Hello, everyone and welcome to PubMatic’s First Quarter 2023 Earnings Call. My name is Catherine and I will be your Zoom operator today. Thank you for your attendance today. The webinar is being recorded. I will now turn the call over to Stacie Clements.

Good afternoon, everyone and welcome to PubMatic’s earnings call for the first quarter and year ended December 31, 2022. This is Stacie Clements, and I will be your operator today. Joining me on the call are Rajeev Goel, Co-Founder and CEO; and Steve Pantelick, CFO. Before we get started, I have a few housekeeping items. Today’s prepared remarks have been recorded, after which Rajeev and Steve will host live Q&A. If you plan to ask a question, please ensure you’ve set your Zoom name to display your full name and firm. A copy of our press release can be found on our website at investors.pubmatic.com. I would like to remind participants that during this call, management will make forward-looking statements, including, without limitation, statements regarding our future performance, market opportunity, 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 Form 10-Q or 8-K, which are on file with the Securities and Exchange Commission and are available at investors.pubmatic.com. 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 May 9, 2023 and we do not intend and undertake no obligation to update any forward-looking statement, 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, including adjusted EBITDA and non-GAAP net income. These non-GAAP measures are presented for supplemental informational purposes only and should not be considered a 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 with that, I will now turn the call over to Rajeev.

Thank you, Stacie, and good afternoon everyone. Our focused strategy, strong execution, and deep customer relationships drove revenue in the quarter significantly above expectations. Underscoring the strength of our model and our continued focus on efficiency and infrastructure optimization, the majority of incremental revenue dropped to the bottom line, driving stronger than expected adjusted EBITDA, net income, and free cash flow. Our results reinforce the value of our platform, our ability to manage through the current environment, and how we are positioned to continue to capture market share despite the economic uncertainty. While we saw sequential improvement through the quarter, it’s too early to say if the ad spend environment has troughed and whether the pronounced uptick we saw in March will continue. We therefore remain cautious with respect to our outlook and investment decisions. A key element of our strategy is to leverage our business model and strong degree of profitability to make targeted investments that position us for outsized market share gains when ad spend growth reaccelerates. We believe the current environment is accelerating consolidation in our industry and will benefit companies like PubMatic that are global, scaled, and profitable. Macro pressures have driven publishers to prioritize their highest margin revenue streams such as programmatic advertising and increase their reliance on global, omnichannel technology providers to manage a greater portion of their ad tech stacks. The pace of new publisher agreements remains strong. We signed over 65 new publishers in the first quarter. We now have nearly 1,700 publishers and app developer customers, up 14% from a year ago. We expect to grow our roster of customers and increase stickiness with them in this environment. This is particularly true for our omnichannel video segment, which is a key growth driver. The omnichannel video market is expected to be a $215 billion market this year. A subset of omnichannel video, CTV, is expected to be a $65 billion market this year. Publishers are increasingly adopting programmatic monetization strategies in order to tap into growing ad budgets that they previously were not accessing. As a result, our CTV revenue was up over 50% year-over-year in Q1. We are accelerating the pace of new business growth in CTV. We saw a 10% increase in our CTV publisher customer base over Q4 to 237 publishers. Driving this is the growing recognition within the media and advertising industry of the advantages of programmatic CTV. Automated transactions are more efficient and data-driven than traditional buying methods, delivering higher ROI to advertisers and revenue gains to publishers. PubMatic has been a leader in providing programmatic technology for more than a decade, and we have seen this trend play out time and again across formats and channels. I believe that we will look back on this period as the turning point that structurally changed the nature of CTV advertising towards more programmatic monetization. At the same time, we are growing our existing relationships with premium streaming content providers as we provide the ability to both monetize their inventory and leverage their valuable first-party data. For instance, PubMatic helped A+E Networks grow its programmatic business by passing valuable data in the bidstream such as content genre and channel, making it easier for advertisers to reach their target audiences across A+E’s properties and drive campaign ROI. We have recently expanded our partnership with iQIYI, one of the largest online entertainment companies in China, who implemented our OpenWrap OTT unified bidding technology to provide global advertisers more efficient and effective access to the company’s streaming inventory. The breadth of our publisher base makes us a scaled provider in the CTV market. We are working with 6 of the top 7 global smart TV providers that have ad-supported streaming services, 4 of the top 8 major addressable broadcast video on demand streaming platforms in the U.S. and 5 of the top 8 free ad-supported TV streamers in the U.S. We also work with all of the top five addressable broadcast video on demand platforms in both Australia and Japan, two of APAC’s largest CTV markets. We are seeing OpenWrap, our Prebid-based wrapper solution, drive increased stickiness for publishers across channels and formats. Originally launched in 2016, over the last few years we have diligently broadened the footprint of OpenWrap to cover all leading ad formats and platforms including CTV, mobile app, and web, as well as video, display, and soon-to-be-launched native making us one of only a few scaled providers with a comprehensive, Prebid-based software solution across all major formats and channels. Over the last several quarters, we have seen a surge in adoption of our wrapper solution as publishers increasingly abandon their homegrown Prebid wrappers or alternative solutions for PubMatic’s OpenWrap. OpenWrap is now a critical component of publishers’ ad tech stacks and central to their operations teams. Overall, signed OpenWrap agreements grew 27% YoY for Q1 as more publishers opt for the performance benefits and customer service PubMatic provides. In the case of online car shopping site Edmunds, although they already had a header bidding solution, they were seeking an alternative that could give them more control over their yield management. After switching to OpenWrap, they not only saw an average eCPM uplift of 35%, but also identified that the trusted header bidding expertise of the PubMatic team was critical to their success. We also continue to deepen our buy-side relationships, where consolidation is most evident as agencies and advertisers lean into scaled and transparent technology providers that can help them increase operational efficiency and innovation. Supply Path Optimization expanded throughout Q1 and represented over 35% of activity. We have been able to leverage our profitability to deepen buy-side relationships, investing in our team and technology to offer a single integrated platform that delivers value to our customers. Plus, as we anticipated, the macro environment has been an accelerant for SPO, as major advertisers and agencies seek to improve return on ad spend and streamline their operations. Our existing SPO buyers continue to consolidate more of their business on PubMatic. Five of the six global agency holding companies grew their SPO spend with PubMatic by 20% or more sequentially from February to March. Even with the significant gains we have made in SPO, we see a long runway of growth ahead. In the past quarter alone, we have seen an over 80% increase in buyers interested in engaging in SPO with PubMatic for the first time and now have an active pipeline of several dozen buyers. Long-term, we believe there are hundreds if not thousands of buyers that we could engage in SPO with globally. The consolidation we have seen across our industry has resulted in the rapid evolution of the advertising supply chain and we believe the industry is at an inflection point. It’s becoming increasingly difficult for publishers and buyers to stay ahead of the curve, requiring significant investment and expertise. As such, we have focused our innovation investments in two areas, both of which expand our addressable market and will create durable long-term growth, Supply Path Optimization and commerce media. Yesterday, we announced Activate, an SPO solution that we have been working towards over the past 18 months and which leverages our recent acquisition of Martin. Activate is an end-to-end SPO solution that enables buyers to execute non-bidded direct deals on PubMatic’s platform, accessing CTV and premium video inventory at scale and unlocking unique demand for our publishers. This groundbreaking solution introduces a new industry paradigm for the supply chain of the future. PubMatic has taken an infrastructure-driven approach to solving some of the industry’s biggest challenges that, historically, have prevented billions of dollars of insertion orders from entering the programmatic ecosystem. Our single-layer technology approach does away with data leakage, discrepancies, multiple hops in the supply chain, opacity, and high aggregate fees associated with having multiple technology providers like SSPs and DSPs. In 2023, approximately $35 billion, or almost 60%, of CTV spend is expected to be transacted via IOs. Direct IOs also account for more than $27 billion, or approximately 18%, of online video spend. By providing a path to bring these direct dollars to programmatic, Activate represents a nearly $65 billion expansion of our total addressable market. With Activate, our SPO solutions become even stickier. We expect buyers who use Activate will benefit from greater control over their supply chain and increased ROI. Publishers will benefit from increased revenue. Over the last few months, as we have engaged with prospective Activate customers, I have been blown away by the magnitude of interest in the solution, which validates our vision and roadmap as well as PubMatic’s market position as a partner of choice. We have seen strong interest among agencies, advertisers, and publishers in every major region and across verticals and buyer size, including global advertiser Mars, agency holding companies, dentsu, Havas Media Group, GroupM, and Omnicom Media Group Germany, and CTV publishers Fubo and LG. As a key launch partner for Activate, GroupM is further expanding its SPO relationship with PubMatic. The GroupM Premium Marketplace, an initiative that provides GroupM clients with direct, transparent, and efficient access to CTV and online video inventory, is built on PubMatic technology and will now extend to Activate. With Activate, GroupM clients can buy GroupM Premium Marketplace inventory on a guaranteed basis in a more efficient and direct manner, with less costs involved in the supply chain. It is also an opportunity for them to bring clients who heavily rely on direct IOs into the programmatic ecosystem. As a result, GroupM intends to improve their clients’ working media and ultimately generate better outcomes. To be clear, Activate is not a demand-side platform. Our industry already has a number of scaled DSPs. PubMatic is not offering a bidder, bid optimization, creative optimization, or a variety of other services that are core to the value proposition of a DSP. As I mentioned, Activate is specifically designed to transition non-programmatic insertion orders for CTV and online video into non-bidded programmatic buying transactions. PubMatic already has a strong foundation in programmatic guaranteed and private marketplace deals, and Activate further expands this opportunity. For PubMatic, we expect to see significant strategic and financial benefits, including Activate being a catalyst for faster CTV and online video growth over the medium term as well as an accelerated mix shift toward more premium omnichannel video formats, resulting in higher gross and net margins. Activate also facilitates greater stickiness with buyers which increases revenue visibility and greater stickiness with publishers, allowing them to access unique ad dollars only available via the PubMatic platform. As we bring more advertiser spend to our platform, we are also unlocking opportunities to further scale other areas of our business, such as retail or commerce media. Commerce media expands on the retail media opportunity set to include not just retailers, but a wide variety of transaction-based businesses like transportation or food delivery providers, travel and event providers, fintech companies, and more. We continue to grow our existing customers like Kroger Precision Marketing, providing the technology and solutions to enable them to activate their retail audiences across PubMatic’s CTV, video, and display inventory. We are also growing our footprint with additional commerce businesses that have high transaction volumes and valuable data. Over the past quarter, we have had several new customer wins such as Lyft and Tripadvisor, who are using our growing suite of onsite monetization solutions to help grow their commerce media businesses. This is a tremendous growth opportunity for us, with an estimated market size of more than $120 billion. Data access and control are key areas of importance for commerce media, both areas where PubMatic already has market-leading solutions. In addition, we have the financial profile to make focused investments in technology that specifically aligns to current and future commerce media needs, such as audience extension, onsite multi-format monetization, and operational efficiencies to help commerce media companies scale their businesses further. Operating under a similar playbook as we did with SPO, making focused investments that lead to market expansion and high revenue growth, we believe our strategy around commerce media will have similar returns. I look forward to sharing more with you in the coming quarters. Our execution over the course of the quarter reinforces the value of the PubMatic platform within the digital advertising ecosystem and our ability to continue to consolidate the market as advertisers seek alternatives to the walled gardens. We are rapidly growing the platform with new publishers and buyers and creating greater stickiness with existing customers. Our omnichannel platform, global scale, and strong financial profile are key differentiators and enable us to rapidly expand our addressable market. We will continue to prioritize long-term growth opportunities through highly focused investment, which we believe will drive outsized market share gains and greater shareholder returns. I will now turn the call over to Steve for the operational and financial details.

Thank you, Rajeev and welcome everyone. Revenue in the first quarter was $55.4 million, above guidance, and plus 2% on top of last year’s growth rate of 25%. Importantly, year-over-year results improved each month through the quarter. With our focus on execution and efficiency, the majority of our revenue outperformance dropped to the bottom line. Adjusted EBITDA was $8.4 million or 15.1% margin. We also continued our long track record of cash generation with $12.8 million in net cash from operating activities and $5.3 million in free cash flow. Against a backdrop of challenging macro conditions, we delivered against the core objectives we have laid out last quarter: deepening our publisher and buyer relationships, driving omnichannel revenues, achieving incremental efficiencies from our owned and operated infrastructure, and investing in high-value product innovation. As I mentioned on our last call, January revenues started off slowly, particularly in display and online video, but we saw sequential improvements into February. Trends further improved into March across all our key formats and channels. For the quarter, revenues from omnichannel video, which span across desktop, mobile, and CTV devices, represented approximately 30% of total revenues and grew 13% year-over-year. Within this category, CTV revenues increased by over 50% year-over-year. As anticipated, display revenues, comprised of mobile and desktop channels, continued to be soft throughout the first quarter, but showed monthly sequential improvement and came in slightly better than expected at minus 7.5% versus Q1 last year. This was an improvement over Q4. From a regional perspective, EMEA continued its strong performance throughout the quarter and grew double-digits year-over-year. Americas’ revenues were down less than 1% compared to Q1 2022 and improved each month in the quarter. Sticky customer relationships drove healthy multi-net dollar retention rates. On a trailing 12-month basis, publisher net dollar retention was 105%. As a result of our global go-to-market efforts and targeted investments, we continued to expand our Supply Path Optimization relationships which accelerated to over 35% of total activity on the platform. Similar to our publisher strategy, once we land new SPO relationships, our Ad Solutions team works closely with buyers on detailed growth plans across formats and geographies. Viewed through the same retention lens as publishers, the net spend retention rate for SPO buyers with at least 3 years of spending was 116% on a trailing 12-month basis. Our ad vertical diversification again proved to be a valuable asset for us in Q1. Food & Drink, Health & Fitness, and Travel in aggregate increased over 30% year-over-year. This growth helped offset declines in Technology, Arts & Entertainment, and Hobbies. The Shopping and Personal Finance verticals ended the quarter in line with Q1 last year. In total, our top 10 ad verticals grew year-over-year. Overall, our business is in excellent shape. For an extended period of time, our strategy, execution, and global scale have enabled us to deliver positive adjusted EBITDA for 28 consecutive quarters. We have also generated cash from operations every year for 9 straight years. And since going public in December 2020, we have generated over $90 million of free cash flow. With our long-term focus on profitability and cash flow, we take a nimble approach to managing our business. We have put in place multiple initiatives to drive productivity across our teams and lower operating costs. For example, we have realigned our global customer success team to ensure appropriate support relative to customer needs and business opportunity by market. This effort is supported by a specialized client team based in India. Over the long run, our owned and operated infrastructure has allowed us to achieve significant operating leverage and control, which consistently delivers efficiencies for us and great outcomes for our customers. With this control, we are proactively managing our CapEx lower in 2023, beyond what we originally planned. Our optimization efforts are already ahead of schedule and we anticipate improved gross margins later this year and next. In Q1, we processed over 46.5 trillion impressions on our platform, an increase of 43% year-over-year. On a trailing 12-month basis, we reduced our unit costs by 16% year-over-year. In addition to our capacity optimization work that’s expanding total throughput, we are also making progress in using this capacity for the highest value display and video impressions. Taking our various optimizations and positive mix trends together, we anticipate lower CapEx spend in 2024 relative to revenue growth. Our Q1 gross margin was 57%, ahead of expectations. As a reminder, our cost of revenue includes depreciation from prior year capacity build-out and third-party hosting costs, which are largely fixed in the near term. We anticipate improving gross margins each quarter through the calendar year. Q1 GAAP OpEx was $42.2 million or 32% increase year-over-year. Included in this total were incremental costs of $2.8 million related to our Martin acquisition and $2.5 million related to our January in-person global sales conference. Excluding these incremental costs, operating expenses increased by 15% year-over-year. GAAP net loss was $5.9 million or minus 11% net margin. Q1 non-GAAP net income, which adjusts for unrealized gain or loss on equity investments, stock-based compensation expense, acquisition-related and other expenses, and related adjustments for income taxes, was $0.9 million or 2% of revenue. Q1 diluted EPS was $0.11 and non-GAAP diluted EPS was $0.02. Turning to cash, we ended the quarter with $173.2 million in cash and marketable securities and no debt. We generated $12.8 million in cash from operations and $5.3 million in free cash flow. Our consistent cash generation enables us to invest in key areas for long-term growth and market share gains. As of April 30, we have repurchased 1.1 million shares of our Class A common stock for $15.4 million in cash. We have approximately $60 million remaining in the repurchase program. Given our strong balance sheet, we are actively using our capital to significantly expand our addressable market, deepen customer relationships, and drive market share gains. We believe this capital allocation strategy, coupled with our repurchase program, will drive long-term shareholder value. Now turning to our outlook. The sequential month-over-month revenue improvements we saw in the first quarter were positive signs, but we remain cautious about the next couple of quarters. Macro conditions continue to be challenging and advertisers remain cautious. Arguably new sources of uncertainty have entered the picture that may impact consumer spending, such as U.S. Fed interest rate plans, the growing perception that inflation is stickier than expected and the effect of tightening credit conditions related to debt ceiling discussions and U.S. banking system concerns. Our April results reflected stable, positive year-over-year trends as well as indicators of ongoing macro challenges. On the positive side, impressions for CTV, online video, and display were all higher year-over-year, ranging from double-digit to single-digit percentage increases. However, the extended macro pressure since mid-2022 has been gradually pushing CPMs down. In April, omnichannel video CPMs were down mid single-digits year-over-year. Overall, CTV revenues were higher, while online video and display revenues were down. The net effect was that our April revenues were roughly flat year-over-year. With the step down in CPMs compared to last year, we see continued revenue pressure in Q2 and are anticipating online video and display revenues will decline in the single digits while CTV will grow in the double digits. In light of our overall revenue mix, with both positive trends and continuing headwinds, we anticipate Q2 revenue will grow sequentially from Q1 and be in the range of $58 million to $61 million. Our view on the market rate of growth for calendar year 2023 and our ability to continue to grow market share remains unchanged from last quarter. On the cost side, as we had outlined in our prior earnings call, we have been taking actions to drive incremental productivity across every aspect of our business. For example, we are well on our way to adding approximately 20% incremental processing capacity by the end of Q2, without a corresponding step up in CapEx. Accordingly, as compared to 2022, we expect GAAP cost of revenues to increase at a slower sequential rate each quarter, in the low single digits. With capacity optimizations, continued strong execution and seasonal revenue increases, we expect second half gross margins to return above 60%. We expect Q2 GAAP OpEx to decline by about $1 million compared to Q1, followed by sequential quarterly increases in the low single-digit percentages thereafter. Given our revenue guidance and our optimized cost structure, we expect Q2 adjusted EBITDA will grow significantly from Q1 and be between $13 million and $15 million or approximately 23% margin at the midpoint. We expect profitability to improve as the year progresses driven by the full effect of our cost reductions, optimizations and typical seasonal increases in ad spend. We anticipate Q3 and Q4 adjusted EBITDA margin levels to be above 30%. For the full year, we expect adjusted EBITDA margin to be over 30%. Turning to CapEx, as a result of capacity optimizations and operational efforts to drive higher value impressions onto our platform, we are lowering our expected investments this year to $12 million to $15 million, more than 60% lower than 2022. These initiatives and others in the pipeline will enable us to incrementally increase free cash flow over time. In summary, our strong execution in the quarter demonstrated our ability to operate successfully within this macro environment. We are on track to drive long-term growth, expand our market share and increase shareholder value. As a result of our durable business model, we anticipate generating free cash flow on par with 2022, delivering margin expansion for the balance of 2023 and beyond, and positioning PubMatic for revenue acceleration when ad spend stabilizes by fostering deeper customer relationships, focusing on high growth omnichannel revenues and launching new products like Activate that incrementally expand our total addressable market. With that, I will turn the call over to Stacie for Q&A.

Thank you, Steve. First question goes to Shweta Khajuria at Evercore. Please go ahead, Shweta.

Thank you, Stacie. Rajeev, could you please provide more color on Activate? So Magnite has ClearLine. How is Activate a differentiated product when you approach advertisers and agencies with that product versus the industry? I believe there are other competitors as well. And then Steve, how should we think about revenue growth for the year? It looks like there was a comment on industry growth being low to mid-single-digit growth rate? Is that what you’re implying for the year? Thank you.

Let me take the first part, and then I’ll turn it over to Steve. So hello, Shweta. So Activate is an extension of our highly successful SPO strategy. Obviously, we’ve been very focused on innovating the digital advertising supply chain, and we take an infrastructure-driven approach. What we’re doing with Activate is to address many of the technological barriers inherent in the current ecosystem, that stem from having multiple technology providers like SSPs and DSPs. Our focus with Activate is to bring in premium video. So that’s both online video and CTV, that today is trapped or stuck in IO-based transactions, and transition that into non-bidded programmatic transactions. And so that’s programmatic guaranteed and also fixed price PNP deals. The roster of launch partners that we have is, I think, a great validation of that strategy. Now, with respect to ClearLine, I think our vision is quite different. So I heard Magnite CEO Michael Barrett describe ClearLine as being for, quote unquote, corner cases. We view this as a paradigm shift in the industry, to be able to change how the technology is delivered, and do away with many of the challenges which I spoke about earlier, that are inherent in the SSP and DSP structure. As I understand it, ClearLine is built on top of SpringServe, which is for connected TV transactions only. Publishers need to have the SpringServe ad server in place. Our solution, our approach, we think, is superior in that it’s ad server agnostic. There’s a fragmented CTV ad server market out there with FreeWheel, Google, PubMatic, and SpringServe. We are not limited to a single ad server. We think that’s a significant value proposition for buyers. Our solution also works with online video and other formats since the online video market is roughly three times the CTV market. Steve?

Nice to reconnect. So with respect to '23 revenue growth, we have talked to a lot of customers, looked at our own trends, and industry data, and we think that based upon the macro, the trends, that our best assessment is that overall ad spending will probably grow in the low to mid-single digits. But when we step back and think about what we’re focused on and how we’ve been growing over time, we think that we’re going to outpace market growth. If you take a look at the outperformance that we achieved in Q1 relative to our expectations, plus our guide for Q2, we’re probably somewhere near about 4% to 4.5%, 5% year-over-year growth. So we’re feeling good about the trajectory. Clearly, there are positives and some areas of concern that we’re monitoring closely. But we are on track to continue to achieve what we’ve been focused on, which is to generate free cash flow on par with ‘22. We think we’re well positioned as you just called out a new product, Activate, to accelerate revenues when ad spend stabilizes. From a long-term perspective, we feel really good about our margin expansion opportunities as we establish new levels of efficiency, both on the P&L and also in terms of CapEx.

Okay, thanks, Steve. Thanks, Rajeev.

Our next question comes from Matt Swanson at RBC. Please go ahead, Matt.

Yes, thanks, guys, and I apologize in advance for the background noise. It feels like you guys are maybe incrementally more positive around the CTV, especially that shift to programmatic. Can you talk a little bit more about what is – I know, this has been the vision for a while, if you want to accelerate that right now, is it increased supply? Is it the focus overall on ad spend optimization as well as? Or is it maybe a slightly weaker demand environment leading to more programmatic to drive CPM?

Yes. Hi, why don’t I take that? And, Steve, feel free to chime in. And hello, Matt. We commented earlier in the year and certainly in the prepared remarks today, that the current macro environment is likely to be, and I think we’re seeing this, the structural growth driver for programmatic CTV. Our CTV strategy has been focused on skating to where the puck is going, if you will, which is towards programmatic transactions. We’ve seen this before. So arguably real-time bidding itself came out of the financial crisis in 2009 and 2010. Economic cycles can be a real driver of programmatic innovation and acceleration in our ecosystem. There’s a lot of pressure on streaming publishers, obviously, they’ve got to get to profitability faster, which means they need to find more revenue. At the same time, there’s a lot more supply coming into the industry. The likes of Netflix and Disney and HBO and the like are moving towards ad-supported streaming tiers. Moreover, macro pressure on advertisers drives them to seek greater accountability for their spend. This sets up well for programmatic monetization; albeit we may see some near-term CPM pressure due to reduced budget growth, but we’re very excited about CTV growth. Our Activate announcement shows strong promise, with great feedback from publishers.

Yes. I would just briefly add, Matt, I mean, one of the most important things to know about programmatic is that we have the resources to consistently invest. The Activate launch is a demonstration of that. We see this as a long-term play in terms of expanding the addressable market, and our ability to be a leading innovator in this space. There are going to be some pauses or plateaus in any rapidly growing market, but this is a secular, long-term positive growth area for us, and we’re playing an important part in innovation.

And then, if I could ask a quick one on Activate. I know this is probably an impossible question. But I mean, it was great to hear the enthusiasm from your customer base and also the launch partners. How early do you think you could start to monetize Activate? Like will it show up in some level in Q2, Q3, like are people going to be up and running on the platform?

Well, I’m pleased to tell you that we’ve already sent out our first invoice to a buyer for Activate. So that tells you that the product is real, it’s up and running, and customers are seeing benefits from it. Publishers are starting to see revenue through those transactions. Obviously, it’s early days, so it’s a small base as we get going. But this balance of the year is really going to be about creating proof points, growing the customer base, and demonstrating the benefits that we believe are there from Activate while preparing for significant scale in 2024.

Thanks, Rajeev. Our next question comes from Jason Helfstein from Oppenheimer. Please go ahead, Jason.

Hi, guys, so two just. Rajeev, can you talk about the changes that Google announced, as far as trying to bypass or modify the waterfall and how you think it impacts you guys, and just SSPs in general? And then just a follow-up question, in general, how should we think about Activate take rates versus the overall take rate? Thanks.

Yes, sure. With respect to Google, the change that they made is to replace waterfall mediation with real-time bidding or programmatic auctions. This is, I think, further evidence of the ecosystem’s general movement towards programmatic auctions, away from waterfall or other types of more traditional methods. I don’t think it has a material impact on us. That said, there’s a possibility that it will open up more mobile app inventory. Typically, when impressions are trapped in a waterfall-type setup, we don’t have full access to the inventory we would like. When things move to real-time bidding, it allows for parallel access where all platforms are called in tandem. This presents an upside scenario where we’ll get access to more mobile app inventory, which is significant for us.

And then, I’ll take the Activate take rate question. From our perspective, it’s all about meeting our customers' needs, both the buyers and the publishers. The key thrust is to make the ecosystem more efficient. We would anticipate that the economics would reflect improved efficiency. It’s also about effectiveness, as we take out hops, improve transparency, reduce latency, and provide clear sight from buyer to publisher. Our long-term plan is to work closely with our customers to define the right economic model that will expand our opportunity. There’s significant potential for us within this new opportunity in the programmatic space.

Thanks, Steve. Our next question comes from Miles at KeyBanc. Please go ahead.

Hi there, thanks for taking the questions. First, with Supply Path Optimization growing and now over 35% of revenue, how is that changing your ability to access inventory from publishers? And then just to follow-up on the Activate product? Any thoughts more broadly on how that changes your relationships with DSPs? Thanks.

Sure. Yes, I can take both of those. With respect to SPO and access to inventory, as SPO grows as a share of budgets on our platform, it becomes a powerful reason for publishers to work with us. We have increasingly advertisers and agencies citing PubMatic as the platform they need to be connected to in order to access their spend. This has driven our publisher acquisition conversations. We signed over 65 deals this quarter, expanding our overall portfolio to almost 1,700. We see this as a key part of the flywheel. More publishers coming on board helps us bring more demand on board. With Activate, the dollars flowing on our platform are only available through PubMatic, which gives another reason for publishers to collaborate with us. Regarding DSPs, we see this as a positive where the budgets we are bringing into the programmatic ecosystem are those DSPs could not previously access—they are transitioning IO budgets for CTV and online video into programmatic transactions. As we evolve the programmatic model, we expect DSPs to participate in these transactions, which increases opportunities for all involved.

Thank you, Rajeev. Our next question comes from James Heney at Jefferies. Please go ahead, James.

Great. Thanks for taking my questions. Rajeev, as we think about what you have done with the Martin acquisition and now the launch of Activate, should investors expect you to continue building out more tools to support the buy side? And then my second question is for Steve, can you talk about why you expect to see such a pronounced Q2 slowdown after putting up the Q1 upside that you saw? Is it fair to say there’s just some element of conservatism or caution? Appreciate the help.

Sure. Yes. On the first question about investment in capabilities for the buy side, that’s not new. We started on this supply path optimization journey roughly four years ago, realizing we could build a roadmap around helping buyers generate more ROI on our platform to drive dollars toward our platform, leading to more revenue for publishers. This has always been a key part of our product development. Activate is the latest extension of that roadmap. With the Martin acquisition, we are always looking for acquisition opportunities to accelerate our roadmap and deliver faster than organic development. We continue to be on the lookout for other acquisition opportunities for technology that can help us with additional capabilities.

Sure. Hi, James. For our Q2 guidance, we had a positive April on several fronts. We saw good year-over-year growth in CTV, online video, and display, so really positive. However, number one, the year-over-year comparison for Q2 is not as favorable given last year we grew around 27%, making this a tough comparison. In terms of CPM trends, the extended macro pressure since mid-2022 has pressured CPMs, so that’s partly driving that effect. Given that context, we’re being realistic with our guidance for Q2 while also anticipating strong margin expansion through the remainder of the year.

Thank you. Our next question comes from Tim Nollen, Macquarie. Please go ahead, Tim.

There we go. Can you hear me okay?

Yes, we can, Tim.

Great. Hi Rajeev. Hi Steve. I would like to pick up on your comments on capacity increases along with capex decreases, which is a pretty unusual combination of factors; most companies have to boost capex to boost their capacity. I wonder if you could talk a little bit about like, what are the needs for the increased capacity? I mean not to sound naïve about it, but Activate or more CTV trading, just whatever the factors are that will cause you to need more computing capacity.

Great. Thanks, Tim. Let me start with the capacity expansion. We’ve added significant publishers to our base as well as product upsells into our existing customer base. There’s always potential opportunity to make more incremental revenue and deepen relationships without necessitating significant build out costs. The last couple of years saw extensive infrastructure build out, so we have refocused this year on optimizing that capacity effectively. As we’ve been ahead of schedule, we expect to generate revenue without a proportional increase in CapEx. This change will improve margins as ad spend stabilizes, allowing us to better position ourselves. We believe the changes we made will lead to lower CapEx in the future. Our goal is to grow in an industry with long-term secular tailwinds.

Is the CapEx a temporary, 1 year or 2-year low? Or will it bounce back?

No, we think that the changes we are making will allow us to reduce our rate of CapEx in relation to growth going forward.

Our next question comes from Dan Day at B. Riley. Please go ahead Dan.

Good afternoon, guys. I appreciate you taking the questions. There has been some industry chatter and debate about SSPs potentially transitioning away from the take rate model, maybe towards more of a subscription-based model. If you could comment from a high-level on the pros and cons of the two approaches, as you see them. Whether the launch of something like Activate more of this sort of two-sided marketplace approach to the business changes the calculus, as you think through that over time?

Sure. Yes. Dan, my view long-term is that pricing in this industry should be on a subscription basis rather than on a percentage of revenue, take rate basis. We innovate our pricing every quarter and year. As the industry consolidates, there’s potential to shift towards subscription pricing in the long term. A challenge has historically been that our primary economic buyer is usually within the publisher side and doesn’t necessarily have an IT budget. Hence, the revenue share has often been the pricing model. However, as we engage in SPO and Activate with buyers, the economic buyer is shifting, offering paths toward subscription models, which we welcome.

Very interesting answer, thanks Rajeev. Just hopefully one more quick one. The buyback track pretty close to free cash flow in the quarter. Is the way to think about it for the remainder of the year that free cash flow dollars will be earmarked to stock buybacks until that’s exhausted?

Dan, the way we have set up the repurchase program is it’s a preset plan with various parameters in place. We have a plan authorized for 2 years at $75 million. We’re executing against that plan and being opportunistic relative to open market opportunities. The plan will just operate as intended.

Thank you. We have time for one more question from Raymond James. Please go ahead.

Thank you for taking my question. Would you– just one on Retail Media? How does the fragmentation in the Retail Media ecosystem positions SSPs as consolidators? And in terms of the mechanics of this space, what needs to happen to make SSPs much more critical? Thank you.

Sure. Yes. Retail Media, as I’ve elaborated in the prepared remarks, is crucial for us. There are various monetization opportunities within Retail Media—onsite monetization that includes sponsored products and display or video ad units, and offsite monetization via audience extension and retargeting. An SSP is core to many of these use cases. We focus on onsite monetization, aiding publishers in effectively monetizing their inventory. They rely on us as we help them with inventory monetization opportunities. On the larger perspective, the opportunity extends beyond retail to various transaction-based businesses like Lyft and fintech. While we have some work to do to enhance our relevance across all onsite and offsite monetization aspects, we plan to roll out additional components to market this year, as this is one of our two principal innovation areas alongside supply path optimization.

Thank you. Very helpful.

Thank you all. We are just about at the hour and there are no more additional questions in the queue. I'm going to turn it back over to Rajeev for closing remarks.

Thank you, Stacie. We delivered strong execution in the quarter as the industry continues to consolidate. We are building deep customer relationships at a new publisher logos at an accelerated pace and have a robust pipeline of buyers interested in supply path optimization. Of course, we are really excited to have launched Activate, which allows us to bring CTV and online video insertion order transactions into the programmatic ecosystem, tapping into a nearly $65 billion TAM expansion. On the operational side, we anticipate incremental margin expansion throughout the year as we continue to optimize prior investments and drive efficiency throughout our business, resulting in strong cash flow. The ecosystem is rapidly evolving and we are poised to grow faster than the market rate of growth. Also, we look forward to seeing many of you at our upcoming investor events including Oppenheimer’s Virtual Conference on May 11th, Evercore’s conference on May 31st, and Jefferies Software Conference on June 1st. In addition, we will be hosting in-person meetings with RBC and B. Riley. Please reach out directly to those firms or contact Stacie or Keenan with Investor Relations. Thank you all for joining us today.