Hello, everyone and welcome to PubMatic's Third Quarter 2023 Earnings Call. My name is Christian and I will be your Zoom operator today. Thank you for your attendance. 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 third quarter ended September 30, 2023. This is Stacie Clements with The Blueshirt Group and I'll 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. 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 the inherent risks, uncertainties and changes in circumstances that are difficult to predict. You can find more information about these risks and 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 November 8, 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. Additionally, 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 welcome, everyone. We delivered above expectations for both revenue and adjusted EBITDA. The upside in revenue was driven by an increase in monetized impressions across all formats. Once again, our durable model led to increased profitability, margin expansion and healthy free cash flow. This quarter, we continued to add new logos and deepen existing publisher and buyer relationships. Total activity from SPO deals grew to an all-time high of 45%, aided partly by the launch of Activate. Customers and partners are seeing great results from our expanded solution suite. This quarter highlights the momentum we're building in the business and fuels our growth expectations for the fourth quarter of mid-single-digit year-over-year revenue growth. I recently spent a week with customers and prospects at Advertising Week New York and I've never been more energized about our long-term growth opportunities. Our customer interactions indicate that sell-side technology that sits closest to the publisher and therefore, to the consumer is key to driving long-term sustainable growth in the programmatic ad market. Several key trends are driving this and we believe our buyer and publisher relationships are strengthening as a result. First, buyers are embracing programmatic advertising to automate the purchase of high-value connected TV and video ad inventory. Sell-side technology companies like PubMatic enable access at scale across the open Internet. Second, consumer privacy changes have resulted in increased global regulation and the looming deprecation of the third-party cookie. These trends have fueled tremendous innovation across the industry and many new solutions are best leveraged when the technology sits closer to the consumer and publishers. At PubMatic, we are the technology platform at the point of consumer consent. Lastly, as our industry matures, there's been an ongoing imperative for greater control over the digital advertising supply chain and increased efficiency across the ecosystem. These trends are forcing publishers and buyers to reevaluate and reconstruct their supply chains to meet their evolving needs. PubMatic is a key technology partner in this process. Our success stems from our owned and operated infrastructure that provides greater control over the supply chain and we believe is more efficient than alternatives in the market. This need is a driving force in our development of Activate. Since our inception, we have prided ourselves on our ability to anticipate market trends and build for the future. I'm extremely proud of the team and the new bar they have set for product development and speed to market. Our pace of innovation has accelerated and engineering productivity has increased over the course of the year, fueled in part by generative AI. We have and continue to accelerate software development, automate software testing and optimize code within our infrastructure. As a result, we released two major software products this year, Activate and Convert, with ongoing feature releases already in the works. We also added a record number of impressions processed with an annual year-over-year reduction in CapEx by 70%. Our durable financial model allows us to invest for future growth, even amidst a challenging economic environment. We believe this model alongside our innovative vision for how the ecosystem is evolving, our expanding product suite and our differentiated infrastructure uniquely positions PubMatic to gain market share. I'd like to spend some time today talking about how our innovative solutions are driving deep customer engagement in key areas of industry growth and set the stage for market share gains ahead. In May, we launched Activate to seamlessly connect buyers and publishers for premium CTV and online video monetization which represents a $65 billion TAM expansion controlled from the sell side. Six months in, we are already seeing a tremendous response from buyers and publishers with an active pipeline of over 50 advertisers, agencies and campaigns. Most recently, we launched Activate in the Asia Pacific region with partners including Dentsu APAC, IQIYI, Kinesso India, a unit of IPG, Madison Digital and Wishmedia. Central to our conversations around Activate is the need to simplify the digital advertising supply chain and drive greater efficiency. This was a driving force for one of our launch partners, global confectionary and pet care company Mars. Mars, a top 30 global advertiser, is innovating its supply chain for digital advertising with a particular focus on increasing efficiency in order to increase return on ad spend and lower its carbon footprint. Mars sees Supply Path Optimization and Activate as key drivers of their strategy, particularly for high-value growth formats such as CTV and online video. Mars exceeded their campaign objectives with their initial campaign tests in Q2 and Q3 resulting in measurable ROI improvements. As a result, Mars is significantly expanding its use of Activate to more products and ad campaigns. I think Ron Amram, Sr. Director of Global Media at Mars, explained it best when he said and I quote, 'We are excited about our growing partnership with PubMatic. Mars is committed to creating efficiency and sustainability in our advertising supply chain and Activate helps us get closer to the publisher and consumers, which contributes to the overall growth of our business.' Agency holding companies are also seeing success with Activate. One global agency expanded its SPO relationship to include the use of Activate in order to drive better campaign performance, particularly for CTV, on behalf of their client. With the structural efficiencies and real-time supply optimization benefits of Activate, the agency was able to exceed the client's cost per user acquisition target by over 20%, and it has since expanded its use of Activate to more campaigns and more accounts across their client portfolio. With the incremental, though still early benefit of Activate, SPO as a share of activity has grown significantly to 45% in Q3 as both agencies and major brands sign strategic deals to grow their businesses with PubMatic. I'm particularly excited about this metric, as it highlights the upside growth potential inherent in our business. First, buyers continue to consolidate ad spend across a smaller number of platforms. When the ad market returns to robust growth, we believe PubMatic should disproportionately benefit and so should our publishers. Second, SPO activity comes from some of the largest ad buyers and agencies in the world. These are typically multi-year, sticky partnerships. At almost 50% of total activity on the platform, we've reached another inflection point of sizeable, durable scale and growth. This increased buyer activity strengthens and expands our publisher relationships. Through our SPO offerings, premium publishers can access ad budgets from brands they had been unable to reach previously. We are particularly excited about the growth potential in CTV, where PMP and programmatic guaranteed transactions are most prevalent. Local Now, an ad-supported streaming service owned by The Weather Channel that delivers local, geofenced content, wanted a technology partner that has proven expertise in CTV PMP and programmatic guaranteed deals, alongside unique advertiser demand. With PubMatic, Local Now was able to optimize data available to buyers, curate and package their inventory and audiences and leverage our extensive SPO relationships, resulting in a more than tripling of their CTV revenue via PubMatic. The benefits that Local Now gained are not unique. We've seen significant growth in our PMP business over the past year, with nearly a third of our revenue now coming from these transaction types, up nearly 10 percentage points year-over-year. Much of this growth is coming from CTV, as we continue to acquire new streaming publishers at a rapid pace as they look to secure ad dollars shifting from linear TV to CTV. We're also expanding technology partnerships across the ecosystem. Just last month we announced an expanded partnership with leading Connected TV advertising platform FreeWheel, a Comcast company, creating a direct path for buyers to access a broad set of CTV inventory via Activate. We expect this expanded partnership to increase CTV revenue flowing through Activate. Our focus on the fastest growing segments of the industry led us to further expand our technology into commerce media, a natural expansion given our existing customer base. We estimate that Convert grows our addressable market by $10 billion and includes monetization of both onsite and offsite media. While it remains early days with Convert, there is strong market recognition for the need for an integrated platform that addresses core use cases from sponsored listings to audience extension to deal ID generation. For large commerce businesses, they can seamlessly manage inventory and consumer data in one system that brands can access and lower operating costs. Partly driven by the success of existing customers, our pipeline of Convert opportunities has jumped 40% in just the past three months. The expanding opportunities for Convert supplement our strong existing business with retailers who leverage our products to drive monetization. For example, Zulily, the online superstore for moms, is using PubMatic to manage their onsite inventory, embracing our OpenWrap header bidding wrapper to maximize monetization from their inventory. Other commerce sites leverage PubMatic for offsite audience extension through Connect. As privacy regulation continues to increase around the world with the consumer at the center of how their data is used to deliver relevant advertising to them, through Connect we have developed and scaled a portfolio of approaches to help publishers and ad buyers move beyond the limitations of anonymous targeting solutions such as third-party cookies or Apple's IDFA. As the primary programmatic advertising platform at the intersection of the consumer and the publisher, we sit at the nexus of consumer consent which we believe is a long-term structural advantage. In many cases, Connect's offerings are superior to the cookie. They provide for consumer privacy and choice as well as deliver increased ROI for advertisers. As the timeline for third-party cookie deprecation potentially draws nearer, we are seeing increasing adoption of our solutions. Already, nearly three-quarters of impressions on our platform have alternative targeting signals attached other than the cookie and we are confident that the remaining quarter will transition as well. Regardless, there is no shortage of impressions for buyers to transact on within our platform, with hundreds of billions of daily ad impressions with alternative targeting signals available. We are now integrated with 29 alternative IDs with a varying mix depending on the country. These IDs drive increased ROI for advertisers as well as an increase in publisher revenue and CPMs. For example, Philo, the leading entertainment focused TV streaming service, implemented Trade Desk Unified ID 2.0 on our platform in Q3 and saw an almost doubling of revenue as a result of buyers' ability to deliver more relevant ads to the consumer. We have also scaled Connect to support dozens of global data providers, further extending privacy-safe, targetable data available for buyers. The end result is again, higher ROI for the buyer and incremental revenue for our publishers. For example, Audigent utilizes Connect to offer buyers premium, multi-publisher curated data sets to meet advertisers' goals across CTV, online video, mobile and display inventory at scale. In an industry-first, buyers now have access to Experian's unique commerce media targeting capabilities, including data such as spending models, property data, automotive audiences and shopping preferences. PubMatic is the first and only SSP with direct access to this data in both the United Kingdom and United States. Lastly, we are actively working with Google to test the Privacy Sandbox APIs, specifically Topics and Protected Audience which allow for targeting user cohorts and aim for providing relevant advertising to those users while safeguarding their privacy. As digital advertising evolves from cookies to various privacy-safe approaches, we will continue to further scale Connect and provide buyers with the targetable audiences and media that they are looking for. The role of sell-side technology and in particular PubMatic has never been more compelling as publishers look for unbiased technology partnerships to help them drive growth and buyers seek to simplify their technology stacks to become more efficient and to navigate privacy changes. As a result, we are seeing increased interest and adoption of our technology across our product suite. The third quarter marks strong execution and our steadfast focus on innovation, strengthening customer relationships and driving operational efficiencies. This momentum positions us well for growth opportunities ahead and sets the foundation for the fourth quarter and what we believe will be an inflection point for growth. I'll now hand it over to Steve for the financial details.

Q3 revenue was $63.7 million and adjusted EBITDA was $18.2 million, or 29% margin, both above guidance. We exceeded our revenue expectations for the quarter by selling more video and display impressions than projected. We also continued to execute against our key operating priorities this year, which sets us up well going into 2024. We converted the majority of our revenue beat into incremental profit dollars, which highlights our ability to expand margins. Our CapEx optimization and working capital efficiency resulted in $17.2 million in free cash flow, the highest quarterly level in nearly two years. Turning to the revenue details, we saw solid improvements for both video and display revenues as the quarter progressed. We drove an incremental 10% monetized impressions above expectations for the combined August and September periods. And CPMs were relatively stable from July onwards. These positive factors helped us offset a challenging July and allowed us to substantially close the gap to our prior year revenues. Omnichannel video revenues came in better than expected and grew sequentially from Q2 by 7%. While down approximately 4% year-over-year due to the soft July, we saw monetized impressions accelerate sequentially through the quarter. As a percent of total revenue, omnichannel video revenues increased to 33%. Display revenues were 67% of total revenue and declined less than anticipated at 4% year-over-year. Revenues improved sequentially through the quarter driven by incremental impressions sold. These display results were particularly notable as we managed through Yahoo's technology transition related to its owned and operated inventory, which is predominantly desktop display. Yahoo has now shut down its sell-side platform. We anticipate it will take several quarters for us to ramp up Yahoo monetization as they migrate their inventory to a new technology stack. In Q3, our revenues excluding Yahoo owned and operating inventory grew in the low single-digit percentages on a year-over-year basis. Over the last several years, Yahoo's proportion of our total revenue has declined as we have expanded and diversified our customer base and increased our revenue mix toward faster growing video formats. In the third quarter, Yahoo's revenues represented less than 5% of our total revenues. On a trailing twelve-month basis, Yahoo revenue represented 9% of total revenue. In terms of ad vertical trends, we saw improving growth through the quarter for the majority of our top 10 ad verticals. We saw double-digit growth for the Automotive, Food & Drink, Travel, Technology and Business verticals. Shopping increased sequentially by about 10% from Q2 but remained below prior year levels. Overall, our top 10 ad verticals grew 8% year-over-year in aggregate. We continued to drive efficiency and optimization of our infrastructure that contributed to our strong financial results. On a year-over-year basis, we have increased our impression capacity by over 20% through software optimizations with limited CapEx. We anticipate expanding our gross margin in the future as a result of these efforts. On a trailing twelve-month basis, our cost of revenue per million impressions processed declined by 9%. Q3 GAAP operating expenses were $38.2 million or approximately 15% year-over-year increase. GAAP net income was $1.8 million, or $0.03 per diluted share. Non-GAAP net income, which adjusts for unrealized loss on equity investments, stock-based compensation expense and related adjustments for income taxes, was $7.6 million, or $0.14 per diluted share. Turning to cash, we ended the quarter with $171 million in cash and marketable securities and no debt. We generated $23.8 million in cash from operations and $17.2 million in free cash flow. Our priority is to drive shareholder value. Our healthy and consistent cash generation fuels innovation for long-term growth and allows for strategic capital allocation. As of October 31, we have repurchased 3.3 million shares of our Class A common stock for $46.6 million in cash. We have $28.4 million remaining in the repurchase program. Turning to our outlook, our Q4 has started out on solid footing with our October revenues growing both sequentially and year-over-year in the single-digit percentage range driven by increased monetized impressions. Importantly, both omnichannel video and display revenues were up year-over-year. In terms of ad spend by vertical, the majority of the top 10 verticals improved sequentially through October. Nevertheless, given current macroeconomic and geopolitical conditions, we remain cautious on brand advertising spend and accordingly have broadened our Q4 outlook range. Our outlook assumes that CPMs remain stable and general market conditions do not significantly deteriorate. Q4 revenue is anticipated to be $76 million to $80 million, or approximately 5% year-over-year growth at the midpoint, which includes the impact from the Yahoo transition referenced earlier. For the full year, we expect revenue to be approximately $261 million at the midpoint. In terms of Q4 costs, we expect to continue to benefit from our long-term focus on efficiency and improving productivity of our infrastructure and team. We anticipate that our Q4 cost of revenue will be similar to Q3's level. We anticipate that our operating expenses will increase from Q3 in the low single-digit percentage range as we continue to invest in our platform and people for long-term growth. Given our revenue outlook and optimized cost structure, we expect Q4 adjusted EBITDA to be in the range of $32 million to $35 million, or approximately 43% margin at the midpoint. For the full year, we expect adjusted EBITDA to be in the range of $71 to $74 million, or approximately 28% margin at the midpoint. This full-year adjusted EBITDA range includes $5.7 million of bad debt expense related to the bankruptcy of an ad buyer in Q2. We anticipate our full-year CapEx to be in the $10 million to $13 million range, approximately 70% lower than 2022. In summary, we believe we have built a resilient and durable business. Strategic investments we've made are beginning to deliver results. We also continue to make progress on the three operating priorities that I outlined last quarter. Number 1, generate significant free cash flow. Through the first nine months of 2023, we have delivered more than 85% of 2022's full-year level. Number 2, position ourselves for revenue acceleration as ad spend and CPMs stabilize. This year we have focused on building deeper relationships with publishers and ad buyers, increasing our supply path optimization relationships and expanding our TAM by over $75 billion with our Activate and Convert product launches. We've also optimized our infrastructure to increase capacity and grow monetized impressions. This focus led to our outperformance in Q3, and we believe has created an inflection point in terms of revenue growth. Number 3, establish a new level of efficiency in our cost structure that will lead to margin expansion in 2024 and beyond as we continue to scale higher value formats like CTV and online video. In conclusion, we are proud of our team's ability to execute our operating plan and excited about our growth momentum as we close out the year. With that, I'll turn the call over to Stacie for Q&A.

Thank you, Steve. Our first question comes from Matt Swanson at RBC.

I think I want to start off talking about the display business and kind of what your assumptions are in the Q4 and if you've given any thoughts to 24. Because I'm sure it to feel like you're a great macro obviously and it really wasn't but you performed really well in that side compared to all my checks in terms of how much macro pressure there was in display. So maybe if you could talk a little bit about like company-specific, what parts are under your control and what aren't and what you're doing to execute through a challenging macro for a major revenue line for you?

Sure, great to connect Matt. So let me just start out with commenting briefly on Q3, but it certainly feels to our Q4 expectations. In Q3, our outperformance was driven by incremental monetizing pressures on our platform. If you just step back and think about what that implies for us as a company, what we can control, we've been working over the last several quarters and years to optimize our infrastructure and this has increased our capacity and we have prioritized higher-value formats. We're seeing great progress, obviously, on video impressions we can get into. We've also seen continued progress on display volume growth. To your point about the macro, the macro has largely affected CPMs, but because we've been staying focused on our customers and the infrastructure, we're seeing really good volume trends in display. And the other aspect to note is that we stay focused on strengthening our relationships with buyers. As Rajeev mentioned, that we've been at an all-time high, 45% of total activity. We're starting to see the early stages of Activate ramp-up. We're seeing SPO help with private marketplace deals, programmatic guarantee deals. But really, overall, as an omnichannel platform, we're focused on optimizing the infrastructure, focusing on relationships and that certainly had a positive impact benefit to display. My expectations going into the fourth quarter is that we can continue to see robust volume growth in monetizing presses, and I anticipate that the fourth quarter potentially is going to see above year-over-year growth. So that indicates sort of the fruits of our labor.

You mentioned the $75 billion total addressable market associated with ACTIVATE invert. Given such a large figure, where do you think we will start seeing the most significant impact in 2024? What aspects of that $75 billion appear the most attainable in the near term?

So where we're seeing, I think, the early signs of success are really around premium ad formats. So that's connected TV and its online video. These are obviously high CPM formats, where, from a buyer perspective, having efficiency and control over the supply chain yields the greatest impact, right? If we're thinking about a $10, $20, $30 CPM versus a display CPM that might be in the low single-digit CPMs. So CTV and online video and particularly for non-bidded transactions, these are aromatic rate transactions and fixed price private marketplace transactions, where the buyer is looking for maximum reach and particular audiences, and I think Activate is really well positioned in those areas. That’s where we are focused. I think over time, we'll see growth as we enter a variety of different ad formats and transaction types as we get deeper into the buyers.

I guess just one question from me to Steve on the Q4 guidance, please. So you sound confident in your guidance. Just help us please lay out the puts and takes for both revenue and EBITDA, the visibility you have, it's November 8, you still have 1.5 months to go. And any incremental contributions that you're accounting for this quarter that weren't necessarily there last quarter. Excuse me, not last quarter, last time this year in Q4.

Let me start out with the core aspects of our outlook. First, we're assuming that CPMs are going to stay relatively stable, and that's what we've seen since July, relatively stable. We also expect, as is typical at this time of year, a seasonal uptick. It is a bit muted given sort of the macro factors that exist across the world. We do expect CPMs to remain relatively stable, but on the back of the earlier comments that I referenced about monetized impressions, we've seen great progress in the August, September period, and that continued into October. Overall, October revenues are going to be over 5% growth on a year-over-year basis. That's a really big inflection point for us. That's the first time at that level this year, and that reflects the key drivers of driving both video impressions and display impressions. And then, as I referenced in our prepared comments, the guidance also includes the transition that’s going on with the Yahoo technology stack. If you were to strip that out, we actually have a guide of about 8% year-over-year growth. The confidence that I have is predicated on recent trends and we try to take a balanced approach. But also, it does reflect the continuation of many of the initiatives that we started multiple quarters ago, starting out with SPO that continues to be a very important tailwind for us. Our strategic focus on expanding publisher relationships and our new product innovation; all of this contributes to our momentum. Taken together, our performance in Q3, plus the core volume trends that we're seeing gives us a positive view. Now, of course, there's a lot going on in the macro. To recognize that we have broadened our revenue outlook for the fourth quarter from 7.6% to 8%. We think that is appropriate given the macro environment. Some of the incremental clearly are our new product developments, and we're starting to see the ramp up. That's something that's us at early stages, but we have multiyear runway with Activate and Convert, and we are looking forward to that contributing.

Okay, Steve. Sorry, just a quick follow-up. Did you call out any headwinds that you may have seen from the reward at all? Or did you see any impact?

Yes, I would say that the overall category that seems to be ultimately affected the most is news. We had already seen a deprecation of news over the last 1.5 years, and news is not inside of our top 10 ad verticals. For us, it's relatively muted.

First, a question for both of you. Just in terms of this Yahoo! transition, I appreciate that that's headwind right now. But as this transitions through to the new tech stack, should we think about this as potentially being an opportunity within the overall business again? Secondly, we've seen more and more SSPs sign up for OpenPath. What's your latest thoughts on teaming up with Trade Desk around OpenPath?

Sure, Justin, I can start with that. So just on Yahoo!, I think it is a growth opportunity going forward. As Steve commented on their migrating, they've shut down their historical SSP or tech stack. Then, they've transitioned to a new third-party tech stack. I do think there's some upside opportunity here, so we're working closely with them. They've been a great long-term partner. But I think there's work to do over the next several quarters.

Yes, I concur with your description, Rajeev. I think the way we're looking at it is we've been a long-term partner with Yahoo! but we are confident that we can continue to be a very positive partner in the future. It's based upon our innovation and our focus. So I fully expect that business to continue to ramp.

With respect to OpenPath, we work quite closely with Trade Desk. They've been a terrific long-term partner for us and continue to be so. We talked about the UID2 example. We are very open to working with Trade Desk in a variety of different ways. We've got a road map in front of us. They've got a road map in front of them, I'm sure and we'll see where we go in the future.

Can you clarify on CTV? Did you see pricing stabilize in October, or has volume stabilized? Steve, could you comment on how the trends in CTV affect the gross margin this quarter? Rajeev, looking at the longer term, with the division of IDs making things more confusing for advertisers, it seems to encourage alignment with their DSPs. How does that fit into your strategy?

Sure. With respect to CTV pricing, the statement that I made was relative to stability to July. As I called out last earnings, the overall macro pressure has put pressure on CPMs over the last year. The deposit base from our perspective has been relatively stable since the end of July. The benefits that we're seeing is really our monetized impression, so more impressions that we are selling across all formats, CTV being an important one. We saw very strong growth in the third quarter, monetized impressions for both video and display, as I referenced. We expect, for example, in the fourth quarter, video to have double-digit monetized present growth on a year-over-year basis. The foundation of our business which is volume is really quite healthy, and we're just navigating through the current environment.

So Jason, on your ID question, I commented on 29 IDs now integrated into our platform. That speaks to the level of complexity and choice or optionality that buyers have. The key focus for us is really on interoperability, making sure that whatever ID a particular buyer chooses, they can find a maximum amount of inventory or impressions on our platform relative to those IDs. The broader trend here is really the increasing relevance for sell-side technology in the ecosystem. The technology that sits close to the consumer and the publisher, which, of course, is where we sit, is increasingly important because typically IDs are only one part of an advertiser's audience targeting strategy post-cookie. They're also looking at first-party data, contextual data, and many of those things are better when they're done on the sell side because that's where consent is coming from the consumer.

Rajeev, can you talk about the partnership that you now have with FreeWheel? Clearly, FreeWheel is one of the most important players in the CTV ad market. I'm just curious about how that partnership works.

Yes, we recently announced an advanced integration with FreeWheel, which significantly enhances opportunities for our customers using Activate to access a much larger inventory of CTV ads available on the FreeWheel platform. FreeWheel is a leading ad server for CTV, widely utilized by traditional broadcasters in both the U.S. and Europe. We have maintained a strong partnership with FreeWheel, and this development expands our collaboration into our new supply path optimization product, Activate. We expect this will provide us with a considerably greater number of impressions and inventory opportunities, making Activate more appealing to buyers and likely leading to increased revenue for Activate over time.

And then, just a follow-up. Maybe for Steve, can you explain why CTV was down 3% year-on-year in the quarter? You're clearly comping over 150%, but I'm just assuming that's off a small base. So anything about the decline would be helpful.

Certainly. We saw growth from the second quarter to the third quarter, which is crucial for maintaining our business's momentum. As I mentioned earlier, over the past three to four quarters, CPMs for CTV have gradually declined. Therefore, when considering a specific moment, the overall impact of this decline is more pronounced. The good news is that our monetization efforts have been growing at significant double-digit rates, and we expect this trend to continue into the fourth quarter. Overall, we believe our business is in strong shape. The various initiatives we discussed, such as SPO and our progress in the private marketplace and programmatic guarantee, all contribute to the long-term health of our CTV business.

Rajeev, please. You previously talked about areas of investment that should position the company to capitalize on opportunities coming out of the downturn. You obviously unveiled and made significant traction with Activate and Convert. How should we think about the investment cadence going into 2024? And then maybe as a follow-up, can you please talk about the pace and traction on some of these ongoing initiatives, particularly as they relate to CTV and how could they position you for 2024?

From our perspective, something that we've learned over many years is that we have taken the opportunity in challenging macro environments to get more traction, gain market share. We've been able to do that through investment in innovation, people, and infrastructure. The last 1.5 years have been exactly that environment, and we've continued to invest. We've had some of the most rapid development cycles than we've had in the history of our company. The reason we can do that is because we have such a strong financial base. We have a terrific business in terms of the core fundamentals. We have strong margins. We generate significant free cash flow. When we've invested in the business, we're able to generate significant upside. So we're not going to change that. The only decision that we need to work through, which is what we're doing right now, is the rate of investment looking ahead into the future. We fully anticipate to keep our foot on the accelerator because of the significant opportunity out there for us. As Steve called out the importance of the sell-side platform, that's just getting more important. We're going to be a significant beneficiary as consolidation continues. We will reinvest some of our incremental profitability back into the business and we fully expect to continue to grow the top line and our market share over time. When we think about what are the most exciting growth opportunities in the industry, it's really around supply path optimization, so getting closer to buyers and capturing a greater share of their ad budgets and return for greater efficiency and greater control on their part; omnichannel video, so both connected TV as well as online video. Just as a reminder, online video is still multiples of the size of connected TV in terms of TAM or opportunity, and addressability. These are squarely aligned with where our investment portfolio sits over the last 18 months. That's not by accident. As Steve described, when we get into a downturn or a soft patch in terms of the macro environment, we consider where the industry is headed when the inevitable upturn comes, and we align our innovation or investment portfolio accordingly. Our intent is to be really well positioned with the fastest-growing segments when we come out of this downturn, which hopefully we'll start to see in the next couple of quarters, although nobody knows for certain. We hope to see a firming up of the display market which is still about two-thirds of our business. All of that combined should push us to market share gains, as Steve mentioned.

So Steve, I think we talked a few months ago on Activate, just how advertisers are likely to take sort of a crawl-walk-run approach with something like it, starting with really small test budgets, getting comfortable with it, ramping over time with more significant budgets. So maybe if you can just talk about where you are right now? Are we still in the test phase with really all of them? Are any advertisers starting to move past that? It could be a more significant growth driver maybe in the first half of next year?

As we’ve called out when we launched the product and on progress over time, this is really a product that's a great product-market fit for us. It leverages our platform, it leverages our publisher relationships and our buyer relationships. We are seeing a robust pipeline, as we mentioned that 50 opportunities that we're going after across the globe. We recently launched in APAC. We are in the ramp-up phase. It depends on the cycles for an agency or an advertiser. We share the specifics, the excitement from a global advertiser like Mars in terms of what they see in the product and their plans for the future. Our goal is to lay the foundation, establish these relationships and get into the investment cycles of the agencies and the advertisers. Often, contracts go through a testing process and then expansion of the budgets. I don't anticipate material benefits to the top line until the second half of '24 as we get more into the ramp-up in the investment cycle of these partners. The way to think about it from an investor's perspective is this is a multi-year runway, so we are taking the time to make sure that we develop the product in ways that ultimately match the opportunity, and we're very positive about the progress we've made.

If I could follow up on Convert, another product you're aiming to scale, how are your connections with retailers and other commerce partners progressing? There are a few established specialized retail media ad tech vendors targeting the longer tail. Can you explain how you differentiate yourself from them? Is it fair to say that there’s room for multiple solutions? They aren't limited to choosing just one, since retail media operates differently, and they may prefer not to collaborate with over ten SSPs like they do in the Open Web.

There is truth to what you're saying, certainly, which is that the industry is still quite early in the Commerce Media evolution and opportunity. Yes, there are some folks that are already playing in this space. But we see the vast majority of the opportunity as really white space. We're going after opportunities where we can bring together a suite of offerings, with onsite monetization, sponsor listings as well as display and video, along with offsite monetization. That's inventory, our audience extension and use of first-party data to scale retailers' budgets. With the launch of Convert, we have a unified platform that brings all of these use cases together, delivering that to commerce media participants. We're seeing that as commerce media participants look to scale their business from an initial set of dollars to a bigger portion of their ad business, having a comprehensive platform can be quite useful. That's really where we're focused in terms of the opportunity set.

I was wondering, I just want to tie back to Convert. I just want to know if it's kind of in line with initial expectations you had. I know this is the first quarter that you've launched the product.

Yes, I would say, so far, it is in line with our initial expectations. As you said, it's still very early. The sales cycles here are not short, right? This is an enterprise software sales cycle. We’re looking at several quarters for a sales cycle, but we've seen a lot of enthusiastic reactions. Obviously, we had a number of great launch partners when we did launch and our pipeline is looking pretty healthy here. So I would say, it's in line with expectations, although certainly still very early going.

Just one for me. Maybe just with Google's Privacy Sandbox API moving bidding from the exchange into the browser. Can you just talk about how that changes the offering for SSPs and maybe just the competitive dynamic there?

A key part of Privacy Sandbox from Google is shifting the auction environment and the data used in that auction environment into the browser, right, to make that privacy safe. So that is a significant shift in terms of the infrastructure required to monetize an ad impression. We have a team of engineers that are working on this, and we're working with Google and testing those APIs. I think it's still quite early going. There are still a number of unknowns as we are in conversation with the Google team about how things will work and how they'll scale. It is a meaningful shift in terms of infrastructure. Given that we own and operate our own infrastructure and have a great degree of control and flexibility, we feel like we should be in a good position to be able to build in the way that we want to build it.

At this time, there are no additional questions. I'm going to turn the call back over to Rajeev for closing remarks.

Thank you, Stacie. I want to thank everyone for joining us today. This quarter, we delivered strong execution and market inflection points for revenue growth in Q4. I couldn't be more excited by the momentum we're seeing across our business and the investments we've made that are accelerating our business. Sell-side technology is increasingly relevant to digital advertising for publishers and buyers, and we are at the forefront of that opportunity. Of course, underpinning our success is our durable model, including healthy cash flow and a strong balance sheet. We look forward to seeing many of you over the next couple of months. Have a great afternoon, everyone.