Earnings Call
PubMatic, Inc. (PUBM)
Earnings Call Transcript - PUBM Q1 2021
Operator, Operator
Hello everyone and welcome to PubMatic's First Quarter 2021 Earnings Call. My name is Kara and I will be your operator today. Before I hand the call over to the PubMatic team, I'd like to go over a few housekeeping notes. As a reminder, this webinar is being recorded. Thank you for your attendance today. And I will now turn the call over to Stacy Cummins with Blueshirt Group.
Stacey Cummins, Moderator
Thank you, operator and good afternoon, everyone. Thank you for joining us on PubMatic's earnings call for the first quarter ended March 31, 2021. Joining me on the call today 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. Before we start, I would like to remind participants that during this call management will make forward-looking statements including, without limitation, statements regarding our future performance, growth strategy, and financial outlook. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and other future conditions. These forward-looking statements are subject to inherent risks, uncertainties, and changes in circumstances that are difficult to predict. You can find more information about these risks, uncertainties, and other factors in our annual report on form 10-K for the year ended December 31, 2020. 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 13, 2021 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. These non-GAAP measures are presented for supplemental informational purposes only and should be considered a substitute for financial information presented in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our press release. And with that, I will now turn the call over to Rajeev.
Rajeev Goel, CEO
Thank you and welcome everyone. We delivered another quarter of strong results, with performance on both the top and bottom lines above guidance driven by multiple growth drivers, continued rapid innovation on our platform, and a distinct business model that addresses the large and rapidly growing digital advertising market. We had a great quarter as we continue to increase our market share. Revenue in the quarter grew 54% year-over-year, totaling $43.6 million. Net income in the quarter was $4.9 million or 11% profit margin, and adjusted EBITDA was $14.5 million or 33% EBITDA margin. Looking ahead, we believe we are well poised to continue gaining market share as a result of two primary factors: the multiple organic growth drivers we have in place across our business, as well as the economic reopening in the U.S. and in other markets around the world. Consequently, we are raising our guidance for the full year. We now expect revenue growth of approximately 33% year-over-year and an adjusted EBITDA margin of approximately 28%. Underpinning our outstanding results is our owned and operated cloud infrastructure built specifically for digital advertising. This infrastructure-driven approach serves as a flywheel that allows us to grow top-line revenue, leverage our largely fixed cost structure to drive profitability, and reinvest in innovation for our customers to again drive top-line revenue. Let me further explain. Digital advertising is unique in its real-time and data-intensive nature. This has never been more true with the rapid increase in impressions caused by header bidding and the rapid growth in media consumption driven by the pandemic, particularly in mobile, video, and CTV. We believe that an infrastructure-driven approach to digital advertising creates outsized value. Being the best at efficiently collecting and analyzing data requires controlling all layers of the infrastructure stack—network, hardware, and software. Our approach provides us with several key benefits and a significant competitive moat compared to our peers. First, we're able to generate superior outcomes for our customers, specifically increased revenue for our publishers and higher advertising ROI for media buyers. Alternatively, operating in public cloud infrastructure only allows for control of the software layer, which would limit our ability to generate superior customer outcomes. Second, controlling all layers of the tech stack allows us to rapidly innovate, which benefits our customers who rely on us for best-in-class technology. We deploy new capabilities, features, and algorithm updates on a daily basis across our global infrastructure. In an evolving landscape, we believe our platform enables continuous innovation and future-proofs our business and that of our customers. And third, by owning all layers of the infrastructure stack, we are well-positioned to continuously drive down costs by becoming more efficient, a benefit to our customers and to us. We have a demonstrated track record of continuous reductions in our unit infrastructure costs, which enables us to deliver a healthy profit while also investing for long-term success. Taken together we believe our infrastructure-driven approach creates a significant competitive moat around our business. Our efficiency advantage allows us to be transparent with buyers, which in turn causes them to spend more on our platform. And as they spend more on our platform, our publishers benefit with increased revenue. Even as our addressable market opportunity continues to grow, PubMatic is delivering outsized revenue growth. In 2020, PubMatic revenue grew 31% over 2019, well above the digital advertising market's growth of 12%. We expect to deliver outsized revenue growth in 2021 as well, driven by the convergence of three key trends: the economic reopening driving omni-channel growth in digital ad spend, continued growth and evolution of the connected TV and over-the-top streaming ad markets, and continued ad spend consolidation by agencies and advertisers. Let me dig into each of these trends in more detail. Significant portions of the global economy, including the U.S., are set for rapid reopening following the anticipated lifting of COVID-19 related lockdowns as people start to travel, seek entertainment, and dine out. With GDP on the rise, eMarketer is projecting growth in global advertising spend to accelerate from 13% in 2020 to 20% in 2021. Mobile advertising, in particular, is expected to grow 23% worldwide this year, and more than half of our business is mobile. Several verticals tied to the reopening, such as food and drink, as well as style and fashion, are rapidly growing ad spend on our platform. We expect several other verticals that have not yet accelerated to do so in the coming months. We expect these trends to create significant tailwinds for us in 2021. Our omni-channel platform is particularly well-suited for the current environment as advertisers can reach consumers wherever they may be consuming media—at home, at the office, or out and about—as each geographic market we participate in evolves on its own reopening path. Furthermore, we maintain the belief that COVID-19 has pulled forward multiple years of consumer behavioral change as people around the world are transitioning more offline activities to online. We anticipate that many of these consumer behavioral changes will stick, driving further long-term acceleration in digital advertising spend. As a leading provider of omni-channel advertising solutions, we are present where consumers are spending time—at home, on a laptop or connected TV, outside of the home on mobile devices, or at the office while working—making us more durable endpoint solutions. Programmatic OTT and connected TV is another area of rapid growth and innovation that positions PubMatic for continued market share gains. This global market was estimated by eMarketer to be $20 billion in 2020, growing at an 11% CAGR over the medium term. The faster-growing portion of this market is programmatic CTV, estimated to be almost $7 billion in the U.S. in 2021, which equates to year-over-year growth of more than 50%. This impressive growth rate suggests that the industry is early in the transition from linear TV to over-the-top streaming connected TV devices. As a pioneer in programmatic CTV, we are one of the first to introduce a CTV header bidding product, enabling ad buyers to benefit from the same efficiencies they enjoy in other formats using unified auctions. More recently, we have built particular strength in biddable and fixed-price private marketplace deals, as well as open market transactions. There are many public examples of major content owners like Disney or NBC and agencies like Omnicom and GroupM speaking to the power and growth of biddable CTV. After almost a year in market, our open wrap OTT header bidding wrapper continues to gain momentum, and ad buyers are seeing results. For example, a large advertiser ran a head-to-head test using our solution and another SSP's tag-based integration. Our solution outperformed across all relevant metrics, demonstrating significant advantages to CTV header bidding. We produce 40% more bid opportunities and 14 times higher total win rates than the tag integration. They also benefited from more efficient CPMs due to transparent and dynamic bid opportunities as compared to fixed-fee deals. These are the same types of benefits we have seen from header bidding in all other major ad formats. We also recognize the importance of brand safety and control across all digital formats. We recently announced our fraud-free CTV program for ad buyers, which extends our existing rigorous inventory review process to in-demand CTV inventory. We believe this will enable buyers to embrace the full potential of programmatic bidding and allow us to further accelerate our growth. In the first quarter, we experienced strong sequential growth in our OTT/CTV business, growing 55% over Q4 2020, and we monetize CTV inventory from over 80 publishers, including new publisher additions like Meredith local group and Local Now. These results provide us with further tailwind for growth as ad buyers continue to shift toward automated biddable buying of this high-value inventory. As buyers make the shift, publishers are meeting their programmatic buying demands while generating increased revenue and delivering increased ROI to advertisers on our platform. The third growth driver fueling our market share gains is the consolidation of ad budgets onto fewer sell-side platforms for greater efficiency, innovation, and transparency. This has been and continues to be a growth driver for our business. Under arrangements known broadly as supply path optimization (SPO) agreements, we are able to capture a higher share of agency and advertiser ad spend while better servicing our publisher customers and delivering increased ROI and innovative solutions to ad buyers. A growing portion of our business comes from SPO deals. In the first quarter of 2021, we nearly doubled the share of ad spend on our platform that is via SPO agreements, as compared to the first quarter of 2020. We are collaborating with major agencies such as Havas and Publicis Media Asia Pacific to provide a combination of custom data and workflow integrations, new product features, and volume-based business benefits to their advertisers. In March, we announced that GroupM selected PubMatic to be a global preferred SSP partner with our publisher partners gaining access to unique, quality ad spend at scale from their broad portfolio of global advertisers. GroupM will gain programmatic advantages given more efficient access to globally scaled brand-safe inventory across OTT/CTV, mobile app, mobile, web, and desktop for video and display advertising. As consolidation continues across the industry, this partnership and others like it will help to ensure that we provide our publisher customers access to a growing share of ad spend from leading global brands. I'd like to turn now to a potential future growth driver that we are investing heavily behind. As the industry continues to evolve, we believe the disruption caused by rapid changes to audience addressability and the impending deprecation of the cookie and other anonymous identifiers will benefit PubMatic as a value proposition for the open Internet grows relative to the walled gardens in the eyes of advertisers. We have invested heavily in this opportunity for several years and continue to do so. I'm pleased to share that today, the majority of revenue on our platform now has alternative identifiers to the third-party cookie and Apple IDFA, which underscores the leadership position we have taken in the addressability transition. Having alternative identifiers available at scale—in many cases, identifiers that provide greater addressability than anonymous identifiers like the third-party cookie—provides an environment to drive even greater utilization of our infrastructure. We expect these identifiers to grow the share of spend in the open Internet and on our platform in particular. We've achieved this milestone through long-term investment in a portfolio of solutions that together meet the growing and evolving needs for audience addressability. Our identity hub solution scaled to well over 175 publishers, including Cox Automotive in the U.S. and Timeout in the UK, allows them to seamlessly integrate, optimize, and manage multiple leading identity providers globally, such as LiveRamp authenticated traffic solution and The Trade Desk's unified ID 2.0 along with a dozen others. Identity hub is also now pre-integrated with our open wrap solution, one of the more widely used pre-bid based header bidding wrappers which has been deployed in 34 countries around the world. This solution creates more value for publishers with registered or subscribed users. Our audience encore solution allows buyers to access high-quality publisher first-party data to execute effective and privacy-safe advertising campaigns at scale. We have a variety of data partners in the retail, CPG, healthcare, automotive, and other industries. For example, we recently announced a partnership with Samba TV to integrate their extensive first-party connected TV data to deliver TV audience targeting to omni-channel programmatic advertising buyers. This partnership allows European advertisers to reach audiences based on TV viewing behaviors and drive incremental reach by targeting audiences that are not exposed to linear TV advertising. We're also investing in contextual solutions to improve advertising efficacy and fourth, we are working with Google and the World Wide Web Consortium on Google's privacy Sandbox proposals, including FloC. Audience addressability is something that publishers need to solve for, and we understand that it will not be a one-size-fits-all approach. With our long-term investment in this area and our portfolio of solutions, we think we are well positioned to help our publisher and buyer customers find highly relevant audiences at scale and improve the efficacy of the open Internet as compared to today. Together, these trends are fueling growth across all segments of our customer base in all formats we serve. As a result of corresponding increases in utilization of our infrastructure, we drive our profit growth and cash generation. As we look forward to the rest of the year, we are confident in our strategic growth drivers and our ability to continue to gain market share. We outperformed in the first quarter. This coupled with advertising dollars beginning to flow back into the ecosystem as global economies recover gives us the confidence to raise our full year outlook. We are successfully executing against multiple organic growth drivers, leading to strong growth and market share gains, and we expect that to strengthen as the economic reopening in the U.S. and elsewhere accelerates. Our continued success fuels our ambition for significant market share gains in the years ahead. We have a differentiated cloud infrastructure platform that allows us to drive strong customer retention while rapidly innovating to grow our addressable market of ad formats and devices. We have a proven ability to consistently drive profitable growth with strong cash flow, which we believe positions us well to keep innovating and delivering for our customers and our shareholders. And I see a lot of growth opportunities ahead of us which I am excited about. I'll now turn the call over to Steve Pantelick to walk through the detailed financials.
Steve Pantelick, CFO
Thank you Rajeev, and welcome everyone. As you see from our reported numbers, PubMatic achieved outstanding financial results with first quarter revenue and adjusted EBITDA above guidance, growing significantly compared to the prior year and importantly, growing organically faster than the market. At the same time, we continue to invest for future growth. We are expanding our solutions across platforms and formats, adding new customers, increasing the capacity of our infrastructure, and expanding our engineering and go-to-market teams. We believe these investments give us a powerful network effect with more visibility and scale, driving increased revenues from existing customers and operating a highly profitable platform that benefits our customers and us. Revenue in the first quarter was $43.6 million, an increase of 54% over Q1 last year. Net income was $4.9 million, an increase of 444% over the prior year, and adjusted EBITDA was $14.5 million, 183% higher than Q1, 2020. These top and bottom line results reflect the strength of our platform and high profit flow-through embedded in our business model. Before we jump into the quarterly financials, I'll recap the five key financial drivers that we believe will drive the long-term success of our business. First, we have one of the few scale global businesses in our highly fragmented industry that offers an omni-channel solution for publishers and buyers. Our specialized cloud infrastructure and local market presence is geographically distributed in all major ad markets apart from China. This framework allows us to continue expanding across the world with existing and new customers both effectively and efficiently. Second, the combination of our usage-based model and our ability to retain or grow revenues from existing customers provides a high degree of revenue stickiness and corresponding visibility. Third, we have built a business that consistently delivers high gross margins. Fourth, our business model is embedded with durable structural advantages emanating from our owned and operated infrastructure and offshore R&D that enables us to cost-effectively invest in technological innovation. Lastly, we generate consistent cash flow through rigorous working capital management and efficient capital expenditures. Now, turning to the highlights for Q1. Our revenue growth was driven by broad strength across advertising verticals, demonstrating our ability to participate in the economic reopening occurring in the U.S. and other markets we participated. Apart from the political and travel ad verticals, spending in nearly every vertical was up 50% or higher versus Q1, 2020. Notably, through the first quarter, we saw significant sequential improvements in such ad verticals as automotive, food and drink, and style of fashion as reopening trends emerged. Ad spending was particularly strong for our mobile and omni-channel video businesses with combined revenues growing at 63% year-over-year. As a reminder, omni-channel video is the sum of online digital video plus OTT/CTV. In aggregate, our mobile plus omni-channel video revenues represented approximately 63% of our total revenues in the first quarter. Looking at just the OTT/CTV format, we delivered 55% growth sequentially versus Q4 2020 with the number of publishers monetizing inventory by OTT/CTV formats growing to over 80 in the first quarter. Since we first launched our header bidding solution for OTT/CTV in mid-2020, we have seen rapid growth in revenues. In Q1, we also saw a continued recovery in our desktop business, with revenue growth of 26% over Q1 of last year. Our Verizon Media Group revenues grew over 20% year-over-year and represented approximately 20% of total revenues in the first quarter. As a reminder, this concentration level is down from 2019 when VMG represented 28% of revenue. We continue to benefit in the quarter from strong existing customer revenues. For the 12 months ending Q1 2021, net dollar base retention was 130%, significantly up from the comparable period a year ago. Another long-term growth driver continues to be our supply path optimization deals with advertisers and agencies. We have seen these relationships serve as a catalyst for buyers to consolidate ad dollars onto our platform with spending coming from SPO deals nearly doubling since Q1 2020. To rapidly scale and take advantage of these growth opportunities, we continue to invest in increased platform capacity. As a result, we've processed over 18 trillion impressions in the first quarter, double what we processed for the same period last year. Turning to our Q1 gross margins. We delivered a 72% margin compared to 65% in the prior year. Our long-term strategy of owning and optimizing our purpose-built infrastructure enables us to reduce our unit costs. Illustrating this point, we successfully reduced our cost of revenue per million impressions processed by approximately 40% year-over-year. Once we have implemented our targeted capacity expansion at a point in time, we achieve leverage because our platform costs are largely fixed in the near term, typically a quarter out. When we exceed our revenue targets, as we did in Q1 2021, we benefit from high flow-through profit. With respect to our Q1 operating expenses, the combination of increased headcount for growth, incremental public company costs, and stock-based compensation resulted in operating expenses of $24.7 million, up 43% year-over-year. Net income in the first quarter was $4.9 million, up 444% year-over-year. It was 11% of revenue, substantially higher than the prior year net margin of 3%. Q1 diluted EPS was $0.09. Adjusted EBITDA in Q1 was $14.5 million or 33% of revenue, compared to 80% of revenue in the prior year primarily due to the high flow-through from strong revenue ahead of plan and the cost leverage we achieved on our platform. To summarize, our strong quarterly performance reflects several key drivers: acceleration of mobile and omni-channel video driven by an increase in open Internet activity globally, strong spending across nearly all ad verticals, increased revenues from existing customers supported by supply path optimization agreements signed in 2019 and 2020, and our targeted investments in people and platform capacity. Turning to our cash flow. We generated net cash from operating activities of $12.7 million for Q1 2021. We ended Q1 2021 with cash, cash equivalents, and marketable securities of $110 million. Now on to our Q2 and full year 2021 guidance. Overall, given our strong Q1 performance, latest trends in Q2, and increased visibility for the balance in year, we are increasing our full-year guidance for revenue and adjusted EBITDA. To set the context, we are experiencing favorable macroeconomic conditions. At a fundamental level, we believe that the total amount of time people spent online has accelerated faster than expected. Of course, it remains to be seen to what degree this current acceleration in online behaviors will continue and when the pandemic will end. Nevertheless, we are seeing the preliminary stages of a robust reopening in the U.S. and select major ad markets around the world, and we believe this trend will benefit PubMatic and its customers. Currently in Q2, we are seeing sequential progress compared to Q1. We anticipate an above-average favorable year-over-year comparison as we will be lapping the early stages of the pandemic when advertising was significantly impacted last year. As referenced earlier, we see encouraging signs with respect to reopening tailwinds helping our revenues. Partially offsetting these positive trends is the impact from Apple's elimination of IDFA, which did not occur in Q1 as originally anticipated and is now rolling through the ecosystem. We factored the IDFA impact into our guidance. Because we are an omni-channel platform, we are well positioned to partially offset this impact as advertisers shift to alternative high ROI formats and channels that we serve. Looking at the full year, we are raising our prior guidance because of the solid momentum we're currently seeing. It is important to note should inflation occur and CPMs increase for advertisers, our usage-based model allows us to participate in that revenue upside. That said, we remain prudent and keep a slightly conservative stance due to the combination of uncertainty around macroeconomic conditions and the reality that some parts of the world are still suffering from the worst effects of the pandemic. Also, keep in mind that year-over-year percentage comparisons in the second half of the year may appear less robust as we lap very strong growth that includes one-time effects such as carryover spending from the first half of 2020 and Q4 political ad spend. On a two-year stack basis, if we add our 2020 second half growth plus our guidance for the second half of 2021, the total cumulative revenue growth is anticipated to be 67%. On the investment side, for the remainder of the year, we plan to add more capacity and people than originally anticipated as we see new opportunities to drive our profitable growth. We also expect incremental costs will lead to the return to our offices around the globe and higher travel and entertainment as our team re-engages in person with customers around the globe. Overall, we expect our operating expenses on an absolute dollar basis to increase over the course of 2021. Now, in terms of specifics. For Q2 2021, we expect revenue between $45 million and $46 million, a range of 70% to 75% year-over-year growth. We expect adjusted EBITDA between $14 million and $15 million or above the 30% margin. For the full year 2021, we are raising our revenue target by $15 million and now expect revenue between $195 million and $200 million or 31% to 34% year-over-year growth. We are also raising our adjusted EBITDA target by $9 million and expect adjusted EBITDA between $54 million and $58 million or 27% to 29% margin. For the remaining three quarters of 2021, we are incurring a new public company cost of approximately $6 million. We are increasing our full-year capital expenditures to capture the increased growth opportunities and make advanced purchases to mitigate risk over the coming nine months. As a result, we expect to have CapEx between $23 million and $27 million for the full year. It should be noted we expect a significant amount of this accelerated capacity to largely come online in Q3, and consequently, there will be short-term below trend Q3 gross margin due to higher depreciation costs, but which will normalize over the succeeding several quarters. We don't see this affecting our calendar year gross margin rate target. Overall, we expect to increase the total number of impressions processed in 2021 by over 60% compared to 2020. In closing, we are pleased with our progress in the first quarter of ‘21, but we are even more excited about the opportunities ahead of us for the remainder of this year. We are proactively taking advantage of the shift to identity in the open Internet. We are growing our mobile and omni-channel video businesses, expanding our SPO relationships, increasing revenues with existing publishers, and adding publishers in existing and new geographic markets. Our track record of driving profitable revenue growth and cash flows allows us to continue innovating and delivering for our customers and shareholders. We believe we have the right platform and the right approach to be at the forefront of our industry.
Operator, Operator
Thank you, Steve. Your first question comes from Brent Thill at Jefferies. You're on the line.
Brent Thill, Analyst
Good afternoon, guys. Thanks so much. Maybe one for Rajeev, and then follow up for Steve. Rajeev just on the overall demand environment is obviously really robust, and I think many are asking the durability and the sustainability, what we're seeing and what you're seeing and signs that that you think this is more durable than just a quick flashback?
Rajeev Goel, CEO
Sure, yes. Absolutely. I think we see multiple signs in terms of the durability of our model as well as the durability of spend growth and therefore our revenue. So we called out a number of reopening verticals that are growing on our platform like food and drink, style and fashion, automotive. There are other verticals that have not yet accelerated that are tied to the reopening. We expect those to start to accelerate. And then at the same time, all of the verticals that grew very rapidly last year during the pandemic continue to be strong. And I think that really signifies that consumer behavior has shifted quite a bit from offline activities to online activities. We do think there's been a significant pull forward or shift in that consumer behavior that will stick. And so that's what we're seeing in the macro environment. And then I think where we have positioned our business is really to benefit from all of these trends. So I think what we've shown is that we have a very diversified omni-channel business. And so whether the consumer is at home watching a connected TV device or on a laptop, or they're out and about on a mobile device, or now maybe going back to the office, we're able to be in front of that consumer on the websites and media that they're consuming as reopening happens as guidance shifts.
Brent Thill, Analyst
Great. Real quick for Steve. Just good first half expense control and EBITDA growth, but I think we all completely understand behavior, more expense coming back into the model, given the return. Is there anything else in terms of big investments we should consider on that, that will come back that will impact EBITDA in the second half of the year?
Steve Pantelick, CFO
The investments that we do anticipate are already factored into the guidance that I've given. But to reinforce the points, we see tremendous growth opportunities. So we continue to invest in people, particularly in technology and go-to-market folks around the world in specialized areas like CTV. So we are absolutely focused on investing in growth.
Brent Thill, Analyst
Thank you.
Rajeev Goel, CEO
Thanks, Brent.
Operator, Operator
Your next question comes from Justin Patterson at KeyBanc. Justin, you're on the line.
Justin Patterson, Analyst
Thank you very much. I hope you're all healthy and well. Rajeev, could you talk about discussions you've had with advertisers and publishers? And just how those have crawled around both the iOS changes and the privacy sandbox proposals? Is this something that's influencing the pace of change in the industry and helping with both adoption of identity hub and audience encore? And then for Steve, how should we think about the returns around the CapEx investments and the opportunities to grow impressions ahead? Thanks so much.
Rajeev Goel, CEO
Yes. Absolutely. Hey, Justin, thanks for the question. So I would say there is a, broadly speaking, there is a degree of iteration and experimentation across the ecosystem as the whole industry transitions from anonymous tracking, whether it was the third-party cookie, or the Apple IDFA towards a different set of solutions. What's clear is that there will not be a one-size-fits-all kind of single solution. We are positioning ourselves to be at the forefront of innovation and be leading the conversation in the industry, and innovating with our customers and with our partners. The way that we have approached that and we've been investing here for two or three years now is to build out a portfolio of solutions, and I think you see the strength of that in the metric that we shared that the majority of revenue on our platform now has alternative identifiers. What's particularly exciting about that is these alternative identifiers are in many cases better or more granular than the past identifiers, the anonymous identifiers, and they also include consumer consent. So the consumer is aware of what's happening, and they have a choice to make in that process. We are going to find that the open Internet will take share as we come through this transition, and our goal is to ensure that PubMatic continues to grow its market share.
Steve Pantelick, CFO
With respect to your question around return on investment on our capacity expansion, we have been managing our own and operating infrastructure for close to a decade. As a reminder, our gross margin has averaged over a nine-year period 70% or higher. It's a function of focus. Ensuring that we're always taking a very close look at the demand side and the supply side, ensuring that we have the capacity in place. Historically, we typically see return on our investment over the course of the succeeding three to four quarters, and I don't see that really changing. We are doing some advanced purchasing to counteract any potential effect from chip shortages so our growth is not constrained. That will have a short-term impact on gross margin, but I expect that to normalize relatively quickly as our top line grows.
Justin Patterson, Analyst
Thank you very much.
Operator, Operator
Your next question comes from Andrew Boone at JMP. Andrew, you're online.
Andrew Boone, Analyst
Thanks for taking the question, guys. Two please. I think you said SPO deals doubled from a year ago, can you just dive into what you attribute that increase of SPO to? And I guess, kind of looking forward, what inning are we in as we think about SPO?
Rajeev Goel, CEO
Sure. Just to repeat the metric, we nearly doubled to almost doubled the share of spend on our platform coming from supply path optimization deals in Q1 of ‘21, compared to Q1 of ‘20. The drivers are really across the ecosystem. There's a desire for the ecosystem to be more efficient and more transparent. We have focused on positioning PubMatic as the SSP of choice for the buy side of the ecosystem because if we can do that we can generate more revenue for our publisher customers. It starts with our infrastructure advantage, owning and operating our own infrastructure. I think all of those things combined make us a compelling choice for agencies and for advertisers to consolidate spend on. As for where we are in this trend, I think we're pretty early still in this trend. Over the next several years, we could see maybe the majority of spend on our platform, or half of the spend on our platform, being through these supply path optimization agreements.
Andrew Boone, Analyst
And then I just wanted to go back to Justin's question on kind of 50% plus of revenue now from alternative IDs. Can you talk about kind of the benefit to CPMs there? Steve, I think the guide kind of implies, kind of mid-teens kind of decline in CPMs. I think about 60% impression growth. And then secondly, how does that get to 100% kind of before 2022 in the deprecation of cookies, like, is that a realistic goal? How do we think about full coverage?
Steve Pantelick, CFO
There are a couple of questions there. First of all, on some of your model questions on the impact for the whole year, we anticipate adding significantly more than 60% impressions, so I really don't see any significant degradation to CPMs. It's an evolving picture depending on when capacity comes online. I'm feeling very positive about the status of CPMs. Regarding the rate at which identity comes into play it really is a function of the overall ecosystem adopting the core principles. Publishers in the open Internet recognize the significant upside. We have multiple case studies and examples where when you bring an identity to the open Internet, CPMs absolutely go up. Our CPMs stabilized for the first quarter, and I would expect the normal cycle to unfold. One other point to add: with respect to inflation, inflation does affect CPMs. Because we have a usage-based model, we will be able to participate in that scenario.
Rajeev Goel, CEO
On the other part of your question, so we've reached that point where the majority of revenue has alternative identifiers and that rate is growing pretty rapidly. I don't see it as our needing to get to 100%. We will, of course, continue to push that higher. The reason is that advertisers will go where the opportunity, the ROI lies. If the majority of revenue has these alternative identifiers, we can hope to lead the industry in this area, then I expect advertisers to shift their ad budgets to those impressions that have these identifiers.
Andrew Boone, Analyst
All right. Thank you, guys.
Rajeev Goel, CEO
Thank you.
Operator, Operator
Your next question comes from Andrew Marok at Raymond James. Andrew, you're on the line.
Andrew Marok, Analyst
Hi guys, thanks for taking my question. You've talked a bit about some of your investments that you've been planning to make. I guess, can you give us a little sense of the prioritization of some of those investments? With the reopening strength coming back, is there any alteration to your thought on your go-to-market strategy or any particular pockets that you wanted to lean into on that?
Rajeev Goel, CEO
Yes, Steve will take the first part.
Steve Pantelick, CFO
In terms of the prioritization, absolutely growing the size of our technology team in India is priority, adding select go-to-market professionals around the globe, driving our identity solution, driving the CTV business. We're going to have a front-end loaded a bit because of the potential exposure around chip shortages. So it's really those two areas that we're going to focus on, focused on growth because we have a very profitable business model. Last year was our ninth straight year of adjusting profitability.
Rajeev Goel, CEO
The second part of your question, I think one of the big shifts will really be around employees making a mental adjustment to being back in the office and engaging with clients in person. I don't see a shift in terms of who we're going after or the channels that they're in, mobile, CTV, etc. On the buy side, there will be an expansion of verticals to go after some of the reopening verticals. The key benefit here is that, structurally, we have a global platform; we're an omni-channel platform. No significant structural changes need to be made because we'll continue to be very present with wherever consumers are consuming media.
Andrew Marok, Analyst
Great, thank you.
Operator, Operator
Your next question comes from Jason Helfstein at Oppenheimer.
Jason Helfstein, Analyst
Thanks, guys. I have two questions. How are you thinking about servicing CTV publishers as they try to move more spending into a digital upfront? How do you try to capture that? And how many preferred SSP deals would be practical for a large global agency? Should they have one deal like that? Should they have three? How do you think about that?
Rajeev Goel, CEO
With respect to CTV, we're seeing strong growth in our CTV business in both private marketplace deals as well as open market spending. We view ourselves as pioneering the future of CTV building a foundation for where the market is headed. The majority of TV spend is still linear, although it's transitioning rapidly. Today, the lion's share of digital ad spending is on insertion orders or fixed price PMP deals, which drive transactions in the upfront. We expect to see more data-driven decisions in the future. As for how many preferred SSPs an agency might have, agencies are moving from having several dozen SSPs to typically a single-digit number due to the efficiency, innovation and transparency that comes with working with a few SSPs. We see most of these agencies evolving to three to seven SSPs.
Jason Helfstein, Analyst
Thank you.
Operator, Operator
Your next question comes from Shweta at Evercore. Shweta, you're on the line.
Shweta Khajuria, Analyst
Great. Thank you. Let me follow up please. A follow up on the GroupM partnership. What does it mean for your business where you say GroupM, you are a partner for them? How meaningful is this partnership for you? And second, could you remind us what SPO contracts usually include? I know there are some volume discounts. But what else do contracts typically include? And then lastly, how big is travel for you?
Rajeev Goel, CEO
In terms of what does it mean for GroupM, it means we've entered into a partnership where we are innovating for them, building certain technology capabilities that they need. This means significant growth in volume of spend on our platform, which means we're growing the share of spend we have from GroupM. It's going to take time to execute and ramp up the rollout of this type of agreement, but it could take several quarters to sign and ramp up. Typically speaking, SPO contracts can include volume-based commercial agreements, transparency clauses regarding data, and custom technology features that we commit to build for a particular buyer. Some deals will include some or all of those components.
Steve Pantelick, CFO
As for the travel vertical, it has been relatively nascent over the last nine to twelve months. Travel is a single-digit proportion of our total ad spending. However, I expect travel to become a bigger part of the business over time as it does start to recover.
Shweta Khajuria, Analyst
Thanks, Rajeev. Thanks, Steve.
Rajeev Goel, CEO
Thank you, Shweta.
Operator, Operator
Your next question comes from Vasily at Cannonball Research. You are on the line.
Vasily Karasyov, Analyst
Good afternoon, congratulations on the good results. The question I had, can you hear me?
Rajeev Goel, CEO
Yes, we can.
Vasily Karasyov, Analyst
I was wondering, as you're growing your connected TV business, where are you on that spectrum with supply constraints? What is the plan?
Rajeev Goel, CEO
Our CTV business is a marketplace built around an auction platform. Unlike others, we don't see the types of kind of temporary constraints. Buyers would simply bid up the inventory if there was a short-term supply constraint, and due to our usage-based model, we benefit as the publisher would benefit in terms of greater revenue. We are focused on building that auction-based platform, as we think that's where the bigger opportunity lies.
Vasily Karasyov, Analyst
And a quick follow-up if I may. In terms of the CTV inventories, are you more skewed towards linear inventory from the MVPDs or AVODs? Where are you?
Rajeev Goel, CEO
We are focused on the MVPDs as well as tier one and tier two segments of channels, broadcasters, and apps in the CTV and OTT space.
Vasily Karasyov, Analyst
Thank you very much. Thank you.
Operator, Operator
And your last question comes from Matt Swanson at RBC. Matt, you are on the line.
Matt Swanson, Analyst
Yes. Thank you for taking my questions. Steve, could you talk a little bit about the recovery on a geo-by-geo and vertical-by-vertical basis? What we have learned through these early stages of recovery that could be applied to some geos and verticals that haven't recovered as quickly?
Steve Pantelick, CFO
In the first quarter, we saw a lot of the beaten-down verticals like travel, style and fashion, home and gardening, starting to come back nicely. Nearly all ad verticals we participated in were up 50% or more year-over-year. From a geographic perspective, we are seeing growth in every major region, and we don't anticipate that slowing down.
Matt Swanson, Analyst
If I could add just one more quick one for Rajeev regarding the CTV opportunity: how do you leverage the advantage of being independent versus competitors in that space? And how do you build competitive moats and differentiation early on?
Rajeev Goel, CEO
Being independent, it means that we're unconflicted in terms of serving the needs of our customers. One of the challenges in the industry has been capacity arbitrage. Agencies engage in things like supply path optimization with us because we treat all inventory equally, and we're transparent about that. In terms of the competitive moat, our moat lies in our infrastructure-driven approach where we're able to innovate rapidly because we own all layers of the infrastructure stack. We're shipping code on a daily basis, making our platform more efficient and transparent, driving superior value outcomes because we own all of that infrastructure.
Matt Swanson, Analyst
Thank you.
Operator, Operator
And this concludes the Q&A portion of our call today. I'll now turn the call back over to Rajeev for closing remarks.
Rajeev Goel, CEO
Thank you. I want to thank you all for joining today. We're very excited about our market share expansion and the number and magnitude of growth opportunities ahead of us. Steve and I look forward to connecting with many of you in the coming days. Thank you all.