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

Good afternoon, everyone, and welcome to PubMatic's earnings call for the second quarter ended June 30, 2023. This is Stacie Clements with The Blueshirt Group, 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 a 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 and use the raise hand function located at the bottom of your screen. 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. These 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. 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 8th, 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, non-GAAP net income, and free cash flow. 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 now, I will turn the call over to Rajeev.

Thank you, Stacie, and good afternoon, everyone. We drove strong results with outperformance on the top line, driven by the strength of our omnichannel platform and deep relationships with customers and partners. Adjusted EBITDA was $12.0 million, which includes the impact from a demand-side platform customer that filed for bankruptcy. Excluding this impact, adjusted EBITDA would have been $17.7 million, highlighting the strength of our business model and our ability to drive incremental profit and generate healthy free cash flow. As we highlighted at the beginning of the year, we continue to focus on deepening our customer relationships and making highly focused innovation investments that we believe will position us for outsized share gains when digital ad spend growth inevitably turns upward. This strategy continues to yield results and is strengthening our position within the ecosystem. We continue to build deeper, stickier relationships with customers. At the same time, we are adding new publishers and buyers to our platform. Our total number of active customers grew 13% year over year, and we are now monetizing inventory from over 1,750 publishers. In the last year, we've also increased the number of advertisers on the platform by almost 30%. New product innovation is driven by this same land and expand approach. The two major technology launches we have announced this year: Activate and very recently Convert, each significantly expand our total addressable market while providing incremental growth opportunities with our existing customers. We do all of this on our owned and operated infrastructure, which allows us to deliver productivity and efficiency gains that we anticipate will improve margins in the future. These efficiencies also benefit our customers, which in turn drive greater customer success and expansion on the platform. In the near term, the current digital advertising market continues to be fluid. Many advertisers remain cautious about the economic environment as they closely manage ad budgets in case of a potential recession, particularly around brand advertising. In addition, current supply growth is outpacing ad budget growth. Combined, these two factors are resulting in an industry-wide downward impact on CPMs or ad pricing in the short term. This will normalize once ad budgets stabilize and start to grow. As a result, impression volume on the PubMatic platform continued to grow in the second quarter; however, CPMs were softer than expected, particularly in June, with continued downward trends in July. Despite these headwinds, we remain in a leadership position. We have increased capacity on our platform toward higher-value formats, optimizing for impressions that command higher overall CPMs. I am confident in our growing list of long-term revenue drivers and ability to gain market share. We have a strong and sustainable financial profile, and our deep technology innovation is widening our competitive moat. What's more, we benefit from industry-wide shifts and consolidation. The current macro environment is forcing publishers and buyers to do more with less. Publishers are looking to better monetize their inventory across a wider set of channels and formats, and they are abandoning homegrown technology and increasingly relying on technology providers such as ourselves. At the same time, buyers are seeking greater efficiencies and control across their digital advertising supply chains. Both require integrating leading global, omnichannel, and transparent technology solutions that are market leaders in innovation. This trend is rapidly playing out across the broadcast industry, resulting in a shift from traditional, guaranteed upfront media buying to a scatter market, or programmatic approach. Publishers, including large CTV publishers, are following suit in order to maintain access to advertiser budgets. As we predicted at the time of our 2020 IPO, we are seeing the programmatic disruption of CTV take hold. As a result, we delivered over 30% growth in CTV, and our pipeline of tier one streamers is growing. We are in active conversations with dozens of CTV publishers, including some of the biggest names in streaming media. We have new and expanded partnerships with premium video providers including AMC Networks, DIRECTV, Fox Digital, TiVO, and Warner Brothers Discovery EMEA. Accelerating this pipeline is Activate, which provides publishers with unique buyer demand not available elsewhere. As buyers continue to consolidate via Supply Path Optimization, we've increased our sales focus and investments in this area. As a result, activity from SPO continues to climb. In the second quarter, SPO made up over 40% of activity on our platform, an all-time high. Our long-term expectation has been that SPO would eventually reach 50% or more of total activity, and we are well on our way to reaching this milestone. Not only is SPO a significant contributor to top-line growth, but it's an important driver of incremental, long-term margin expansion. Our continuous reinvestment of profit into targeted innovation underpins our long-term growth strategy. With generative AI, we can further expand and accelerate our innovation. While still early, we are seeing gains in engineering productivity across many use cases, including building proofs of concept for future products. We're also seeing greater efficiencies through the use of generative AI to increase automation, such as software testing. As a result, we have already started to shift hiring away from software testing engineers to feature development engineers. It's still very early in the application of generative AI and we continue to experiment with many different opportunities. Exactly three months ago, we launched Activate, our end-to-end SPO solution that enables buyers to execute non-bidded direct deals on PubMatic's platform while accessing CTV and premium video inventory at scale. Activate represents a nearly $65 billion expansion of our total addressable market. We couldn't be more pleased with the industry reception and interest that this highly innovative product has received. We're seeing traction and enthusiasm across every region and having active agency and advertiser discussions with several dozen accounts. We are hard at work building more features into the platform based on our vision and customer input. While we are scaling up existing customers and adding new ones, we are investing in building out a global customer success team to help our customers expand their usage of Activate. Over the next couple of months, we will extend the availability of Activate from the Americas and EMEA regions into APAC. Two weeks ago, we launched Convert, our unified solution for commerce media that leverages our global infrastructure, ad monetization expertise, and customer relationships. Over the years, we've built relationships with retail and commerce customers and have gained a deep understanding of the unique technological challenges they must solve for in order to build out their multi-pronged ad businesses. One of the biggest challenges that these retailers or commerce media participants face is the fragmentation of the advertising ecosystem, and the complexity that it creates. For example, a grocery store chain may use one platform for their onsite sponsored product listings, another for onsite display and video ads, and yet another for offsite audience extension across the open internet. Not only does this require their teams to learn multiple systems, but their advertising data is also proliferated across various partners, causing challenges for closed-loop reporting and optimization, in addition to privacy or data security concerns. For advertisers, this challenge is multiplied across the different retailers they want to work with. Our latest offering, Convert, is built to solve these challenges by centralizing commerce media capabilities in a single, self-service platform that offers onsite and offsite monetization across a variety of ad formats, including our newly available sponsored listings capability. For the past two years, we have been building the new platform to work for both traditional retailers as well as high-transaction businesses such as transportation or food delivery providers, travel companies, or any scaled commerce company that processes transactions. We have seen strong interest among commerce companies around the globe, including rideshare provider Lyft and Wallapop, a leading European classified listings site. By integrating sponsored listings into our existing omnichannel solutions: CTV, video, and display, all onto a single platform, agencies and advertisers can easily access all available inventory and programmatically deploy working media dollars with the same transparency in fee and pricing structures that PubMatic is known for. Major media buyers like dentsu, IPG, and MiQ are partnering with us to help their advertisers more efficiently scale access to commerce media inventory and data. With the addition of Convert to our growing software suite, including our SSP and Connect, we now offer a comprehensive solution for commerce media that allows commerce media networks to tap into PubMatic's nearly two decades of success helping media and data owners safely and securely monetize their assets programmatically. With this launch, we are significantly expanding our total addressable market by $10 billion and growing. Much of this TAM expansion is from performance marketing budgets, which will allow us to further diversify our business beyond brand ad spend. I'm extremely proud of our team and all that we've accomplished so far this year. We've increased impression capacity to accelerate the shift in our business toward higher value formats and channels, while also significantly expanding our TAM with the launch of two innovative solutions. Our land and expand strategy is proving successful, adding more publishers to the platform and building stickier relationships with existing customers and partners. We remain a leader in a rapidly evolving industry, and our investments and achievements today strategically position PubMatic for long-term, durable growth. We believe the industry will continue to consolidate, strengthening the leaders in the space that provide omnichannel, global scale and creating more opportunities along the way for technology innovation to play an even bigger role across the ecosystem. I'll now hand it over to Steve for the financial details.

Thank you, Rajeev, and welcome everyone. Q2 revenue was $63.3 million, above guidance, and adjusted EBITDA was $12 million, which includes an unexpected bad debt expense related to the bankruptcy of a top 10 buyer. Excluding this one-time expense, adjusted EBITDA would have been $17.7 million or 28% margin. In Q2, we prioritized the initiatives that strengthen the foundation of our business and position us well for long-term growth. We focused on operational excellence, customer relationships, and innovation. We delivered incremental efficiencies from our owned and operated infrastructure and generated $10.8 million in free cash flow. We increased activity from SPO deals to over 40%, an all-time high. And, importantly, we launched high value product innovation, with the recent launch of Convert, a unified self-service platform for commerce media and our buyer-focused Activate offering last quarter. These two new areas are expected to increase our long-term TAM by over $75 billion. Turning to the key revenue drivers in Q2, monetized impressions increased year-over-year while CPMs were lower, reflective of the cross currents we are seeing in the macro environment by region and ad vertical; trends varied by format and channel. CTV continued to be a high-growth channel for us, driven by an increase in monetized impressions, partially offset by lower CPMs. Overall, CTV revenues increased over 30% year-over-year. Online video monetized impressions, across mobile and desktop, also increased, but experienced double-digit percentage CPM declines that pushed revenues down more than 10% year-over-year. Total omnichannel video revenues, which span across mobile, desktop, and CTV devices, declined 4% year-over-year and represented approximately 31% of total revenues. Display monetized impressions, across mobile and desktop, grew year-over-year while CPMs declined. Overall, display revenues were down 1% year-over-year as compared to down 8% in Q1. Display revenues represented 69% of total revenues. In terms of ad verticals, while the top 10 grew 8% year-over-year, we saw a divergence of trends across categories. Four of the top 10 verticals increased double-digit percentages year-over-year, led by the Food & Drink vertical at over 30% growth. Five of the top 10 grew in the low to mid-single-digit percentages, while Shopping was the only top 10 vertical that declined year-over-year in the high-single-digits. On a regional basis, EMEA grew over 16% year-over-year, while the Americas declined by 1%. In terms of the monthly progression through the quarter, April revenues were flat, and May revenues increased year-over-year. June revenues declined, driven by softness in both online video and display CPMs. Turning to our operational strength, our Q2 financial results benefited from increased efficiencies and optimization of our owned and operated infrastructure. Overall impression processing capacity increased over 30% year-over-year, largely driven by software optimizations with minimal incremental CapEx. On a trailing twelve-month basis, our cost of revenue per million impressions processed declined by 12%. The combined impact of our operational efficiency and business model leverage enabled us to achieve outstanding marginal profitability. Approximately 85% of every incremental revenue dollar above Q1's level converted to gross profit in Q2. This capability is a key differentiator for us and has enabled us to achieve consistent profitability for a decade while building the foundation for future growth. In terms of operating expenses, Q2 GAAP OpEx was $45.4 million. Included in this total were incremental costs of $2.1 million related to our acquisition of Martin in September last year and $5.7 million in bad debt expense related to the bankruptcy of one of our buyers. Excluding these incremental costs, operating expenses increased less than 10% year-over-year. In Q2, GAAP net loss was $5.7 million, or $0.11 per diluted share. Excluding the impact of the bad debt expense, we would have delivered a GAAP net loss of $49,000. Q2 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 $1.3 million, or $0.02 per diluted share. Excluding the $5.7 million of bad debt expense, non-GAAP net income would have been $7 million. Turning to cash, we are in excellent financial shape and ended the quarter with $170.9 million in cash and marketable securities and no debt. We generated $15.8 million in cash from operations and $10.8 million in free cash flow. Our consistent cash generation is an important driver for our long-term growth and market share gains as it allows us to consistently invest in innovation. As of July 31, we have repurchased 1.8 million shares of our Class A common stock for $27.5 million in cash. We have $47.5 million remaining in the repurchase program. Now turning to our outlook. In light of recent trends, we remain cautious about the next couple of quarters. On the one hand, many advertisers, particularly brand-centric, remain cautious about the economic environment and are tightly managing ad budgets in case of a potential recession. On the other hand, current ad supply growth is outpacing ad budget growth. In June and July, we saw the impact of these factors with both softening of ad spending by vertical and pressure on CPMs. To illustrate this point, for the combined April and May periods, ad spending for our top 10 ad verticals grew 9% versus the same period last year. For the June/July period, the top ten ad verticals slowed to 1% year-over-year. A notable change in trajectory was observed in four consumer-centric verticals: Shopping, Technology, Personal Finance, and Arts & Entertainment. In aggregate, they were down 7% for the June/July period versus the same period last year. Video CPMs took a 10% step down in July versus June. Display CPMs showed a similar pattern of softening in July. Our outlook for August and September assumes that CPMs remain relatively flat compared to what we saw in July. Given the progression of CPMs over the last 12 months, on a year-over-year basis, this translates to roughly 20% lower CPMs for video and 10% lower CPMs for display in Q3. On the positive side, monetized impressions continued to grow in July sequentially versus June and versus last year. July online video impressions increased over 20% year-over-year. CTV impressions increased in the single-digit percentage range as they were lapping approximately 300% volume growth in the prior July. And display impressions increased 5% over last year. We anticipate these volume trends will continue through Q3. As a reminder, we are proactively taking steps to diversify our revenue mix by adding more higher-growth formats and channels. For the first half of 2023, we increased the number of high-value omnichannel video impressions monetized by 15% over the first half of 2022, while monetized display impressions increased 2% over the same time period. While these efforts will provide long-term, durable growth and margin expansion, they will not outweigh the soft CPMs that we project for Q3. We anticipate that Q3 revenue will be in the range of $58 million to $61 million. The format and channel projections underpinning this guidance are: display revenues will decline in the single-digit percentage range; online video revenues will decline by approximately 10% year-over-year, similar to what we saw in Q2; and CTV revenue, which grew over 150% last year, will decline on a year-over-year basis. Also influencing our near-term outlook is the recent bankruptcy of one of our top 10 DSP buyers on June 30th. We estimate that it will take several months for this ad spend to be fully redistributed to other buyers already integrated on our platform. This transition will reduce our second-half revenue by several million dollars. In the long run, we do not expect this development to have a material effect on our business. Assuming macro conditions do not worsen, we estimate that Q4 revenue will grow sequentially from Q3, consistent with the lower end of typical seasonal trends. In terms of potential upsides, if CPMs declined at roughly half the rate we are currently assuming, we estimate it would add $3 million of incremental revenue per quarter. On the cost side, we have been taking actions to drive incremental productivity across every aspect of our business, and you can see the positive results in our Q2 financials. For example, we successfully added approximately 20% incremental processing capacity by the end of Q2, without a corresponding step-up in CapEx. This accomplishment means that we expect our second-half GAAP cost of revenue on an absolute dollar basis will exhibit very limited quarter-to-quarter sequential cost increases despite impressions continuing to grow. As a byproduct of our leveraged business model, in the near term, we expect any uptick in CPMs beyond our current expectations to result in strong marginal profitability. We anticipate that over the long run, these efficiencies will have a compounding effect and will drive higher gross margins for us. As previously noted, our Q2 GAAP OpEx includes a one-time incremental bad debt expense of $5.7 million. Adjusting out this cost, we anticipate that Q3 OpEx will be roughly flat compared to Q2. We anticipate that Q4 OpEx will increase sequentially from Q3 in the low-single-digit percentage range as we add incremental innovation investments supporting our Activate and Convert products. Given our revenue guidance and our optimized cost structure, we expect Q3 adjusted EBITDA will be between $13 and $15 million, or approximately 23% margin at the midpoint. Turning to CapEx, our capacity optimizations and operational efforts to drive higher value impressions onto our platform have been going well. We expect a further reduction in full-year CapEx and now project CapEx at $10 million to $13 million. This would be a reduction of more than 70% compared to our 2022 CapEx of $36 million. We expect these initiatives and others in the pipeline will enable us to incrementally increase free cash flow over time. To summarize, over many years, we have built a resilient and durable business that is one of the world's leading, scaled, global SSPs. In Q2, we continued making progress on the three operating priorities that I outlined last quarter. Number one, generate significant free cash flow. Through the first half of 2023, we have delivered more than 40% of last year's level. It should be noted that with the recent DSP bankruptcy, we expect Q3 free cash flow will be below normal trends, but we anticipate a return to robust free cash flow in Q4. Number two, position ourselves for revenue acceleration when ad spend and CPMs stabilize. Despite near-term pressure in CPMs, we remain confident in our long-term growth opportunity, as evidenced by our ability to continue increasing monetized impressions. We are building deeper relationships with publishers and ad buyers, expanding our TAM by bringing innovative new products like Activate and Convert to market and scaling higher value formats like CTV and online video. We anticipate that our new product offerings will add to our revenue growth in the second half of 2024. And number three, establish a new level of efficiency in our cost structure that will lead to margin expansion in 2024 and beyond. With that, I'll now turn the call over to Stacie for Q&A.

Thank you, Steve. Let's dive into Q&A. We will first start with Matt Swanson from RBC. Please go ahead, Matt.

Yes, thank you, guys, so much for taking my questions, and congratulations on battling through the macro this quarter. I guess the first thing is, it's really exciting to hear about both Activate and Convert, and obviously conceptually, it makes a ton of sense for all the value this can add. But maybe building some context for us around that $75 billion, could you just talk about the use cases and customer types that maybe make the most sense early on in kind of the parts of those broad markets you're focused on?

Sure. It's great to hear from you, and let me address that. We're really focused on innovating to provide the right solutions for the anticipated growth in ad spending once the market stabilizes. A significant part of this involves Supply Path Optimization and omnichannel video, including Connected TV with Activate, as well as commerce media with Convert. Together, these represent approximately a $75 billion total addressable market expansion, with around $65 billion from Activate and about $10 billion rapidly growing in the commerce media space. It's important to note that combined, these two initiatives more than double our existing total addressable market, representing a substantial increase for us. The core objective is to help the industry create a more transparent, efficient, data privacy-focused, and effective digital advertising supply chain. All the use cases focus on enabling buyers to connect more closely with media owners, whether that's a retailer, commerce media player, or a publisher, and to access data in a privacy-safe manner. By emphasizing efficiency—connecting PNPs and PG deals through omnichannel video and aiding onsite monetization of sponsored listings, display, and video in commerce media—we aim to enhance ROI for buyers, encouraging them to invest more on our platform and driving additional revenue for media and data owners. We're optimistic about utilizing our unified, global omnichannel platform to further explore these use cases while leveraging a wide range of existing customer relationships. For example, in our Convert launch, we have partners like IPG, dentsu, and MiQ on the demand side, alongside a mix of both new and long-term collaborators like Wallapop, Lyft, and eBay.

And then, if I could ask for my follow-up, kind of an actual follow-up on that, when we're thinking about SPO and kind of the traction when you're tying up new customers, do you think having a more well-rounded and kind of future-proof platform, having some of these additional solutions that can Activate or Convert or some of the headway you're making in CTV, like does that, when people want to standardize, are those all things that are coming into these conversations, so maybe benefiting even before they start to really monetize?

Yes, absolutely. So a prime example of this is the Convert launch. So you see IPG and dentsu, these are big buyer customers that we previously announced Supply Path Optimization deals with. We've had a number of conversations with agencies where they've said, hey, we need to figure out, we as the agency, what our play is in commerce media, PubMatic what you've just announced sounds great. We're already pushing more of our spend on to your platform through non-commerce media-oriented advertising as well as through Activate. So come in and let's talk more about the commerce media opportunity and how we can do more with you. And I think this is kind of part and parcel of what we typically see in an economic cycle, which is everybody has to figure out how to get more efficient, how to do more with less resources. And a key part of that in our industry is relying on fewer bigger partners. And that's why we always are talking about being omnichannel, being global, and having a single integrated platform. But advertisers and agencies want to rely on fewer platforms that are self-service and transparent to help them grow their business and become operationally more efficient. And we think we can really play a key role in that and use this timeframe when ad spend growth is muted to really lay the groundwork for outside share gains in the future.

Our next question comes from James Heaney from Jefferies. Please go ahead, James.

Great. Thanks for the questions. Steve, could you just talk about just the reasons for why omnichannel video is declining at steeper rates in display business, and then I think you mentioned that CTV revenue would decline in Q3, but wanted to make sure I heard that correctly. And then, just one for Rajeev, realize it's still early, but could you just talk about how you anticipate commerce media to benefit your business in the holiday quarter? And then, just anything around your partnership with Kroger and how that's evolved over the last year. Thank you.

Great. Nice to reconnect, James. So with respect to the trends that we're seeing, what we shared in our prepared remarks is we actually had a pretty solid Q2. April was stable, May was up, and we start to see softness in June, particularly in what we describe as sort of brand-centric advertising. And that speaks right to video predominantly online and CTV. And so we saw a couple of things going on. Number one, CPMs were becoming softer. We started to see that in June, and we saw it take a step down in July. And so, with that sort of combined effect, you have sort of one category of downward pressure. The other fact is that overall, that pressure on CPMs has been building up on a year-over-year basis, so it looks more extreme on a year-over-year basis than it otherwise would look. And so at the end of the day, what our focus has been is to make sure that we are getting more share in the market. And one of the measures that we really track very closely is monetized impressions. And so while CPMs have been soft for video, our monetized impressions have been quite robust as I called out plus 20%. And so at the end of the day, we're going through a short-term cycle here where brand advertisers are being more cautious. You can also see that in the ad spend verticals. Shopping has been down for a couple of quarters, as has a couple of consumer-centric verticals, technology, personal finance, and so all of those do have an impact on the video segment. Now, the positive that I called out in Q2 was display trends were starting to improve in terms of revenue down 1% versus the prior year, and it was down 8% in Q1. And so the benefit of having a diverse platform as we do; omnichannel platform allows us to take advantage of the different trends in the business. And the reality is, at the end of the day, we have built a very scaled business and we're broadly exposed to all the ad verticals. So it is sort of a function of macro pressures, but we're doing all the right things to make sure that we are well-positioned when ad spend stabilizes. Rajeev just described the investments and the outcomes in terms of new products that will be a big positive benefit for us in 2024 and beyond. So I'm not overly concerned about current CPM pressures because they inevitably will recover.

Right. And James, let me turn to the question for me around commerce media. So we are not anticipating any material revenue contribution from our commerce media solution this year. Obviously, we've just announced the product a couple of weeks back. So we're really at the point of bringing initial customers on and obviously getting more feedback from those customers on features and capabilities they're interested in. So we aren't anticipating material revenue, but I think there are absolutely some upsides there. And maybe Kroger is a good example of that. So with Kroger, we have been working with them for several quarters and primarily in one of the four commerce media use cases that we're focused on, which is inventory extension or finding users to bring back to their shopping website that may have looked at a shopping part or looked at a product and abandoned that without purchasing. With our new release, we anticipate being able to add more use cases to that relationship and to be able to expand that revenue set. And it may be worth me just commenting briefly on what are those four key use cases? So two of them are related to onsite monetization. So first is onsite monetization via sponsored listings. So this is a very common shopping specific ad format that you see on commerce websites. And that is a new capability that we've launched. Second is onsite monetization of display and video ads. And so we're already doing this with folks like eBay but now more recently announced Tripadvisor, Lyft, and Wallapop. Third is the inventory extension opportunity that I mentioned with Kroger. And then the fourth is using our Connect data platform to monetize first-party data with audiences attaching that to other media that's flowing through our platform. So companies like Epsilon and IOTA are using that capability. So we've been building these components now for a couple of years, and so we feel like now we can bring all of this together in a single self-service platform and be able to now upsell and cross-sell across a variety of different customers that are using single use cases and cross-sell them into multiple use cases.

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

Hey, thanks. I would like to delve deeper into the CPM weakness. Firstly, does MediaMath play a role in this for the third quarter? Can you identify it as a challenge, and if so, to what extent?

Sure. Just unpacking it some more, I mean, the reality is, as I shared a moment ago, we are broadly exposed to many ad verticals and many advertisers, particularly brand advertisers. And so we do believe that there's just general caution people keeping it very tight brain on ad budgets. And so in any supply-demand ecosystem as we operate real time, when supply expands and demand declines, the equilibrium point of course drops, i.e., the CPM. So that's really broadly what we're seeing. Now in terms of MediaMath, from our perspective, it does not have any long-term effect at all on our business. It's really a function of just resetting that spend that had been going through that DSP and then getting it redistributed because you can imagine you have advertisers who have programs all lined up to go run on MediaMath, and now they didn't need to decide where they're going to put that spend, and it takes time to do that. But we fully expect, given that we're integrated with every major DSP in the world, that that spend is going to come back to us. So in the short term, we do see a couple million dollars of revenue being deferred over the next couple of months. But I would expect that to be fully repopulated onto our platform down the road.

And then, just let me just say, let's say's a few million MediaMath; we can do the math on that. Are you seeing specific weakness in tech and telecom, and then any concern about media and advertising because of the Hollywood strike?

One of the statistics I shared in the prepared comments was an analysis of four consumer-focused sectors: Shopping, Personal Finance, Technology, and Arts & Entertainment. I examined the combined data for June and July and compared it to the same period from the previous year. In that comparison, spending in that group was down 7%. This change is quite notable, especially considering that the preceding months of April and May showed slightly positive trends. There has been a significant shift in the short term, which we believe reflects temporary dynamics. However, because we are diversified across various sectors, we anticipate some positive developments. For instance, I noted that spending in Food & Drink is rising strongly. As we approach the fourth quarter, I expect a seasonal increase in both monetized impressions and CPMs, although not as robust as in previous years. Nonetheless, I do foresee some seasonality due to our exposure to areas like travel, fashion, and health and fitness, although certain sectors remain weaker.

Okay. I think everyone's going to make comparisons. Clearly, you pointed out the strength of the brand, which is a dominant player in the market. They have extensive geographic coverage. While you may not have the same reach, retail media has shown impressive growth. Perhaps you're seeing some decline in consumer products, but there could also be a significant shift towards retail media from more traditional categories, which you may not be fully capturing yet as you continue to build that area.

I think it's a great question, and I want to comment on it. From our perspective, the shopping sector has been under pressure for about a year. We highlighted this in the fourth and first quarters. If you take a closer look, the consumer in the U.S. is likely to face increasing pressure as pandemic-related spending decreases. So, shopping is a clear indicator of that. Regarding retail media, it's still early for anyone to be capturing significant market share; there are many opportunities available. One of our main reasons for entering this space is to diversify our business. Currently, we are a brand-centric programmatic platform, and by expanding into retail media, we will be enhancing our performance advertising, which will be another positive development. In the most recent earnings cycle, performance advertisers performed reasonably well, while brand-centric advertisers struggled with CPMs. Additionally, the Google Network, which is our closest comparison, saw a 5% decline in Q2, whereas we remained flat. Therefore, I don't see any significant share shifts happening yet. Retail media is still a developing market, and we feel confident about the tools we've created; now it's about gradually ramping them up over time.

Thanks, Steve. Our next question comes from Dan Day, B. Riley. Please go ahead, Dan. We can't hear you. Dan, if you're talking.

Can you hear me now?

Yes, we can.

Okay, great. I have a question regarding the launch of Convert. To my knowledge, a traditional SSP hasn't ventured into the sale of sponsored content listings for that inventory. How much more technically challenging is this compared to standard display ads? I would assume you need to have databases of advertiser SKUs in conjunction with retail inventory. Have you been preparing for this for some time and built up your capabilities, or are there some initial challenges as you move into this category?

Sure. Yes. Hey, Dan, so I think I would agree with the premise of your question. The technology specifically for sponsored listings, which is one of the four use cases that I called out earlier, is pretty different. It's a more performance-oriented as Steve called out and in some ways more search-oriented ad tech stat, right? Where you might be on a retailer's website and you search if it's Home Depot, maybe you're searching for shovels or mulch or something like that. And so that type of ad response there is going to be quite different in the type of technology needed to build that than brand advertising. As you said, it requires SKU level integration into the retailer's product catalog, requires being able to associate the search term with the right ad units, etc. So it is something that has been a high degree of focus for us over the, I mentioned about two years to build out these capabilities. And I would say broadly we've been building towards this moment. So our data platform Connect, which has been built over the last several years, also plays the key role, our core SSP for onsite video and display monetization. So, sponsored listings was really, I would say, the key kind of missing technology component. And so that's an area where we've been ramping an engineering team and really focused on building technology in this area. And look, this is the launch, so I want to make sure I kind of calibrate correctly. We think there's going to be multiple years of ongoing innovation as we go deeper and deeper into this area to build performance, build capabilities, build feature breadth, etc. And I think that's one of the things that we are really good at. And so we look forward to that challenge and that opportunity, but we note that it is significant TAM expansion and it's really core to many of the customers that we already work with, right? So doing onsite monetization for display and video for dozens of retailers, building, working with the buy side through Supply Path Optimization. These are kind of the building blocks that give us confidence that we can really deploy and scale up technology here.

Great. Thanks. That's a very detailed answer. Just one follow-up. I'm sure one of the hot topics kind of across the ad tech vendors right now is this move towards attention as the new kind of metric people are looking at for campaign measurement. Just wondering if you guys see a role there for you to play as people move towards attention whether that's sort of just kind of the middleman passing along through the bid stream, or if there's kind of a way you can play in the monetization of that.

Yes. So we're very much playing in the monetization of attention metrics today. So we've announced partnerships with a couple of different platforms or technology providers like I believe Adelaide, Coles 360, and a few others where they have the measurement or attention data. We integrate that into our platform. And then we can deliver private marketplace deals or open exchange inventory that meets a buyer's needs for a particular attention metric. So it could be based on some audience cohort, could be based on time and view of ads. There's a variety of different ways that each of these technology providers measures. And I think that's a kind of exciting platform aspect to our business, which is we have the media, we have the buyers, we integrate in the attention metric vendors, and then the buyers can find the inventory that they're looking for on our platform, and we can make it easy for them to access that media. And we are able to generate revenue stream both in terms of technology fees as well as our typical SSP fee in the process.

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

Hi, guys. I'd like to ask about the CTV topic again, if I could. A number of the traditional media groups have talked about some pretty good growth in their connected TV streaming advertising. We all know linear is weak, but it seems like CTV is kind of taking share from linear, so it's kind of surprising to hear you talk about CTV demand falling at the moment. What I'm wondering is, how much of this might be related to supply of impressions, which I'm trying to understand what that really means. Is this supply relative to demand is going up, or the absolute supply of impressions is going up, which could mean all of these fast channels like Pluto TV and Tubi and all of that, Netflix with ads, Disney Plus with ads. So could you just help us understand a bit more what's going on with the supply and demand components within CTV?

Sure. Rajeev and I can address this together, but let me start by clarifying a point. We're discussing this on a relative basis. For instance, in Q2 of last year and Q3, our CTV revenue grew over 150%. We're comparing ourselves to some significant changes. In the third quarter of last year, we increased our CTV monetized impressions by 300%. So, we won't grow our CTV impressions by 300% this quarter, Q3 2023, which is influencing what you're seeing. It's a challenging comparison, but the underlying trends for CTV remain strong. We're continuing to bring more publishers on board. As you hinted, the opportunity to monetize CTV programmatically is where the future lies, and that's the core solution we've developed. Therefore, I wouldn't interpret our current results as anything more than short-term pressures from CPMs, which have been declining due to macroeconomic factors over the past year, slightly each quarter. Consequently, you're noticing a larger year-over-year difference. Moving forward, we are focusing our investments on driving CTV; Activate plays a crucial role in our ongoing ability to expand our CTV business. We're also enhancing our SPO relationships, which have reached an all-time high of 40% of our activity, with many of these relationships tied to high-value formats like online video and CTV. We definitely feel on track; our monetized impressions are increasing, but this quarter and possibly the next present significant comparisons. However, we are very confident about the future trajectory. Rajeev, do you have anything to add?

Yes, Tim, I want to add something quickly regarding the supply of impressions. There's significant growth in the supply through various options available for ad buyers. This includes not just traditional streaming but also formats like reels and shorts from Meta and YouTube, which are experiencing substantial supply growth. In an environment where the growth of ad budgets is relatively slow, this increase in supply is likely to create some downward pressure on CPMs in the short term, which isn't unexpected.

Thanks. Could I just follow up with one more, which is you both kind of alluded to this already, but I wonder if these dynamics going on right now maybe drive more demand for the SPO work that you guys do in CTV specifically?

Yes. I mean, I think in general we see a lot of demand for SPO; there's a variety of factors for it. Buyers wanting to get more efficient, buyers wanting to get closer to the supply, buyers wanting to make sure that as much of their dollar as possible is going towards the things that they care about. So there's I think a variety of different factors; the transparency, I think oftentimes they're concerned about if I put my budget into a walled garden, there was this recent article or more than an article, but research report about ad spend in a particular wall-garden, where does your inventory, where does your ad budget actually run? So all of these things, I think are drivers for SPO and are continued growth there.

Our next question comes from Shweta Khajuria at Evercore. Please go ahead, Shweta.

Thank you, Stacie. I appreciate you taking my question. Regarding cookie deprecation for next year, it seems Google is sticking to the plan. Could you remind everyone how you foresee the potential impact, particularly in the latter half of next year and beyond as things progress? Thank you.

There's been a lot of history regarding cookie deprecation. Google appears to be quite firm about their timeline, but the industry is less certain due to the involvement of antitrust authorities ensuring a fair playing field. Google has introduced several frameworks like FLEDGE, Topics, and Privacy Sandbox, and we are actively testing them. However, many questions remain about the technology they are deploying. The independent verification of their timeline is still to be confirmed. That said, we believe it's wise to prepare for deprecation, regardless of Google's timeline. We are investing in various solutions such as contextual targeting and private marketplace deals using modeled audience cohorts. This will help us transition away from cookie identity data through our identity hub solution. The main challenge in this environment is the uncertainty surrounding the deprecation timeline, which leads to varying levels of engagement from publishers and buyers in adopting these solutions. While significant groundwork has been laid, it will take time for the entire industry to align once the timelines are clearer. Nonetheless, we are dedicated to this process every day.

Thank you, Rajeev. I would like to ask if you can provide any insights regarding the scale of the impact. Specifically, could you discuss how much of your business is currently affected by cookies or what reassures you that the impact will not be significant?

Yes. So the majority of revenue on our platform has alternative identifiers to the cookie. So we have, through those mechanisms that I mentioned earlier, we have a variety of different ways to deliver a target impression without relying on a cookie. So that gives us a great degree of comfort that once cookie deprecation comes, we'll be well-hedged in that sense. And then I think there's quite a bit of upside, which is that as we move off of the cookie, there's a lot more of a future around targeted ad delivery against opted and consumers. And CTV is a good example of that, where typically you're logged into your streaming or TV device, and there's an email address or some other mechanism for identity that's being shared. And the CPMs, because of the ability to target a superior, tend to be significantly higher by several multiples than when there's a cookie present. And so we think actually the cookie deprecation process, once it's ultimately sorted, could lead to a significant tailwind in the business in terms of delivering more relevant ads to the consumer and doing so at higher CPMs.

Our next question comes from Andrew Boone at JMP. Please go ahead, Andrew.

Great. Thanks for taking my questions. I wanted to go back to CPMs, Steve or Rajeev, is there a way to compare current CPMs or 2Q CPMs to historical levels? Like are they 10% below 2019? How do we think about that versus kind of historical cycles?

Certainly. We analyze trends over time, and one thing that reflects the strength of our platform is the stability of our overall CPMs over the past five years across all formats and channels. While there have been slight deviations lately due to the current macro environment, our diversified platform and ongoing investments in high-value growth areas enable us to capitalize on shifts in value creation. This stability in CPMs is evident despite the recent fluctuations. For instance, in the high-value segments like video and omnichannel video, we have experienced some quarter-over-quarter reductions, which contributes to the observed 20% difference compared to last year. However, when we look at the overall CPM trends since 2019, they have not strayed significantly despite this cycle's dip, and I anticipate a recovery. While the timing and extent of that recovery remain uncertain, I am confident in our ability to adapt through continuous innovation and by focusing our resources on high-value opportunities, which has allowed us to maintain stable CPMs. Additionally, we've been successfully monetizing and increasing our impressions, which reinforces our long-term confidence in our direction and potential. Even with a couple of challenging quarters, we are in a strong position with $170 million in cash and no debt, providing us with the flexibility to innovate. We see this as an opportunity to enhance our market share when CPMs stabilize. Although there are many dynamics in the current market, they only bolster our confidence in the path we are on.

And just maybe a opportunity for us in the future. With a couple of quarters with some headwinds, that's not a huge deal for us because we are very well capitalized, $170 million in cash, no debt, and an ability to continue to innovate. So we think this is a perfect opportunity for a company like ours who can actually position ourselves for when ad spend CPM stabilized to take more share. So obviously a lot going on in the market today, but if anything, it gives us more confidence about the trajectory that we're on.

Oh, go ahead, Andrew.

And just maybe a little bit difficult, but just the dynamic between pricing and then impression growth, right? Understood, you guys are targeting higher value impressions. Is there a way to think about the impact though of lower CPMs in terms of maybe a headwind towards impression growth for 2Q?

You mean in relation to Q3? In Q2, we observed an increase in monetized impressions, which are the impressions we sold, alongside a slight decline in CPM. In July, as I previously mentioned, we again saw an increase in monetized impressions sold on our platform, but there was pressure on CPMs. Consequently, there is a clear relationship since we operate in a real-time bidding environment. If demand weakens, the clearing price on the supply/demand curve drops, which is basic economics. With demand decreasing and supply either remaining constant or increasing, CPMs represent the equilibrium point. This gives us confidence that we’re progressing in the right direction as we are increasing our volumes, which is a key health metric for our business. Looking ahead, we have become more efficient, as I noted earlier in the call; we have cut back on CapEx, setting ourselves up well for the eventual recovery of CPMs, leading to strong marginal profitability.

Thanks, Steve. Our next question comes from Max Michaelis at Lake Street. Please go ahead, Max.

Hey guys, just one from me. I know you guys were hurt in this quarter by that bad debt expense, and it's going to kind of trail off into the next few quarters. My question is more, I guess it's a 2024 question some other initiatives maybe you plan to implement just to increase profitability over the next coming year. Thanks.

Yes, we are actively focused on enhancing profitability. We've consistently maintained a growth and profitability mindset, achieving our 29th consecutive quarter of positive adjusted EBITDA in the last quarter. We have implemented several measures to address short-term challenges in the macro environment, including finding efficiencies. We increased our overall capacity by over 30% with minimal additional capital expenditure through software engineering. This increase in capacity supports future margin expansion without the associated depreciation costs. Additionally, we have carefully managed our costs, keeping our overall headcount stable while strategically hiring and reallocating staff to high-innovation areas, which enhances our efficiency. As we continue to shift towards higher-value formats and higher CPMs at relatively consistent costs, we expect a positive impact on our gross margin and bottom line. Past initiatives like SPO, efficiencies, and software optimization give us confidence that we will expand margins in 2024 and beyond.

Thanks, Steve. We're over time. So I'm going to go ahead and turn it over to Rajeev for some quick closing remarks.

I want to thank everyone for joining us today. We continue to drive the business forward through a long-term lens. Our investment in SPO and high-growth formats and channels are delivering growth. We're deepening customer and buyer relationships and adding solutions that more than double our TAM. We also continue to diversify our business beyond display and brand-centric ad spend. Monetized impressions are up as we continue to add more premium supply to our platform. Ad spend will inevitably return, and CPMs will normalize. We believe that the areas we remain focused on will drive outsized gains over the long term. We look forward to seeing many of you at our upcoming investor events including Oppenheimer's Virtual Conference tomorrow, August 9, and Lake Street's Growth Conference on September 14. We'll also be hosting in-person meetings in the Midwest and the East Coast. Please reach out directly to Stacie to request a meeting. Thank you for joining us today.

Thank you.