looking ahead to 2022, we intend to continue investing in people and infrastructure to maximize our growth potential in '22 and beyond. On the CapEx side, we noted last quarter that we plan to continue adding capacity to capture incremental growth opportunities this year, and we are accelerating purchases forward from 2022 to mitigate the risk of chip shortages over the coming 9 months. We also expect incremental costs related to the office reopenings around the globe as well as higher travel and entertainment expenses as our team reengages in person with customers. Overall, we expect our GAAP operating expenses for Q3 and Q4 to increase at roughly similar year-over-year rates to Q2. Now in terms of the specifics. For Q3 2021, we expect revenue between $51 million and $53 million or 35% to 39% year-over-year growth. In terms of the year-over-year percentage comparisons supplied by our guidance, keep in mind, we are lapping very strong growth in the second half of 2020 of 50% that also included one-time effects such as carryover spending from the first half and political ad spend. In this regard, it is useful to reference our growth on a 2-year stack basis, which translates for Q3 to 68% to 72% for the 2-year period. For Q3, we expect adjusted EBITDA between $15 million and $16 million, approximately a 30% margin. For the full year 2021, we are raising our revenue expectations by $9 million and now expect revenue between $205 million and $209 million, representing 38% to 40% year-over-year growth. On a 2-year stack basis, our revenue guidance implies second half growth of 68% to 73%, similar to our first half. We are also raising our full year adjusted EBITDA expectations by $10 million and expect adjusted EBITDA between $65 million and $68 million or 30% to 32% margin. For the remaining two quarters of 2021, we will be incurring new public company costs of over $4 million. We expect CapEx to be $26 million to $29 million for the full year. A significant amount of our capacity investments will be put into service over the next several quarters, and consequently, our Q3 and Q4 gross margins will be slightly below historical second half margin rates due to depreciation costs brought forward from 2022. We don't see this affecting our calendar year gross margin target of approximately 70%. In terms of our ad impression growth, we now expect the full year number of impressions processed in 2021 to increase by more than 70% compared to 2020. In closing, we are pleased with our progress in the second quarter and first half of 2021, but we are even more excited about the opportunities ahead of us. At a fundamental level, we believe that the size of the digital advertising opportunity we can address is larger as the total amount of time people spend online continues to grow. Our differentiated business model built on an omnichannel platform positions us well to capture advertising opportunities across devices and formats wherever people go online. As a result of our strong financial position emanating from our efficient infrastructure, we are able to consistently invest in targeted growth initiatives like OTT/CTV. We are seeing strong results across our global business and correspondingly expect our fiscal 2022 year-over-year revenue growth to be 25%, which corresponds to an organic 3-year compound annual growth rate of 32%, well ahead of the expected growth in digital ad spend. Given the strength of our business model, scaled global presence, increasing market share, and experienced team, we are confident we can deliver annual adjusted EBITDA margins of 30-plus percent for this year and next, inclusive of our growth investments.

Thank you, Steve. This is Stacie Clements. We'll now start the Q&A portion of the webcast. In the spirit of bringing access to all investors, we'll also be taking a few questions posted from the broader investment community. Let's start with the sell-side analysts. The first question comes from Shweta Khajuria at Evercore.

I have two questions, please. First, could you discuss the demand trends you’re observing in the second half, both domestically and internationally, that are reflected in your guidance? Are the sectors you mentioned, such as travel, food and drink, and fashion, returning to normal levels, or have they already normalized? For my second question, what were the CPM trends in the quarter, and can you provide an update on your publisher count?

Sure. Nice to speak with you, Shweta. So of course, there is a lot of uncertainty around the impact of COVID variants around the globe. And one of the strengths of our business as an omnichannel platform, we really have opportunities wherever folks go online, combined with the fact that we are a global business and have a very good diversified portfolio. And so when we look at the potential exposure, the fact that we have a very diverse ad spending portfolio, meaning we have 20 ad verticals that we have spending on, that if a particular vertical is affected, we have the ability to respond and react accordingly because we have the ability to generate revenues in other ad verticals. That's really sort of the high-level point. In terms of how we think about the business, on the demand side, throughout the pandemic in digital advertising, we saw continued progress in growth as people were spending more and more time online. We don't see those factors particularly changing. With respect to CPMs, we actually saw a very strong recovery on a year-over-year basis in Q2. And that is something that is a function of continued ROI returns for our advertising partners.

Our next question comes from Brent Thill with Jefferies.

Rajeev, if you could give us an update on CTV, and I think you called out some financial goals at the end of the year, are you still tracking to that framework? And then for Steve, you had mentioned 25% growth for 2022. Very few companies in the industry are guiding to next year. What gives you the conviction to come out and put a 25% stake in the ground for next year?

Yes. Hey, Brent. Good to connect. So first on CTV, I would say we're really excited about the growth and really the acceleration in growth that we're seeing in CTV. And that's one of the key drivers, and now, we're raising our guidance not only for the second half of this year, but also establishing guidance for 2022. And what we're seeing is that the growth is accelerating. You might recall, sequential growth from Q4 to Q1 was about 55%. And now, Q1 to Q2, we're seeing over 100% sequential growth. We've also grown the number of publishers dramatically from roughly 80 a quarter ago, to now 114 as of the end of the second quarter. And what we're really seeing is that our approach, as we've talked about, we're focused on where the market is headed. It's still quite early days in the CTV industry. But where we're headed with programmatic transactions is really where the hyper growth is. And I think you also see that with what we shared in terms of The Trade Desk and Google's TV marketplace, our 2 largest DSPs now becoming buyers on our platform in that format. And very simply, buyers see more ROI when they can buy in a programmatic fashion as compared to legacy ways of buying. So we're seeing tremendous growth there. And again, that's driving our higher expectations for ourselves. And then I will turn it over to Steve.

Great to reconnect, Brent. So you're right. Very few companies are talking about 2022, mid-'21. And so the reason why we are talking about it now is we really are seeing great momentum really across the board, not only in terms of particular formats, channels, mobile, video, as Rajeev just called out, CTV, but on a regional basis, every region is growing very strongly. And so what that gives us confidence is in our understanding that we have momentum, but there's also some very important structural factors that are driving our confidence. As we mentioned in our earnings release, the proportion of our supply path optimization deals now accounts for about 25% of the total ad spend on our platform. And that creates quite a bit of ballast for our company, and that has a degree of revenue visibility into the future. And so when you combine the fact that we have strength across the board, particularly in the fastest-growing formats, mobile, online video, CTV, combined with the supply path optimization deals, we're very comfortable with our 25% goalpost.

Our next question comes from Justin Patterson at KeyBanc.

Great. I was hoping you could expand on audience addressability and identity more. As you see products like Identity Hub and Audience Solutions gain traction, how is that influencing advertiser behavior and spending trends? Is that something we should think as mostly a CPM benefit? Or can these products drive market share gains over time? And then as a follow-up question, just around investment, it sounds like there's a step up in headcount and infrastructure. Could you expand upon just where those headcount investments are taking place? Is it more R&D or sales and marketing, business development people? And then on infrastructure, how should we compare the returns on that versus what I believe is a pretty big infrastructure investment this past year?

Yes. Why don't I take the first half of that, Justin, and then Steve can comment on the second half of that. So with respect to audience addressability, our focus over the last couple of years has really been in investing in a portfolio of solutions that we think will bring the open Internet forward significantly. And by forward, what I mean is not just replacing things that are likely to go away like the cookie, but really to bring a much more transparent and highly performant open Internet solution, both for consumers in terms of data that they might share as well as for advertisers with the ROI that they're looking for from their ad budgets. And I think what we're seeing is that after several years of investment, we're gaining traction, and we're seeing some of those investments start to pay off. And that is also a factor in our raised guidance. So for instance, with Identity Hub, what we see is that as publishers layer in some of these much more granular IDs, like a Unified ID from Trade Desk or a LiveRamp, et cetera, advertisers are able to deliver more targeted ads, and that, in turn, drives the ROI up and so they're willing to spend more. So this case study that we shared in the earnings call with 9GAG, 150 million users in Hong Kong, a social media company, they're seeing a 10x increase in monetization. So that's not about getting back to maybe where we were with the cookie, but it's fundamentally improved monetization, and that comes from higher CPMs, higher bid rates, which means more impressions filled also at higher CPMs. So that, I think, is one of the key linchpins for us, which is our Identity Hub product. And then the second key area is our Audience Encore solution. And with some of these anonymized identifiers going away like IDFA and the cookie, we see a real potential for the value of data to shift from the buy side to the publisher, where the publisher, of course, has the direct relationship with the consumer. And so we've been investing here with our Audience Encore solution. We're now at 30 customers and growing, tens of thousands of audience segments on our platform. And as we called out with Dentsu and that tech enthusiasts example, they were able to find the users that they're looking for. And when they do, they're willing to pay a higher CPM and buy more of those users. So again, we're finding that that's not only great, of course, for the publisher, but it also increases the utilization of our infrastructure. Steve, over to you.

Sure. With respect to investment, Justin, we are very comfortable with making accelerated investments for a couple of reasons. As a company, for many years, we've been focused on driving revenue profitability, and that's really an important operating principle. For framework reference, as I've shared in the past, 2020 was our eighth straight year of positive adjusted EBITDA, fifth straight year of positive GAAP net income. So we have a lot of confidence in our ability to invest and do it wisely and get return. And so it's a part of our long-term focus on driving the top line, is why we are investing as we are today. We shared that we increased headcount by about 14% thus far, just in calendar year '21. We continue to invest in adding infrastructure to take advantage of that opportunity because we see the ROI on those investments. And as we look ahead, we see the opportunity even larger as the pandemic-related online behaviors stick as well as just the success we've had in our rapidly growing initiatives, specifically in CTV. And so as we look ahead, we're going to add additional people ahead of our plan, specifically in R&D to continue to drive innovation as well as selected people in sales and marketing to drive our new initiatives around addressability as well as in CTV. So overall, as a company, we have a model that has durable structural advantages in terms of profitability. We believe that the top line has significant upside, and so we are investing today. And as I shared in my guidance, inclusive of those investments, I'm confident that we can continue to deliver 30-plus percent EBITDA margins.

Our next question comes from Matt Swanson at RBC.

Two quarters in a row. It was great to see the success in CTV. I was wondering, could we get a little bit more color on the 114 publishers? So the 24 add, just some context on how we should think about that in terms of maybe internal targets. And obviously, all publishers are not created equal. So is that a good metric for us to kind of use to think about your scale and market positioning, I guess, within what's still a fast-growing but kind of nascent market?

Yes, I can start, and then Steve can add if he wishes. We're focusing on a few internal metrics, notably publisher growth. We're selective about the publishers we target in the CTV or OTT space, choosing those that align with our criteria for scale, inventory quality, and our capacity to add value through programmatic monetization. Our approach is global, not just limited to the U.S. Publisher growth is certainly one of our metrics. Another key metric relates to our ability to monetize inventory, which involves increasing partnerships with demand-side players and optimizing supply paths. During our last earnings call, we mentioned our group MDO, which includes CTV monetization. We recognize that it's a two-sided marketplace, requiring a balance between supply and demand. We're feeling optimistic about our progress. The discussions with buyers indicate they are experiencing higher ROI from programmatic purchases. As buyers see more ROI, they are more inclined to spend, benefiting publisher revenue.

Yes. That's fantastic. And if I could add one more. I mean as far as the story goes, it really feels like SPO is increasingly becoming kind of a main point of differentiation. And as you're gaining more and more recognition in the market for this, could you just talk about any changes in how these deals come together? Are you seeing customers coming to you more often than having to approach them about it? And then I'm assuming the vast majority are already large customers on the platform, but I was wondering if you ever are seeing any exceptions, where you see newer customers or lower volume that you're ramping with quickly because of this notoriety?

Yes. I think SPO is absolutely a growing trend. And the simple reason is that advertisers are able to generate more ROI from their ad campaigns, from their ad budgets, when they engage in supply path optimization with PubMatic. And the reason is we're focused on bringing high-quality inventory, we're focused on data, we're focused on ROI solutions for buyers that are complementary to what they're doing with their DSPs. And so again, buyers see more ROI, and so of course, they're going to shift more spend into those tactics and channels where they see that. And so we are, I would say, we are seeing this trend accelerate, not only with major agencies, but also with major advertisers. And part of our innovation investment is in continuing to build out our sales and customer success team on the buy side, for instance, going after mid-market agencies, where we have not been able to engage with them so far, just because we've had our bandwidth full and engaging with the largest buyers. So we definitely see opportunities to go further into the mid-market and also geographically across Europe and across Asia, to engage in supply path optimization. So I think we're doing well here, and we plan to continue to do well here. But there's still, I think, a lot of room to run.

Our next question comes from Andrew Marok at Raymond James.

I also wanted to touch on addressability, but maybe from a little different angle. So we've heard from some other players in the ad tech ecosystem that the cookie deprecation delay has maybe lessened the urgency around the move to cookieless. So how has that affected uptake of Identity Hub, Audience Encore and the addressability products and the conversations that you're having with clients around those products and if there's any disruption in the pace of adoption there?

Yes. I think we've seen, I guess, I would say, a multitude of reactions. Some folks certainly have lessened their focus. But I think just as many folks, and maybe even more, have said, hey, the uncertainty here is not a good thing. And so let's work even harder to find solutions to move away from things like cookies. And I think it's key, one of the things that we're doing is we're reminding the ecosystem that this isn't about just getting back to parity with cookies. Through some of the case studies that we've shared, we can clearly demonstrate that buyers can get much higher ROI, publishers can get more revenue, and consumers can have more of a voice in what data is used to deliver relevant ads to them by adopting some of these alternatives. And so I think, in general, what I would say is we don't see significant pullback. In fact, we see people continuing to push forward. And we are not, on our side, we're not reducing our investment, we're reducing the pace of dialogue that we're having in the ecosystem around these audience addressability solutions.

Our next question comes from Andrew Boone at JMP.

So one on growth and one on profitability, please. So mobile and video was impressive at 108% growth. Can you help us understand the contribution from video more specifically, just as we think about viewership from linear TV moving to digital? Is there any way to size that or understand the contribution to growth? And then on profitability, gross margins hit 74% this quarter. Understood the capacity investments there, but you are 4 points above kind of long-term margins that were set at the IPO guidance. Is this level sustainable going forward? How do we think about that?

Sure. I'll add a couple of points, and Rajeev could elaborate on our perspective regarding the video opportunity. Our video business is growing significantly, with combined mobile and omnichannel video seeing over 100% growth. Both categories are performing very well. Over the past 12 to 18 months, we've observed our mobile video business growing to about two-thirds of total revenue, with the video aspect constituting a substantial portion. Therefore, when considering PubMatic, it's important to view it as primarily a mobile video business that includes the fastest-growing formats, which will increasingly become a larger part of our operations in the future. Regarding profitability, I previously highlighted how we manage the business in terms of enhancing both top-line growth and profitability. This is based on a few key principles. First, we have an infrastructure-driven approach to digital advertising, owning all our infrastructure globally. During Q2, when we exceeded revenue expectations, the additional profitability from that revenue was substantial and positively impacted the bottom line. Specifically, we had a several million dollar revenue beat, contributing to the 74% gross margin this quarter. However, looking at the bigger picture, I remain confident that we can achieve an approximate 70% gross margin in the long run. While there may be some quarter-to-quarter variability due to the timing of investments, I am very comfortable with that long-term target I set for the public.

And Andrew, the only other thing I would add on video is when we think about TAM and market opportunities that we're going after, if we think about, let's say, 2025 digital video, excluding CTV, it was about a $115 billion market. CTV is about a $35 billion market, so combined, about $150 billion. But that digital video piece, it's 3 to 4x the size. And when we talk with agencies, talk with major advertisers, they continue to see that digital video opportunity at about 3x the size of CTV. So we're absolutely going hard against that $115 billion of digital video, just as we are with the $35 billion of CTV.

And our next question comes from Jason Helfstein at Oppenheimer.

I have two questions. First, Rajeev, I believe the significance of the audience addressability product is not fully appreciated, especially in relation to what others are doing with solutions like UID or LiveRamp. Could you elaborate on the value it brings? It seems that even though you’re not increasing charges for it, it's helping you gain market share, which you consider crucial as identity issues become more significant in the coming years. Second, Steve, there is a consensus in the ecosystem that CTV gross margins are increasing because of higher CPMs and lower technology costs. So, why wouldn't gross margin continue to rise? Is that the reason you feel confident investing more, knowing that you'll have increased gross margin dollars in the coming years to back those investments?

Yes. Why don't I start on the audience piece, and then Steve can come back on the margins? So just in terms of what Identity Hub does is what we see is there's a pretty fragmented ID landscape out there, right? Jason, you mentioned 2 of the leading IDs, of course, Trade Desk Unified ID 2.0, LiveRamp. And then there's PubCommon ID. If you go to Europe, there's netID. There's ID5 in Germany and the U.K. There's others in the U.S. There's emerging ones in APAC. And so that creates a lot of complexity for publishers in particular, where doing an integration with each ID is not trivial, right? So if you want to stand up Unified ID 2.0, you have to do server integrations, you have to manage latency, you have to put code potentially on your apps or on your websites. So that's a lot of work. And of course, publishers are very strapped for resources in terms of engineering bandwidth. And at the same time, publishers don't know which advertisers are going to adopt which IDs. So maybe one advertiser, Advertiser 1, they adopt Unified ID, and maybe another advertiser adopts LiveRamp. And from a publisher perspective, of course, they want to be able to sell inventory to both of those advertisers in order to generate more revenue. And so what Identity Hub does is it really accelerates this future away from the cookie, where publishers can do one integration with PubMatic. And of course, we know these publishers' setups. We know their teams. We're talking with them on a daily basis. So they do one integration with us, and we've integrated and we continue to maintain very fast, low latency integrations with all of these other identity solutions. And so then a publisher can convert a phone number or an e-mail address or some other identifier into all of these IDs simultaneously, and that creates more liquidity for the publisher, where now all of those advertisers can bid on that publisher's inventory. So I think, for us, the benefits that we see are we can not only gain share, but also we can drive higher utilization of our infrastructure. So as CPMs go up, as buyers adopt these IDs away from the cookie and as fill rates go up, then that creates better utilization of our infrastructure as we see it.

Sure. With respect to gross margins, Jason, you're correct that they're higher for CTV. The challenge with gross margins, as with all technology companies, depends on the time on investments and the mix of products sold. And so I do think that over time, CTV gross margins will be higher, and overall gross margins will come along with that. But we also are focused, and I would say the drivers in our business go back to our operating model, focused on delivering value to our customers, reinvesting that for growth using our durable model that has structural advantages in terms of how we operate. And the fact that we are building out a broader set of solutions across many channels and many formats provides ample solution space for our customers and drives indeed an overall margin as well. We see a dynamic here as a culture around both revenue and preserving margin, and I think that's what sets us on the right path over the long term.

Our next question comes from Vasily Karasyov at Cannonball Research.

Rajeev, you were talking in your prepared remarks about the opportunities you see, the investment that you are putting behind that opportunity. At the same time, there are a lot of ad tech companies that are reported to be for sale or looking for some kind of strategic options. And some of your peers have been quite acquisitive in the past 18 months or so. So I was wondering how you think about build versus buy kind of options. And what drives those decisions?

Yes, sure. So look, we've done a few deals in the past, and we're certainly open to doing acquisitions that would meaningfully accelerate our product roadmap, help us acquire new customer relationships or otherwise maybe accelerate traction in high-growth formats like CTV or video, et cetera. But I think all that being said, we have a very strong in-house innovation capability, and we have a track record now of multiple years of consistently investing in driving innovation on our platform. And so we couple that as well with a profitable business model. And the importance of that profitability is that it gives us the financial capacity to continue to make ongoing investments. And that really drives strong organic growth, and so that's exactly what you see us doing. So I think our focus is really on both, but we know we have, I think, a well-built machine around how we invest internally on growth and innovation. So we're going to continue to do that, and then we'll be opportunistic around M&A opportunities.

Thanks, Rajeev. We'll now take a few additional questions that have come in. The first question comes from someone who wants to understand the challenges you anticipate over the next 3 to 5 years. Rajeev, do you want to take that one?

Sure. I think the industry is evolving very rapidly and of course, growing quite quickly. And so we need to constantly be focused on how do we innovate and how do we serve our customers extremely well. And so I think the challenges that arise from that are really centered around recruiting and retention. So recruiting great talent, we are growing our team at a pretty rapid rate as well as retaining the great talent that we do have. We want to be focused on maintaining an industry-leading platform and infrastructure so that we can continue to innovate at a rapid pace. And then third, making sure that we're focused on the biggest opportunities in the ecosystem. And so that's things like supply path optimization, CTV, and audience addressability and not getting distracted with other things that could seem interesting but really are just not as relevant from a size of opportunity perspective. And so I think when I look back over the last couple of years, including the pandemic period at its peak, Q2 and Q3 last year, I think we've done exactly that. We've stayed nimble. We've grown our market share. And we've stayed really focused on our talent and on innovation, and I think our results indicate that.

Thanks, Rajeev. The next question is around competition, specifically around Criteo as it has evolved into both the DSP and SSP.

Yes. So Criteo is a value partner for us as a buy-side customer. And I think what we've seen over a long period of time is that, by and large, independent technology providers that are focused on the needs of sellers or buyers tend to perform best. I think when you marry both together, there can be a natural tendency towards optimizing for yourself rather than for your customer, when you have both the supply side and the demand side under the same umbrella. And I think that inward shift moves the focus away from the customer. So I think being very focused on the needs of the customer over the long run is ultimately critically important to long-term success.

And we have time for one more question. It's a 2-parter, Rajeev. This person would like to know more about how an infrastructure-first company gives you the competitive advantage. And then secondly, talk about what other ways you can add more value to your customers and partners longer-term.

Yes. So I think the infrastructure component or the infrastructure focus that we have on digital advertising is critically important because digital advertising is unique in that it's done in real-time and it generates significant amounts of data each and every ad impression, each and every transaction. And that data, when analyzed deeply, can yield tremendous results. And to excel at both the real-time aspect as well as the data aspect, that requires significant infrastructure. And when you own your own infrastructure, that means you can optimize things between network, hardware, and software to create better outcomes and to do things more efficiently. So for instance, we can make changes at the network layer in conjunction with our software to speed up transactions. And if you're in the public cloud, you can't do that because you're not allowed to touch the network layer. We can also integrate with customers at the network level rather than purely at the software level in order to speed up transactions. I think it was Andreessen Horowitz, maybe a month or so back, they published some research called the $1 trillion paradox. And they highlighted how software companies are giving up about $1 trillion in market cap by not being more efficient in owning their own infrastructure. And so why this is critically important for us is not only can we generate better outcomes for our customers, and I think they do see that every day and that's reflected in our 150% net dollar retention metric. But also, we get a lot of leverage out of our model, as Steve commented earlier, and that leverage and that profitability is really key to our ability to continue to invest on an ongoing basis and stay ahead of the market.

And we're just over the top of the hour. This concludes our call today. Thank you, Steve and Rajeev. Thank you all for joining us today, and I hope everyone has a great afternoon.

Great. Thank you for joining, everyone.

Thank you.