Hello, everyone and welcome to PubMatic's First Quarter 2024 Earnings Call. My name is Kelsey and I will be your Zoom operator today. We thank you all for your attendance today and as a reminder, today's webinar is being recorded. I will now turn the webinar over to Stacie Clements with The Blueshirt Group. Stacie, over to you.

Good afternoon, everyone, and welcome to PubMatic's earnings call for the first quarter ended March 31st, 2024. 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. Today's prepared remarks have been recorded, after which Rajeev and Steve will host live Q&A. A copy of our press release can be found on our website at investors.pubmatic.com. 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 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, 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 May 7, 2024 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 delivered another outstanding quarter, which highlights the growing need for sell-side technology for digital advertising, our strong customer relationships, and our breadth of solutions, resulting in growth across all formats and channels. Revenue and profit significantly exceeded our expectations, marking multiple quarters of accelerating revenue growth. Revenue grew 20% over Q1 last year. Excluding revenue from Yahoo!'s owned and operated inventory, year-over-year revenue growth was 25%. Adjusted EBITDA margin was 23% and we generated over $16 million in free cash flow. I'm incredibly proud of the team's hard work and focused execution, which has positioned us well for the growth opportunities that lie ahead. We built an integrated platform that is flexible and efficient so we can meet the needs of a growing customer base as we expand our total addressable market. We see continued momentum in the business, evidenced by adoption of new solutions and growth in customer count as clients across the ecosystem choose to build their ad businesses on PubMatic technology. With these strong results continuing into April, we are raising our full year guidance. Adding to our confidence is the increasing importance of being positioned on the sell-side as the advertising ecosystem evolves. The need for deep and specialized technology to monetize ad inventory and audiences is increasing at a rapid pace. New opportunities, including changing privacy regulations, the influx of new ad inventory from CTV and Commerce Media, and the increasing need for buyers to control how their ad budgets are deployed are best addressed on the sell-side, which sits closest to the consumer. PubMatic is unique. Our focus on our owned and operated infrastructure and strength in organic innovation results in robust technology that efficiently connects buyers and sellers. We've spent 17 years building differentiated solutions and our competitive moat continues to widen, even as our logo list continues to grow. These advantages attract both advertisers and publishers to PubMatic, adding scale to the platform and fueling continued growth. Let me explain. Advertisers are looking to gain scaled access to premium inventory, audiences, and data, which is primarily done through sell-side technology, whether they connect directly to us via Activate or via a demand-side platform. Our owned and operated infrastructure provides an efficient, transparent, omnichannel, global, and privacy-forward solution while giving buyers granular capabilities to control how their ad budgets are deployed. At the same time, premium publishers and data owners are using PubMatic to gain access to our scaled buyer demand, further amplified by Supply Path Optimization and Activate. Moreover, our addressable market continues to grow as we attract new entrants to the digital advertising ecosystem, like leading streaming providers, commerce media participants, and now social media companies. The most recent example of this is Roblox. When the global immersive platform was looking to enable programmatic ads for the first time, they tapped PubMatic to power this offering. Not only can PubMatic provide scaled access to premium brand advertising demand through our buy-side relationships, but we also understand the needs of content providers across web and app environments. As Roblox's VP of global partnerships, Stephanie Latham, explained, and I quote, 'partnering with PubMatic unlocks the opportunity for more advertisers to seamlessly engage this community through preferred content formats, like video, while providing advertiser controls around brand suitability.' More broadly, as cookie deprecation nears and privacy regulations increase around the world, the future of digital advertising resides in technology like PubMatic's, that sits closest to the publisher, and therefore the consumer. We have a unique opportunity to tap into the myriad of behavioral, demographic, identity, interest-based and contextual signals that publishers have access to, all while enabling media owners to maintain control of their data and access, a critical component as they build their ad tech stacks. As we cross the 500-person mark in product management and engineering, we continue to focus on building solutions ahead of the trends that are playing out today, namely, buyer spend consolidation via SPO, growth from connected TV, and expansion of commerce media. I'd like to walk through these growing areas and how we've differentiated ourselves in each. Our goal is to maximize content creators' access to programmatic advertising budgets. While we work with top DSPs on a global basis, we know that advertisers and agencies have tremendous influence over how and where their budgets are spent. With large ad budgets continuing to shift from linear to programmatic, SPO via Activate offers ad buyers a highly efficient and fully scaled solution that directly connects buyers with premium video inventory while reducing operational friction. Further, our approach focuses on both ad buyers' and content creators' interests. We deliver increased ROI that warrants higher CPMs, which elevates the value of the entire digital advertising ecosystem. I couldn't be more pleased with the success we are seeing as we continue to expand customer engagement through new products and regions. Several of the top global agency holding companies are in the process of ramping up their adoption of Activate. We've also recently expanded Activate into Latin America. Our comprehensive suite of buyer solutions is what makes our SPO offering so compelling. As a result, ad buying activity from SPO continues to drive growth across the PubMatic platform. Our multi-year partnership with GroupM is just one example of how we are meeting the growing needs of buyers. We initially engaged with GroupM for SPO in 2019. Over time, we expanded the relationship from desktop display to mobile, online video, and ultimately connected TV. We further partnered to power their Premium Marketplace across Europe and Asia and most recently in the U.S. In 2023, we launched a comprehensive Private Marketplace Deal Library across multiple GroupM agencies, which consolidates media buying onto approved inventory packages that meet their performance and quality standards. And just this past month, we announced a first-of-its-kind solution to deliver AI-generated cohort-based audience models customized for each GroupM advertiser client. What's most interesting about this journey is that it can only be done with technology like PubMatic's that sits on the sell-side. At the end of the first quarter, SPO activity increased to 50%, up 4 percentage points from the end of Q4. Our SPO activity is creating a growing moat and flywheel to attract new publishers who want access to the unique demand only available on PubMatic. I anticipate that over the next several years, there is potential for SPO activity to be 75% of our total buyer activity. Driving this confidence are a few things: one, the nature of our land and expand strategy. Our net spend retention rate from ad buyers with at least 3 years of spend reached 125%, which gives us high visibility into impression and revenue growth; two, we are adding 50% more buyer-focused salespeople this year so that we can bring the same efficiencies and high ROIs to mid-tier agencies and large advertisers as they too embark on SPO initiatives; and three, total global digital ad spend is estimated to grow by 32% over the next four years to nearly $850 billion. We will disproportionately benefit as the industry continues to consolidate. The capital outlay needed, global scale requirements, and ongoing pace of innovation make it challenging for other platforms to compete and even harder for new entrants to emerge. At the same time, publishers are also mandated to find increased efficiencies and greater monetization. Both of these objectives can be solved by shifting from in-house software to PubMatic solutions, which allows publishers to focus on their core competencies, creating content and connecting with consumers, while leaning on trusted experts like PubMatic to power more of their tech stack. For example, OpenWrap, our header bidding wrapper solution across CTV, mobile app, and web environments, drives increased yield for publishers and streamlines their engineering and ad operations. Publishers like Realtor.com, Internet Brands, sports app LiveScore, and NPR are increasingly realizing the benefits of OpenWrap as we have more than doubled the number of paying customers year-over-year. This same mandate, to find increased efficiencies and greater monetization, holds true for streamers. Even the biggest names in CTV are opening up their inventory and data to access a greater proportion of ad budgets in order to drive growth. In fact, as an increasing share of CTV ad budgets move to programmatic transactions, top streamers are increasingly adopting PubMatic to support direct transactions with buyers via private marketplace or programmatic guaranteed auctions. Beyond the one-to-one direct access, our technology enables streamers to optimize yield across multiple bidders and improve impression-level data available to buyers that can drive higher yield. Our strategy to penetrate CTV budgets is multi-pronged. First, our growth in SPO and Activate provides publishers with unique demand on the PubMatic platform not available elsewhere. This creates a catalyst for growth, allowing us to rapidly expand our CTV publisher base, which increased 15% year-over-year in Q1. Further, as publishers derive value from our platform, they are increasingly choosing to move more of their direct-sold deals to PubMatic, which is a significant portion of how CTV and online video is sold today. The results of our strategy are clear. Last quarter, we added DISH Media and Vevo to our platform, and we most recently onboarded Virgin Media, one of the UK's premier entertainment and communications companies. Virgin Media selected PubMatic as one of only a few sell-side technology companies helping to power their free ad-supported TV or FAST offering because of our strength in SPO and private marketplaces. We believe we are at the early stages of this new CTV and online video flywheel for growth, particularly as Activate begins to ramp. Convert, our commerce media platform, also benefits from the scale of premium inventory on our platform. This supply, coupled with the richness of our data capabilities, allows us to attract retail media budgets. Programmatic retail media expands our total addressable market by $10 billion in the fastest growing part of the market where ad buyers use retailers' unique data sets to deliver relevant, high performance ad campaigns. Further, this is a nascent market today with plenty of greenfield opportunity. In addition, commerce media sites, with their trove of first-party data signals, stand to benefit the most as the third-party cookie is eliminated. As this transition unfolds and adoption of alternative signals increases, a more resilient supply chain will emerge delivering more relevant ads for consumers, better performance for advertisers, and superior monetization for content owners. We integrate directly with retailers and their data, positioning us well for growth in retail media. We are already seeing strong interest in Convert from some of the largest commerce media platforms. Just a few weeks ago, we announced a partnership with Instacart, allowing buyers to leverage Instacart's first-party retail media data to reach audiences across our expansive inventory. Equally important, because we sit primarily on the sell-side of the ecosystem, with direct access to scaled, omnichannel inventory, we are in a unique position to deliver offsite audience targeted campaigns in a privacy-compliant way. As these large content creators embrace their advertising potential, they are also choosing PubMatic to power their on-site inventory. Klarna, the global payments company that boasts the world's fastest growing community of shoppers, recently partnered with PubMatic to monetize the native inventory on their app. They chose PubMatic because of the scale we provide so that any advertiser, regardless of their DSP, can reach Klarna's highly engaged audience at the point of purchase for better campaign performance. While still early days for Convert and our commerce media business, I'm excited about the breadth of opportunities ahead of us. Our strong agency and advertiser relationships driven by SPO and Activate, coupled with our strong portfolio of audience solutions, are gaining traction with commerce media companies. Collectively, the driving forces of innovation and growth in our industry are creating a wealth of opportunity for the Open Internet. Buyers are looking to engage their audiences alongside brand-safe, professionally curated content, which the walled gardens do not provide. I've had numerous conversations with key advertisers and media buyers at global ad agencies about how they are actively looking to move media buys out of walled gardens, but need the performance and ROI that they are accustomed to. I believe that the Open Internet has the potential to deliver performance consistent with walled gardens, especially after third-party cookies are deprecated and first-party data from CTV publishers and commerce media partners continues to scale. In summary, we delivered an outstanding start to the year, with continued momentum into April. We've added new clients and established deeper relationships with content creators and buyers, and we are investing in the highest return areas of the business like Activate for SPO, Connect for data, and Convert for commerce media. As a result, we expect revenue growth to accelerate in 2024. Our competitive moat is widening, as is the need for sell-side technology. Those that are looking to build their advertising businesses need three things: technology that carries them into the future and ensures control of inventory, data and buyer preferences; access to premium inventory and buyer demand; and an efficient, transparent path to execute direct programmatic transactions. At PubMatic, we have global, omnichannel scale, a rich innovative product roadmap and the resources for ongoing investment. We have tremendous opportunity in front of us as we expand our addressable market and deliver real value to content creators, buyers and data partners. I will now hand it over to Steve for the financial details.

Thank you Rajeev, and welcome everyone. We once again exceeded guidance on the top and bottom line, led by strong execution and continued momentum in our business. Several factors drove accelerated year-over-year revenue growth of 20%. Monetized impressions increased for every format and channel, in aggregate by 17%; CPMs were stable across formats and channels; and emerging revenue streams, comprised of new products, data partnerships, and enterprise software integrations, contributed approximately 2 percentage points of growth in the quarter, on track to double their contribution by the end of the year. This strong outperformance also drove incremental margin expansion, with adjusted EBITDA margins of 23%, once again demonstrating the strength of our business model which is built on owned and operated infrastructure, innovation investments to deliver differentiated products, and operational excellence. Compared to Q1 last year, we doubled our adjusted EBITDA and tripled our free cash flow. Breaking Q1 down by format and channel, which includes Yahoo unless otherwise called out: omnichannel video revenue from CTV, mobile and desktop devices grew 33% over Q1 last year, driven by an increase of monetized impressions by more than 50%. As we continue expanding our roster of new customers and growing our share of wallet with existing customers, we see a long runway of opportunity in this high value channel. We also saw continued strength in display, most of which was via the mobile channel. Display revenue grew 10% over Q1 last year, led by a double-digit percentage increase in monetized impressions. Excluding Yahoo owned and operated inventory, display revenue grew 17% year-over-year. On a global basis, every region grew double-digit percentages in the first quarter. As mentioned in prior earnings calls, our results include the revenue headwind in our business from Yahoo. Excluding revenue from Yahoo's owned and operated inventory, revenue grew significantly by 25% over Q1 last year. We anticipate this headwind diminishing in the second half. We also added 99 publishers on a year-over-year basis, including premium CTV and transactional commerce brands. And we grew our existing publisher revenues on a trailing 12-month basis with net dollar-based retention at 106%. Excluding Yahoo, net dollar-based retention was 114%. Looking at growth in ad spend, the top 10 ad verticals combined increased by 20% compared to Q1 last year. Within this group, the majority of ad verticals grew nearly 30% year-over-year. Our relationships with buyers continued to expand as activity from SPO climbed to 50% of total activity on our platform. Underscoring the long-term strategic value and stickiness of these relationships, the trailing 12-month net spend retention rate from SPO partners with at least 3 years of spending on our platform was 125%. As the share of SPO to total activity increases, we anticipate revenue visibility further improving and the proportion of high-margin revenue growing. In February, I outlined our key operating priorities for delivering accelerated year-over-year revenue growth and incremental margin expansion. Consistent with our long-term track record, we remain focused on investing in high impact, high return projects while driving further efficiencies across the business. First, we are executing our plan of adding over 150 net new team members this year to accelerate product innovation and go-to-market expansion. We are adding engineers to create incremental monetization opportunities for PubMatic as we generate both publisher revenue and data fees from our Connect transactions. Prior investments in this area have led to increased value creation for clients, resulting in the number of Connect customers more than doubling over the last 12 months. These investments are also focused on expanding our alternative data signals. Similarly, increased sales and engineering investments in OpenWrap have broadened our value proposition and the capabilities that we deliver. Our wrapper solution generates revenue via our core SSP revenue stream as well as a software-based fee from all publisher revenue flowing through the wrapper. We've also expanded our buyer-focused sales team by nearly 20% year-over-year to accelerate growth in SPO and Activate. We expect this broader team will enable us to further penetrate large agencies and advertisers as well as bring on mid-tier buyers who are starting to embark on SPO initiatives. You'll recall that in February, I shared that our plan was to increase this SPO focused team by 50% over the course of 2024. Second, we continue to make prudent investments in CapEx, with a focus on funding new products and efficiently increasing capacity on the platform. As previously communicated, we anticipate full year capex to be marginally higher than last year's level. And third, our team is building on cost saving efforts from last year and optimizing via software and AI to deliver incremental efficiencies across our owned and operated infrastructure. For the trailing 12 months, these efforts reduced our cost of revenue per million impressions processed by 10% compared to the comparable prior 12-month period. Moving down the P&L. GAAP operating expenses in Q1 were in line with expectations at $46.8 million, an 11% increase over the prior year reflecting targeted investments across the business. Q1 GAAP net loss was $2.5 million or $0.05 net loss per diluted share. Non-GAAP net income, which adjusts for stock-based compensation expense and related adjustments for income tax was $4.8 million or approximately $0.09 per diluted share. We have a strong balance sheet that supports our long-term capital allocation strategy. We ended the quarter with $174 million in cash and marketable securities and zero debt. Year to date through April 30, 2024, we repurchased 1.1 million shares of Class A common stock for $20.1 million in cash. Since the inception of our repurchase program in February 2023, we have repurchased a total of 5.1 million shares for $79.4 million. We have $95.6 million remaining in our repurchase program authorized through December 31, 2025. We generated $24 million in net cash provided by operating activities and delivered $16 million in free cash flow, which was more than three times the free cash flow we generated in Q1 of last year. Now turning to our outlook. In Q1, we saw terrific growth across our business and this momentum continued through April with revenues up double-digit percentages over last year. Both omnichannel video and display revenues in April increased over last year and the majority of our top 10 ad verticals grew over 20% year-over-year. We are also making steady progress on our 2024 operating priorities in terms of hiring for continued product innovation and go-to-market expansion that we believe will help accelerate year-over-year revenue growth. These data points give us confidence in our underlying growth strategy and the effectiveness of the growth investments we are making. Our Q2 and full year outlook also reflects an anticipated headwind as one of our top DSPs has informed us it is modifying its bidding methodology in Q2. This change had been made by other DSPs over the past several years. Nearly 100% of impressions on our platform will now be transacted via a similar bidding approach. Based on prior experience from similar DSP changes, we expect lower bid prices from this specific buyer to be partially offset by real-time competitive reactions by other DSPs. Further, we anticipate that our strong underlying growth across ad formats, channels, and regions, as well as growth of our emerging revenue streams, will help us offset this headwind throughout the year. For Q2 revenue, we are projecting $69 million to $71 million, or approximately 11% year-over-year growth at the midpoint. For the full year, we expect revenue between $296 million and $304 million, or 12% year-over-year growth at the midpoint. In terms of costs, we expect GAAP cost of revenue to increase sequentially each quarter in the low-single digit percentages range. We also expect Q2 GAAP OpEx and subsequent quarters to increase sequentially in the low-single digit percentages as we continue to invest for long-term growth. With our revenue guidance and expected cost structure, which is largely fixed in the near term by design, we expect Q2 adjusted EBITDA to be between $17 million and $19 million or approximately 26% margin at the midpoint. For the full year, we expect adjusted EBITDA to be between $90 million and $94 million, or approximately 31% margin at the midpoint. We expect CapEx between $16 million to $18 million for the full year. In summary, we had a very strong start to the year, which continued into April. SPO relationships now account for 50% of activity on our platform, we added significant new customers, all regions grew double-digit percentages, and new products are contributing to growth. Our results highlight the profitability and the durability of our model as we focus on sustained innovation, go-to-market expansion and operational excellence. As one of the largest independent sell-side technology providers, I am very excited about our long-term growth opportunities and the trajectory we are on for sustained double-digit revenue growth this year and beyond.

I will now turn the call over to Stacie for questions.

Our first question comes from Matt Swanson at RBC.

Yes, congratulations on the quarter. This might be a little bit of an SPO question, but I kind of want to phrase it differently and go back to an idea we used to always talk about, which is omni-channel. So as new formats like commerce media and CTV continue to gain scale. Could you just talk a little bit about customers focus on being able to get these things back to a single pane of glass, right, as they get bigger and more part of their ad buying process? And then I guess the importance of the work that you're doing at PubMatic to kind of redefine yourself for this expanded definition of omnichannel.

I can take that. Absolutely, the complexity for ad buyers is increasing. This includes both advertisers and agencies facing challenges with privacy regulations, new media types, and data sources like CTV and commerce media. Buyers are seeking more control over their purchasing processes, including which inventory to buy, the signals they use, and the performance or brand KPIs for their campaigns. Managing this across multiple platforms presents significant challenges for brands, leading to operational complexities. Their teams must navigate various user interfaces, making it difficult to enforce practices like frequency caps within siloed systems. Workflow issues, data aggregation, and performance measurement become significantly harder. We see substantial benefits, reflected in the 50% SPO metric, in helping buyers consolidate their efforts, work with fewer partners, and manage workflow, data, and targeting. We anticipate further consolidation in the ecosystem toward fewer, larger platforms that offer control, data, and workflow capabilities. Notably, we're observing a shift in the ability to meet buyer needs to the sell-side of the ecosystem. Privacy regulations contribute to this change, as data is increasingly contained within the sell-side. As an SSP, we are deepening our engagement with buyers through SPO and Activate, allowing us to connect buyers more effectively to the sell-side of the ecosystem.

Maybe picking up right on SPO, obviously, impressive to get to 50% this quickly, but also thinking about that long-term view of 75%. Could you just kind of talk about; one, is that expansion going to imply moving, I mean, not down market but to smaller enterprises, or is it just even more spend from the largest enterprises? And then I guess, how does that kind of dictate how you're thinking about maybe R&D and where your costs are going, if it is more of an emphasis on those largest customers?

Sure. Yes. So there's, I think, two key ingredients. One is, further share of ad budgets within buyers that were already penetrated into, and then the second is of course going after entirely new buyers. And so on the first, obviously, we've been doing SPO now for, I think maybe about six years. We've grown, as you said, that metric quite a bit. We were in, I think the high 30 percentage a year ago, up to 50% now. But there's still plenty of runway inside of the large agencies and advertisers that were already penetrated into. And so when we look at share by ad format, by geo, by type of publisher, there's still plenty of runway inside of those existing customers. And then the second piece, which is a key area of investment for us, is expanding our sales team that is covering SPO opportunities is to go after independent agencies and a bigger roster of brands. And the bigger roster of brands is still very much large brands. I think where our sales team was historically, we didn't have enough bandwidth to cover as many brands as we wanted to. One of the key things that the industry report I think was the ANA, Association of National Advertisers report last fall highlighted is that only about 30% of large brands have engaged in Supply Path Optimization. So that speaks to the opportunity that for us is under penetrated, that remains in net new brand acquisition for us.

Our next question comes from Ian Peterson at Evercore.

Two quick questions. First one, I know the Q2 guide implies a material deceleration to 12% year-over-year growth at the high end and softer than historical seasonality despite the continued into comps. Can you help us unpack this? Steve, I know you called out the potential impact from the DSP changes. Have you sized this potential impact? And is there any other puts and takes embedded in your Q2 guide that we should be aware of? And secondly, for the raised full year guide, can you help us unpack your confidence in the back half of the year? Besides the timeline for cookie deprecation getting pushed out, are there other factors that give you more confidence, maybe from emerging products?

So when we put together our Q2 guide, as we typically do, we focus on providing an objective viewpoint and we took a look at the balanced view of opportunities and challenges. And as you point out, I called out a headwind that we anticipate emerging latter part of the second quarter related to a single DSP making bidding methodology change. And so that obviously does factor into our adjusted guide. And I'd say the way to think about it is our underlying growth has been very strong, very strong Q1, continued into April and we've tried to balance it out for the remainder of the year. And so the Q2 reflects a partial quarter impact from that DSP bidding methodology change and then a full quarter effect in the third quarter and fourth quarter. But what I call out is that in the background, you have strong growth across every format and channel. And so we anticipate, being able to offset that over the balance of the year. And so some of the things that we're very confident about in the second half is the SPL momentum. Of course, that's been a long-term growth driver for us. We are expanding our team as Rajeev just called out to go after incremental opportunities both within agencies and large brands, but also new SPO buyers. We’re seeing really positive progress in our emerging revenue opportunities. We commented on the prepared comments, OpenWrap, Connect in the quarter that added a couple percentage points of growth. We anticipate that continue to develop in the second half. You’ve seen some of the very important deals that we’ve signed recently, Instacart, Klarna, GroupM. We anticipate those deals will add to the top line later in the year. And then, of course, as the Presidential election comes into focus, six months away, we’re starting to see political spend starting to firm up. So when we put together our full-year outlook, we saw strong underlying growth, an offset related to this headwind. But overall, on balance, we’re raising our full year guide to 12% at the midpoint.

Our next question comes from Justin Patterson, KeyBanc. Moving on, we'll take next question from James Heaney at Jefferies.

Can you just walk through just what this DSP bidding change really is? I just don't fully understand at a granular level, how it impacts the business. So if there's any more detail you could provide on that would be super helpful.

So the DSP in question, they're converting all of their auctions to first price auctions. And historically they've used a combination of first price and second price auctions. And these changes will make their methodology consistent with what the rest of the industry does. And the rest of the industry has made this transition really over the last several years. So after this change from this DSP, nearly 100% of auctions on our platform will be first price auctions using a consistent methodology. Now, as Steve called out, we operate a real-time auction. And so based on our experience in managing this kind of a transition with other DSPs in the past, we anticipate that the bid prices from this particular DSP will be lower given their changes. But those lower bid prices will be partially offset by other DSPs who should see an increase in impression wins because they already had already moved to this methodology. And then further, we anticipate that given the strong underlying growth across ad formats, channels and regions, as well as the growth of our emerging revenue streams, that we will offset this headwind throughout the course of the year.

Just one more on Activate. Would love to hear just the momentum you're seeing on that business. And I'm also curious like where you feel we are in that transition from direct insertion order into biddable. Curious kind of where you see that journey.

I'll just briefly comment on that second part and then get more broadly into Activate. I think we're still quite early, so that journey is definitely underway, but I think still a lot of runway ahead of us. So in general, with Activate, we're really excited about the progress that we're making. And so there's a clear progression of steps. When you roll out a new product like Activate, we've trained our sales team to talk about it at scale. So that's in every region, across multiple customer types, agencies, and advertisers. We've gotten very strong and positive feedback in terms of our vision and the initial capabilities. Our vision is definitely resonating with the problems or challenges that buyers have, that prospects have, and they do trust us to solve these challenges for them given our track record of success with supply path optimization. I think the commercial and contractual process is also resonating. And as a result, we're signing up advertisers and agencies at a pretty good pace and we've completed deals in every region around the world. Now what we're also learning is that inside of large agencies and large advertisers, this is very much an enterprise initiative. And so who we are pitching the value prop of the product into can be different from who are the hands-on people on the keyboards that are setting up deals and managing the actual campaign spend. And so it takes time to get all of the teams on board fully up to speed, fully educated on how to use the product. And so there are things that we are looking into to try to accelerate that which we are in the process of working through. But at the same time, what I would also add is just that we see business acceleration around SPO even if Activate isn't in place. And that's because customers know that they can do more with us over time, right? And so as a result, they tend to pull Supply Path Optimization levers to move more business to us and grow the mutual relationship, even if they're not using Activate today and they plan to in the future, or if they don't have any current plans to use Activate, but it's something that creates optionality down the road.

Our next question comes from Mauricio Munoz at Raymond James.

Yes, I just want to go back to the SPO results and objectives. Rajeev, you spoke about these on your prepared remarks, but maybe if you could please expand on the drivers of the 1Q upside. I'm particularly interested in contributions and traction from Activate this quarter. And then maybe while we are at it, you could speak about the competitive dynamics. We're seeing some DSPs commenting on some traction, trying to cross these SSP, DSP demarcation line. So if you could provide some color on that, that would be helpful? And then I have a follow up.

Let me address your questions. If I miss any part, please feel free to remind me. First, it's important to understand that our interactions with publishers and buyers indicate that the significance of advanced technology on the sell-side is increasing significantly. One of the main reasons for this is the impact of privacy regulations and the timeline for cookie deprecation, particularly with Chrome, which is the latest example, though we’ve seen similar actions from other browsers and operating systems. This has resulted in a more restricted ability to share data from the sell-side to the buy-side. Additionally, we are witnessing a surge in new high-value media, particularly in CTV and commerce media, where buyers seek more efficient transaction methods given the CPMs that can range from $10 to $50, compared to the traditional $1 to $2 display ad impressions. Furthermore, buyers are taking more control over how their ad budgets are spent, seeking differentiation and performance, and wanting to avoid a monopoly that dominates both sell-side and buy-side operations. These factors contribute to an increased emphasis on technology in the sell-side, which is a key area of opportunity for us with our initiatives like supply path optimization and Activate. Regarding Activate, we observe that both buyers and sellers desire a more efficient transaction method. While the traditional DSP and SSP model has its advantages, it also comes with significant operational challenges, particularly in data transfer between the sell-side and buy-side. With Activate, we are implementing a streamlined technology layer that connects sellers and buyers, focusing on fixed-price deals in insertion orders for CTV and online video. This approach is proving appealing to buyers as they recognize the potential efficiency improvements and trust in our solutions, leading to a reduction in operational overhead and simplifying the technology stack. However, the sales process for Activate entails considerable onboarding and training for media buying teams, meaning hands-on efforts are necessary. This process has its own pace, and we are learning how to expedite it and applying more resources to enhance our efforts. Finally, regarding your third question about DSP competitive dynamics, did I capture that correctly?

Yes, yes. We've seen some DSP also talking about gaining some traction on crossing over to...

Yes, yes, absolutely. So I absolutely understand that. And I think the significant advantage that we have is that we've been building publisher relationships now for 17 years. So if we get one buyer to leverage our platform, they can access all of the media, all of the inventory, all of the audiences that we've been building over 17 years. I think when you approach this problem from the buy-side of the ecosystem, you have many buyers maybe using a particular buy-side platform, but the breadth of publisher inventory is quite limited, right. And so that DSP or buyer interface, they have maybe been working on plugging in inventory for the last six months, 12 months, 18 months. And so the scope of inventory, the scope of audiences, particularly when you think about a variety of ad formats, a variety of geographies that can be very limited. And so what we're seeing that resonates very strongly with buyers is we can go in and say, hey, all of the types of media that you might want to buy all over the world, we have that available inside of PubMatic and inside of Activate, and that's available today. And so I think that's a very compelling value proposition.

And if I can squeeze in one more, it looks like you're on full steam to expand from your historical focus on the top 5, 6 agency holdcos. And this is related to SPO as well, perhaps into other smaller independent agencies as well as directly with brands. I think you articulated the sort of investment required to do that, mainly in the form of headcount additions. But how should we think about the margin profile from revenue contributions from those somewhat smaller agencies and brands as you bring that cohort into the SPO fold?

Yes. Steve, do you want to take that?

Yes. Happy to. So from our perspective, we already get a significant amount of leverage just given sort of the centralized nature of our GTM organization. We have a few people covering relatively large swaths of customers. And so we're going to apply the same model. We're not going after every SPO opportunity. We have our ideal client profile and we're focused on that. So, we're feeling pretty confident in terms of getting the leverage and the appropriate economics from the go to market side. Now, from an overall cost of serving and dropping it to the bottom line, all of these opportunities ultimately help us fill more of the impressions that we process. And because we've already incurred the cost to process, last count, 650 billion impressions on a daily basis, the upside is fairly significant if we can increase that fill rate. And so we see this as a very positive direction for us because ultimately they were not having to incur incremental processing costs. We're just monetizing more of what we already process, and we're doing that in every major region. So we're feeling very good about the strategy. We're early days in the execution. And as Rajeev has commented on previously, we anticipate upside to about 75% of activity through SPO relationships. And you can see, coming through the financials, how that does benefit us not just from a profitability perspective, but also from a stickiness perspective. I shared this data about 125% net spend retention. That's incredibly powerful just in terms of revenue visibility and stickiness and scale over time.

We have time for one more question from Justin Patterson at KeyBanc.

I just wanted to go back to the land and expand strategy. With now 77% of revenue coming from high value formats and channels, that seems like it provides a nice margin tailwind of the business. So curious how you're thinking about just taking some of that margin and driving more growth, with new customers, existing customers, versus having that margin drop through play out?

And it's something that we think about every day given sort of our strong profitability, but also strong goal imperative to keep driving the top line. And you can see the results from the last quarter. From our perspective, it's a balance. But absolutely, going into the year, we said that we're going to incrementally invest in a couple of key areas. The areas that we envision to be the fastest growing around video, mobile, Supply Path Optimization in the commerce media space. So, we feel that now is the time to make those investments and we're appropriately managing those in terms of timing and the magnitude. You can see from our guidance that we still have a very robust expectation forecast for the year at 31% at the midpoint. And I would say that for us, it's really about taking advantage of the opportunities that we have and we see them emerging and we've proven an ability to innovate and then capture that opportunity. And so we're going to keep doing that and still deliver very robust margins and free cash flow.

Great. Thank you all. We're just about, or we're actually over the top of the hour, so I'm going to go ahead and turn the call back over to Rajeev for closing remarks.

Thank you, Stacie, and thank you all for joining us today. We had a strong start to the year with continued momentum into April. This, along with the planned investments this year in high return areas, gives us confidence to raise our full-year guidance. Content creators, ad buyers, data partners, commerce media networks, they're all choosing to build their ad tech stacks on PubMatic. Our platform offers efficiency and control across the digital advertising ecosystem, resulting in higher CPMs and increased advertiser ROI. And our logo list continues to grow, fueling greater access to ad dollars, data and high-value inventory. We'll be out on the road over the next month and we look forward to seeing many of you then. Thanks and have a great afternoon, everyone.