Earnings Call Transcript - PUBM Q2 2025

Operator, Operator

Hello, everyone, and welcome to PubMatic's Second Quarter 2025 Earnings Call. My name is Oren, and I will be your Zoom operator today. Thank you for your attendance today. As a reminder, this webinar is being recorded. I will now turn the call over to Stacie Clements with Blueshirt Group.

Operator, Operator

Good afternoon, everyone, and welcome to PubMatic's Earnings Call for the second quarter of 2025. 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 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 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 and are available at investors.pubmatic.com, including our most recent Form 10-K and our subsequent filings on Forms 10-Q or 8-K. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. All information discussed today is as of August 11, 2025, 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, cash flow from operations 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.

Rajeev K. Goel, Co-Founder and CEO

Thank you, Stacie, and welcome, everyone. We delivered a strong second quarter with revenue and adjusted EBITDA ahead of expectations. Revenue from our underlying business, which excludes the affected DSP and political advertising, grew 19% year-over-year. Importantly, our reported revenue returned to year-over-year growth at 6%. Our performance was driven by CTV and emerging revenue streams, which includes Activate, sell-side data targeting and commerce media, as clients increasingly turn to the PubMatic platform for greater performance, transparency and control over their digital advertising strategies. Once again, our robust business model drove the incremental revenue through to the bottom line. We delivered a 20% adjusted EBITDA margin, marking our 37th consecutive quarter of adjusted EBITDA profitability. I'm proud of these results and the value that PubMatic delivers to clients. Our journey to transform the business started years ago, evolving from an SSP provider only to an end-to-end platform serving publishers, ad buyers, commerce media networks and data providers and curators. We pioneered Supply Path Optimization and launched Activate to put more control in the hands of advertisers and agencies. We delivered significant growth with sell-side data targeting and commerce media. We expanded relationships with the world's largest streamers with CTV now representing nearly 20% of total revenue, and we recently added a top 5 U.S. streamer, which increased our market penetration to 26 of the top 30 global streamers. The execution in these secular growth areas has been strong, and yet our financial results are not yet reflecting where I know they can be. Today, our top legacy DSP partners contribute the majority of ad spend on our platform. Historically, this strategy has delivered growth and scale. But platform changes on their end are often done with limited visibility and create revenue headwinds for us while we take steps to mitigate them. The most recent example occurred just last month in July and will impact our revenue in the second half of this year as we work through mitigation initiatives. Steve will provide more details in a few minutes. I've seen this industry evolve for 2 decades, and it's clear that we are at an inflection point. The lines between SSPs and DSPs are blurring, and AI is fundamentally changing how advertising is created, transacted and optimized. Long term, we believe the reshaping of the programmatic ecosystem will be to our advantage. The status quo simply won't do. As we look to the second half and beyond, our key priority is to accelerate stronger, more sustainable growth. As our model continues to deliver significant efficiencies via AI and software optimizations, we are able to fund, even accelerate investments to match the pace of change we're seeing across the ecosystem. This includes diversifying our DSP mix, accelerating investment on the buy side, advancing our leadership in CTV, scaling emerging revenue streams, and integrating AI across our tech stack and operations. The good news is that we have already been investing in these areas. We have the team, the tech, the customer relationships and the financial resources to accelerate the opportunities in front of us. My confidence stems from the progress we've already made in these areas. First, we have been actively diversifying our DSP mix over the past couple of years. Performance marketers and mid-tier DSPs are gaining share of ad budgets as spend shifts to ROI-based outcomes, including in CTV. We see this on our platform. Ads spend from these newer DSPs is growing at over 20% rates, and we're adding more of these high-growth ad buyers to our platform every quarter, including SMB CTV ad platforms like MNTN and tvScientific and China-based performance DSPs to support their non-China business. Collectively, these DSPs strengthen our platform and bring better demand diversity, buyer resilience and platform stickiness. Second, we are accelerating investment on the buy side. The momentum we are seeing with our direct buying platform, Activate, is a testament that our strategy is working. Buying activity more than doubled from Q1 to Q2 as advertisers look beyond legacy platforms for increased performance, control and transparency. We're seeing success across both brand and agency partners. Omnicom Media Group Germany recently used Activate to power a CTV campaign for a leading online marketplace for handmade goods and was able to exceed their clients' performance benchmarks. According to their Managing Partner, Nicolai Keiland, the collaboration with PubMatic allowed the agency to implement an efficient programmatic setup for the CTV campaign that delivered impressive results in both visibility and brand impact. At the same time, commerce media players are integrating with Activate to power their programmatic advertising businesses. PayPal is leveraging Activate to combine their unique transaction-based audience data from over 430 million accounts with PubMatic's premium inventory to streamline campaign execution for advertisers across multiple formats, including CTV. This demonstrates how buyers are increasingly turning to PubMatic's unified platform to improve targeting precision, reduce operational complexity and scale their programmatic commerce media strategies efficiently. I'm excited about the potential this partnership has in the near term, but more importantly, see it as a blueprint for broader adoption across the commerce media landscape. As more commerce players seek to activate their data in premium, brand-safe environments, our end-to-end platform provides scalable programmatic infrastructure that complements their direct sales efforts. These integrations unlock high-margin revenue opportunities for PubMatic across data, media and buying technology, further diversifying and accelerating our growth engine. To support growth, we are adding headcount in our go-to-market teams with a focus toward independent agencies and direct brand relationships. This complements our ongoing leadership in supply path optimization, which continues to represent a majority of activity on our platform. To capitalize on this increased demand, our third priority is to advance our leadership position in CTV as buyers increasingly move budgets from linear to programmatic streaming. CTV revenue grew over 50% year-over-year in Q2, indicating continued significant market share gains. International expansion and new innovative formats are driving CTV growth. In a recent landmark partnership with Nippon TV, one of Japan's largest broadcast companies, PubMatic is now powering programmatic access to their traditional broadcast TV inventory for the first time. This reflects a broader trend among broadcasters globally who are turning to PubMatic to modernize their monetization strategies at scale. We were also selected as the exclusive SSP partner for performance marketing company, Wunderkind's launch of Pause Ads across their premium CTV inventory. Also driving growth in CTV are our curated marketplaces. Most recently, we launched our live sports marketplace, allowing advertisers to access sports inventory from FanServ, MLB, FuboTV, DirecTV, Spectrum Reach and Roku. Our proprietary marketplace solves ad monetization for one of the most underserved and high potential segments. FanServ's VP of Demand Partnerships, Ben Goodfriend, explains, "It empowers brands to connect meaningfully at the exact moment that matters most across every platform they love." As our growing live sports footprint expands, related buyer activity in the first half of 2025 was up nearly 3x year-over-year. Fourth, we continue to scale emerging revenue streams that monetize outside of traditional auction dynamics. This includes platform fees from data curation, commerce media and enterprise software solutions, all of which are high margin and contribute to the natural flywheel of our existing platform. For example, we recently partnered with Trainline, Europe's leading train and coach app with 27 million active customers worldwide. This commerce-focused company has integrated with our platform to drive incremental performance-based revenue at scale. By leveraging our SSP as well as our Connect and OpenWrap offerings, they are monetizing both on-site inventory and off-site activations. This allows us to diversify our revenue via our SSP, data and software fees. Connect is a powerful solution that allows data owners, publishers and commerce media networks to create curated audience segments using their first-party data. For example, one large digital media company with a diverse portfolio across technology, gaming and shopping leveraged our platform to unify audience data across their properties. This enabled advertisers to tap into an expansive set of high-value audience segments like tech enthusiasts or deal seekers. By offering these holistic, cross-property segments, the publisher is able to drive increased advertiser demand and improve CPMs. Plus, they're able to use Activate to monetize that audience across third-party inventory as well. These use cases demonstrate how publishers are moving from selling ad space to selling true audience insight, and how PubMatic is empowering them to do it with full control and transparency, all while unlocking revenue streams outside of traditional DSP-controlled auction dynamics. And finally, as we accelerate these priorities, AI is a critical component integrated across our tech stack to further automate decisioning and streamline activation. This not only drives cost efficiency for our customers but enhances campaign performance and optimization. In the past 12 months alone, we've launched multiple AI-powered capabilities that will help drive even greater adoption and usage of our platform, including PubMatic for buyers, our generative AI media buying solution launched in May, that enables advertisers to build optimized campaigns using natural language prompts. Our solution lets buyers run campaigns through Activate or their DSP of choice, accelerating setup and improving time to value. PubMatic Assistant, an AI-powered analytics engine that allows publishers and buyers to access insights, troubleshoot issues and guide campaign decisions through an intuitive chat-based interface. Predictive diagnostics that detect yield anomalies in real time and surface optimization opportunities via Agentic AI workflows to improve publisher monetization with less manual effort, and a dynamic floor yield module currently in beta that uses live auction signals to adjust pricing per impression, outperforming static solutions in early testing. We have owned and operated our infrastructure for many years and optimized our integrations with industry-leading technology solutions to deploy high-performance machine learning models that enable increased data ingestion and faster processing, setting us apart from others. The scale, premium inventory and wide variety of data sets on our platform allow us to deliver measurable results that give us a differentiated advantage. We're moving fast on the AI front, and it's changing the game. It's opening up the market in new ways and deepening our customer engagements. We believe that focusing on these key priorities will ultimately result in a stronger, more sustainable revenue profile for PubMatic over time and drives better outcomes for our customers and shareholders. Further, these priorities are converging with a major inflection point in the industry that we believe can result in significant market share expansion. The recent ruling in the Google AdTech antitrust trial confirmed what we've long known. We've been operating in a monopolistic environment for decades, and yet PubMatic has grown our market share. Now with remedies on the horizon, we're entering a new chapter. Advertisers and publishers will need trusted independent technology providers with the scale and innovation to replace what they've relied on in legacy systems. PubMatic is that partner. We anticipate that a significant portion of Google's 60% market share will be up for grabs in 2026. Further, we estimate that a 1% market share shift to PubMatic would represent approximately $50 million to $75 million in net revenue, with most of that flowing through to our bottom line. This is a singular once-in-a-generation opportunity. On top of that, given our full stack platform and breadth of capabilities, we believe any structural changes could unlock multiplicative effects as ad buyers expand adoption of our end-to-end platform, such as adding audience targeting functionality or consolidating buying via Activate and supply path optimization. In closing, our Q2 results reflect strong secular growth and highlight how our platform is meeting the needs of today's digital advertising ecosystem. While we are actively addressing the recent disruption related to one of our DSP partners and seeing early signs of stabilization, it only reinforces conviction in our strategy to diversify demand and revenue streams and invest in the highest growth areas. We are building for what we believe will be one of the largest market shifts our industry has seen in years. As the programmatic ecosystem evolves, customers are demanding performance, control and transparency, all of which is increasingly dependent on AI. We've built a platform that gives buyers and publishers choice and independence. We have the team to deliver, and we are making the investments. I'm confident that we are building a stronger, more sustainable growth business that creates long-term value for our customers and shareholders. I'll now turn the call over to Steve for the financial details and outlook.

Steven Pantelick, CFO

Thank you, Rajeev, and welcome, everyone. We delivered a great second quarter and exceeded both revenue and adjusted EBITDA guidance. Driving this performance were secular growth areas, CTV and emerging revenue. We ended the quarter with strong margins and healthy free cash flow. We have made significant progress in transforming our business. And as Rajeev discussed earlier, we are accelerating our efforts. We proactively began evolving PubMatic several years ago from an SSP provider to an end-to-end platform. This evolution has significantly increased our total addressable market, and we've accelerated growth in key secular areas and improved our profit mix. Today, I will briefly comment on the second quarter highlights, which underline our confidence in our go-forward strategy. I'll then spend the remaining time outlining our second half plan, anticipated changes and how it flows through to our outlook. Starting with the revenue highlights. Omnichannel video revenues grew 34% year-over-year and represented 41% of total revenues in the quarter. CTV revenues increased by over 50% year-over-year for the fourth consecutive quarter and represented approximately 20% of total revenue in the quarter. Emerging revenue streams more than doubled year-over-year and accounted for 8% of total revenue in the second quarter. Within this category, Connect, our curation and data business, continued its rapid revenue growth trajectory, growing over 100% year-on-year as publishers and buyers prioritize sell-side targeting through a more controlled and transparent environment. Our strong momentum is being driven by expanded AI product capabilities and expanded sales team. Revenue from display was flat year-over-year, a significant improvement from Q1's year-over-year decline of 10%. As a reminder, we lapped a sizable DSP headwind in the second quarter, and as we had anticipated, this DSP spend returned to year-over-year growth in July. We processed approximately 78 trillion impressions in Q2, which was 28% higher than last year and a 4% increase versus Q1. I want to give a little more color on the composition of these impressions to address concerns around AI search traffic as it relates to our business. Nearly 60% of all of these impressions were CTV and mobile app, which are unaffected by AI search. The remaining impressions are largely from web-based premium publishers, which are primarily accessed via direct navigation rather than search. Additionally, with our expanding publisher and streaming partnerships, we have growing access to more high-value traffic from which to choose and process. With respect to Q2 ad spending, in aggregate, the top 10 ad verticals grew in the mid-single-digit percentages year-over-year. Health and fitness, technology and computing, travel and arts and entertainment each increased over 20%. We saw softer trends for shopping, automotive and business, which declined by single-digit percentages. On a regional basis, EMEA and APAC revenues grew 18% and 7%, respectively, while Americas declined 1%. Dovetailing with Rajeev's comments, we also made progress diversifying DSP spend across our platform. In the second quarter, we expanded the share of spending from DSPs outside the top 5 as spend from performance marketers and mid-tier DSPs grew over 20% year-over-year. Turning to profitability. Our robust leverage cost model highlights that when we meet or beat our revenue targets, we deliver high incremental flow-through. Our revenue outperformance and continued focus on efficiency enabled us to significantly exceed the upper end of adjusted EBITDA expectations by over 15%, inclusive of a significant foreign exchange headwind. Q2 adjusted EBITDA was $14.2 million or 20% margin and was our 37th straight quarter of adjusted EBITDA profitability. Included was a foreign exchange impact of approximately $2 million due to the weakening U.S. dollar over the quarter. Total operating expenses in the second quarter were $50 million, flat with Q1 as ongoing cost savings from AI-driven efficiencies funded investments in high-growth secular areas. On a year-on-year basis, we managed our total headcount growth to less than 3% and realigned our team and resources to the highest growth areas like CTV, emerging revenues and supply path optimization. We increased our buyer-focused sales team members by over 20% compared to Q2 last year, which helped diversify revenue and drive our quarter's top-line results. Q2 GAAP net loss was $5.2 million or $0.11 per diluted share. Moving to cash and our capital allocation. We have a healthy balance sheet and generate positive cash flow, which provides financial stability while at the same time, allowing us to consistently invest for revenue growth. Over the last 4 years, since Q2 2021, we have produced approximately $350 million in net cash from operations and more than $180 million in free cash flow. In the second quarter, we generated $14.9 million in net operating cash flows and free cash flow of $9.3 million. We ended the quarter with $117.6 million in cash and marketable securities and zero debt. Given the strength, we continue to deploy our capital to maximize shareholder value. Since the inception of our repurchase program in February 2023, through the end of Q2, we have bought back 12.2 million Class A common shares for $178.2 million. We have $96.8 million remaining in our repurchase program authorized through the end of 2026. To recap, through the first half of the year, our results came in well ahead of our expectations, driven by CTV, growth in sell-side data targeting and Activate. We added new publishers and DSPs to the platform, continue to scale Commerce Media and are seeing significant growth in Connect. Looking to the second half of the year, we are confident that we'll continue to see growth in these secular areas. Our end-to-end platform, supply path optimization and recently launched AI-driven solutions are helping customers scale their ad businesses while streamlining their operations. At the same time, beginning in July, we saw a headwind emerge from another top DSP buyer, which recently made platform changes. As a result, we saw a notable drop in spend in July from this DSP, which has stabilized in August. Given the scale and complexity of our real-time platform, we anticipate it will take us several months to iterate and optimize our activity with this DSP. Outside the top 5 DSPs, all other DSP spend increased over 30% year-over-year in July. To successfully navigate this headwind and to accelerate the key priorities that Rajeev outlined, we are well positioned both in terms of our capabilities and financial resources. We have a highly disciplined team focused on driving incremental cost efficiencies led by an AI-first strategy. We will optimize our existing resources and apply them to where we can achieve accelerated sustainable revenues. And our financial discipline, combined with our operating capabilities, provides a strong foundation to deliver on our priorities. Turning to our outlook for the third quarter. We are taking a conservative approach as it relates to the current impact from the large DSP and the continued uncertainty in the macro environment. Our July revenues came in slightly below last year, and we saw some sequential weakness versus June in several consumer discretionary ad verticals. We expect Q3 revenue to be in the range of $61 million to $66 million. As a reminder, Q3 last year included approximately $5 million in political advertising or 7% of revenue. We expect Q3 operating expenses to be relatively flat with Q2 as we realign resources and work aggressively to diversify our DSP spend and deliver continued growth in key secular areas. We expect our Q3 adjusted EBITDA to be in the range of $7 million to $10 million, which also factors in a $1 million plus incremental impact of continued weakness of the U.S. dollar. We are maintaining our full year CapEx projection at $15 million, which is a year-over-year reduction made possible by optimization efforts and cost-saving measures. In closing, in Q2, we delivered strong growth in key secular areas, continued investing for long-term growth and benefited from our robust operating model. While our outlook includes a reduction in ad spend from one of our top DSP partners, the underlying health of the business remains strong while we mitigate the impact. We are optimizing resources to accelerate our key priorities that include diversifying DSP mix and expanding investment on the buy side, growing CTV, scaling emerging revenue streams and integrating AI across our tech stack and operations. We have a healthy balance sheet and generate positive cash flow and are confident in our long-term strategy to drive durable, accelerated growth, increase profitability and maximize shareholder value. I will now turn the call over to Stacie for questions.

Operator, Operator

Our first question comes from Matt Swanson at RBC.

Matthew John Swanson, Analyst

Rajeev, I understand you may not be able to share all the details, but could you provide any additional information regarding the change from the DSP, especially since we haven't heard similar updates from some competitors? Also, it seems there was a decline in July but stability in August. Can you explain the process for optimizing activity through iterations? Steve, could you also discuss the balance between the DSP and the macro factors in your thought process for guidance? That would be helpful.

Rajeev K. Goel, Co-Founder and CEO

Yes. Thank you, Matt. So beginning in July, we saw a headwind emerge from a top DSP buyer, which recently shifted a significant number of clients to a new platform that evaluates inventory differently. And so the parameters of how they value inventory have changed, and we are working to optimize the inventory that we send this DSP accordingly. In addition, for some of our supply path optimization partners, they did not realize until after the changes were made that their supply path optimization strategies were no longer implemented. And so as a result, they need to reimplement their supply path optimization settings on this DSP's new platform, and that process takes time. So accordingly, we saw this notable drop in spend in July, and then we've seen that stabilize in August. Now given the scale and complexity of our real-time platform, we anticipate that it will take several months to iterate and optimize the traffic that we send to this DSP. And so, while we're doing this, a top priority for us is to accelerate the diversification of ad spend on our platform away from legacy DSPs. And we've been making progress, but we plan to accelerate our strategy. So for instance, in Q2, we expanded the share of spending from DSPs outside the top 5 with performance marketers and mid-tier DSPs growing over 20% year-over-year, such as MNTN and tvScientific and some China-based DSPs. In July, that same cohort accelerated to over 30% year-over-year. And we think generally that there is significant opportunity as advertiser budgets outside of the top 250 advertisers and their holdco representatives is growing significantly faster than the growth rate within that top 250. But it's clear that the concentration of our legacy DSP relationships is a significant factor that's constraining our growth, and we intend to address that head on. I'll turn it over to Steve.

Steven Pantelick, CFO

Sure. With respect to the outlook, Matt, the vast majority of the outlook is being influenced by this change by the DSP in July. Just to give you some additional color. In providing the range, the way that I look at the bottom end of the range, it assumes that the latest trends that we're seeing today continue as such, and there's minimal but some consumer softness from the macro. And of course, the upper end of the range assumes the mitigation efforts take hold and start to improve that spend, and there is limited impact from the macro. And I think the key point to note for investors is that as a business, we are very focused on moving quickly. Obviously, we have a bias towards action. We were surprised. We had limited visibility from this change, but the team is moving very quickly. And as we demonstrated with the DSP change that occurred mid last year, we worked through that. And as I commented in the prepared comments, we grew that spend for the first time in July from that DSP. So we're confident we're on the right track.

Operator, Operator

Our next question comes from Jacob Armstrong at KeyBanc.

Jacob Armstrong, Analyst

This is Jacob on for Justin Patterson. With SPO now at 55% of activity on the platform, can you discuss how conversations with advertisers have evolved over time? And further, how is this impacting your go-to-market approach as you invest more behind direct sales efforts?

Rajeev K. Goel, Co-Founder and CEO

Sure, thank you for the question. SPO has now reached about 55%. Our discussions are increasingly focused on how we can address more of the challenges faced by advertisers and agencies. These challenges include the shift from cookies to identity solutions, the need for performance-based results, and demonstrating ROI to clients and CFOs. We're also noticing a significant change in sell-side targeting and curation. There's a trend towards growth in formats like CTV and Commerce Media. Many of our conversations center around enhancing the technology solutions we offer, such as Activate, which we believe will be key to our growth, along with Commerce Media and our data and curation platform, Connect. Ultimately, our discussions are about integrating the right capabilities within our platform to present effective solutions to buyers. As we increase our presence in the mid-market, where we anticipate accelerated growth, our SPO metric may experience some variability, since not all deals will be related to SPO; they might focus more on capabilities, performance, or media scale on our platform. Therefore, we might see some fluctuations in that statistic moving forward.

Operator, Operator

Our next question comes from Shweta Khajuria at Wolfe.

Shweta R. Khajuria, Analyst

Thanks, Stacie. Let me try 2, please. Rajeev, if the lines between DSPs and SSPs are emerging, based on your earlier commentary, what's your view on the evolution of the industry? Do you think that the stand-alone DSPs and SSPs today will offer kind of an end-to-end solution? Or do you think that take rates for just stand-alone DSPs and SSPs are at risk? And then the second question I have for either Rajeev or Steve is on the specific inventory changes that caused the headwind in the quarter. So is it fair to assume that PubMatic is still one of the platforms of choice or SSPs of choice? There's just a different change that they are making. Just want to understand what exactly that means. And Steve, what is the concentration of DSPs today?

Rajeev K. Goel, Co-Founder and CEO

Yes, Shweta. As the industry evolves, particularly with the shift toward connected TV, performance-focused strategies, and the transition away from cookies to more identity-based targeting and AI, we see a movement towards an end-to-end platform. AI performs better when it isn't limited but can optimize across all parts of a transaction. This approach aligns with our initiatives over the past few years through Activate, which is gaining significant traction. Our Activate spending more than doubled from Q1 to Q2, indicating this trend. There is a blending of lines, and as various players in the ad tech ecosystem aim to achieve optimal results for advertisers, it can also enhance revenue for publishers. This trend isn't new; platforms like Google, Microsoft, Xender, and Yahoo have operated on both sides of the transaction for a while. We believe that performance, alongside transparency and control, will remain crucial moving forward. Regarding your question about being a platform of choice, we view ourselves as such. This is based on our platform's scale in ad impressions, our omnichannel capabilities, the data we have through our Connect business, and our global reach. We are committed to investing in our growth as a preferred platform, not just for our top demand-side partners but also for an expanding group of small to medium-sized business advertisers. I'll now pass it over to Steve for the other part of your question.

Steven Pantelick, CFO

So Shweta, so with respect to your question on the format mix of this latest DSP change, when we took a look at what happened in July, the majority of the impact is being felt in display on both desktop and mobile. We're actually continuing to see really positive results in terms of CTV spending. And so from where we have been investing and focusing our energies, we're well positioned to continue to grow and to be successful. It is a function of the areas that we focus on and the Q2 results really indicated the strength that we see in those secular growth areas. Now with respect to the DSP concentration, our top 2 DSPs represent about half of our overall spending. And as I just commented, notably, while there was some pressure in display, CTV spend from both of these DSPs continue to grow in the double digits. And when we step back, take a look at over time, we see the concentration of these 2 DSPs declining as other buyers, advertisers, DSPs are upping their spend. Of the top 5, a commerce DSP is growing the fastest. And in July, what we saw for the first time in many years, we have a new #5 DSP that we've been nurturing and growing over time and has picked up the slack. So we're focusing on diversifying the DSP mix given the time frame and impact that just happened a couple of weeks ago. We have some near-term headwinds. But we're obviously very confident in our strategy and our ability to execute. And so as we've done before, we're going to execute through this.

Operator, Operator

Our next question comes from Jason Helfstein at Oppenheimer.

Jason Stuart Helfstein, Analyst

Is the best way to understand that this DSP platform that approached you in July was unhappy with how you conducted the auction for display edge or accepted bids? Is that the simplest way to look at it?

Rajeev K. Goel, Co-Founder and CEO

No, I don't think it had anything to do with the auction dynamics, rather it's how they value inventory has changed. And so we need to do a better job, a different job to prioritize across all the hundreds of billions of daily ad impressions that we have, which subset of those impressions that we send to this DSP. That's a normal part of our traffic shaping platform. And when we revise that, iterate that and optimize that, then I would expect to see our spend with this DSP normalize.

Jason Stuart Helfstein, Analyst

It's because you don't make every impression available, only the ones you choose to make available.

Rajeev K. Goel, Co-Founder and CEO

That's correct. And that's how we operate with the vast majority of DSPs and that I think is true across the ecosystem is just the volume of ad impressions that we take on across the world and in different formats is such that we need to shape that for each of our DSP partners.

Jason Stuart Helfstein, Analyst

What specifically made this DSP different? If your criteria for valuable inventory worked for everyone else, why didn't it work for this DSP?

Rajeev K. Goel, Co-Founder and CEO

Yes. Our view is it was precipitated by a shift in clients that this DSP has from one platform to a different platform, and that shift corresponded with the quarter border. So we saw that impact starting in July.

Jason Stuart Helfstein, Analyst

All right. And then just 2 quick ones in. I mean, are you seeing any retaliation on the DSP side for like your continued effort on Activate?

Rajeev K. Goel, Co-Founder and CEO

No, I don't think we are. And the reality is Magnite has ClearLine, so they're out there with that. We've got Activate. There are obviously buyers, right, whether it's Yahoo! with Backstage, Trade Desk with OpenPath, Viant with their direct platform. So I think we're seeing across the ecosystem in response to advertiser or buyer desire for more outcomes and more performance, the shift in the ecosystem, as I described earlier. So I don't think it's really specific to anything that we're doing.

Jason Stuart Helfstein, Analyst

Just a follow-up for Steve regarding Shweta's question about DSP concentration. I understand you don't want to disclose specific numbers, but could you provide an estimate of what percentage of revenues is coming from DSPs buying display? Considering the biggest buyers, can we assess if we've moved past concentration risk? We had issues with that DSP towards the end of last year, so how can people feel reassured that DSP concentration risk on display is not a concern?

Steven Pantelick, CFO

So I mean it's a process that we've been working on and undertaking for some time. So the good news from our perspective, desktop display, a legacy format is now roughly 20% of all of our revenue, down from 30% approximately 2 years ago. So we're definitely moving in the right direction. And it's a function of where we're investing and what advertisers buyers want. The reality is we still have a significant amount of display, but that's sort of, let's call it, roughly flat. As I shared in the second quarter, our display revenues were flat year-over-year, whilst CTV emerging revenues doubled. So it's a shift over time. And when you look at the specific DSPs within what they're buying, it's absolutely shifting to the faster secular growing areas. But at the end of the day, advertisers want to touch consumers wherever they are. So it doesn't mean like display is going to go away, but it's going to grow at different rates.

Rajeev K. Goel, Co-Founder and CEO

Yes. Maybe I can just briefly add to that, Jason. So it's clear that it's really critical for us to diversify our DSP mix. We called out MNTN and tvScientific as 2 examples of ad platforms. We're bringing new SMB dollars, small, medium business dollars to our platform, China-based DSPs. I think it's also maybe useful to call out as an example, Amazon is a significant relationship for us, both as an inventory provider as well as a DSP buyer. So we previously shared that we are one of three SSPs in their certified supply exchange program. On the sell side, we monetize Fire TV app inventory from almost a dozen different streaming apps. We've been monetizing that inventory for many quarters now. And as Amazon is scaling their ad business, we are scaling with them. In fact, in June and July, our Amazon revenues grew very healthy double digits.

Operator, Operator

Our next question comes from Matt Condon at JMP.

Matthew Dorrian Condon, Analyst

My first one is just as you focus on building more and more buy-side direct relationships and you think about Activate, can you just talk about what the differentiation of PubMatic is compared to some of those other large SSPs in the market?

Rajeev K. Goel, Co-Founder and CEO

Sure. I believe the main focus with Activate is to enable buyers to transact through their chosen demand-side platform or through Activate itself. Earlier this year, we introduced AI-powered curation, allowing buyers to easily configure audiences by using simple text chat or prompts, utilizing various data providers. They can then take that deal ID and use it in any DSP they prefer or in Activate. Our goal with Activate is to create a more efficient path for advertisers to enhance their business outcomes while also ensuring transparency and control. In the current ecosystem, with DSPs and supply-side platforms driving most transactions, there are complexities such as traffic shaping where supply platforms decide which impressions to send to demand platforms. This results in latency, multiple hops, and discrepancies between platforms. By consolidating everything onto a single platform, we can greatly simplify transactions and achieve better results. Additionally, we are committed to offering transparency and control so that buyers know exactly what inventory they are purchasing, what fees are involved, and can measure their outcomes effectively. This approach is leading to significant growth for Activate across all regions.

Steven Pantelick, CFO

And just a quick stat. In the second quarter, we more than doubled our activity on Activate because of those features that Rajeev just described. And we are going to be accelerating the investment behind driving Activate in the coming months and quarters.

Rajeev K. Goel, Co-Founder and CEO

I do think it's important to call out, though, that our DSP partners, I think we're very important for them, and they're certainly very important for us. And so we plan to continue to work very closely with DSPs. And I think that's a key feature of our platform and our business model.

Matthew Dorrian Condon, Analyst

Great. And then maybe, Steve, just a follow-up. Just as you've built out the buyer sales force, just where are we today as far as that build-out? Is it complete? Or are there more investments that need to be made in the back half of the year?

Steven Pantelick, CFO

Yes. We think that there's definitely incremental opportunities in the back half of the year, certainly in the mid-tier areas that Rajeev described, the performance marketers, mid-tier agencies as well as putting more sales resources behind our emerging revenues, Commerce, Connect. So we're selectively identifying where we're going to have the greatest impact. And as I called out, we're not doing it by adding incremental costs. We are optimizing the base that we have and putting those resources in the right area.

Operator, Operator

Our next question comes from James Heaney at Jefferies.

James Edward Heaney, Analyst

Rajeev, I just wanted to ask about generative AI and the potential risks that could present to your display business. I'm interested just to hear what you're seeing so far and why you think you're well positioned to navigate that secular shift.

Rajeev K. Goel, Co-Founder and CEO

Yes, absolutely. Thanks, James. So look, we believe the exposure to our business is limited as a single-digit percentage of revenue if there was 0 search traffic going to our publishers, and we took no steps to mitigate it. So as Steve shared in the script, roughly 60% of all the impressions we are processing today are for CTV and mobile app, which is unaffected by AI search. Of the remaining business, which is browser-based, where, of course, search is relevant, industry data indicates that search referral traffic is roughly 15% given we work in the head of the market, top publishers rather than the long tail, I would expect that share to be lower because most consumers are using direct navigation to get to those websites. So we think, again, if you kind of run through that math, it's a single-digit percentage of revenue. But there's also an offensive opportunity, which is that the growing cadre of AI search companies will likely need ad-supported business models to support the growth in their cost base and user growth. And I'm not just talking about the large guys like an OpenAI or Perplexity, there's those guys, of course, but there are also B2B services, consumer AI chatbots, retail experiences. I think there's a wide canvas of probably thousands of companies in the not very distant future that will likely need ad-supported AI search or chat ad monetization that create significant opportunity for us.

James Edward Heaney, Analyst

And then maybe, Steve, just another one for you. Is there anything that you can share just regarding the overall demand environment that you saw in April post tariff announcements and how that's progressed through the remainder of the quarter?

Steven Pantelick, CFO

Sure. I mean with respect to the second quarter, there's a couple of categories on a year-over-year basis that performed quite well, technology computing, arts and entertainment, health and fitness, and each of those increased over 20%. We did see some softer trends in a couple of areas in the second quarter, automotive and business, two notable areas, they did decline. Now in terms of July ad spending, our total top 10 grew on a year-over-year basis. So that obviously was very positive. But we did see some sequential decline on a July versus June basis in a cohort that one could argue is sort of consumer discretionary. So food and drink, health and fitness, travel, arts and entertainment. Now it's too early to say if that's sort of a trend. And so as I called out, incorporated a portion of that into our outlook. But we are not seeing sort of a significant decline on a year-over-year basis, and it's more sort of on a sequential basis. But obviously, there is a lot of uncertainty out there, and that's why we're very focused on keep on driving our business towards the fastest-growing areas that can grow through these challenges. And the other point to call out is, at the end of the day, in this environment that is uncertain, advertisers are going for performance, control, transparency. And these are all strengths that we built and continue to evolve through our various product offerings. So in this kind of uncertain environment, we think we're going to continue to do well and then be well positioned when this is all in the rearview mirror.

Operator, Operator

Our next question comes from Rob Coolbrith at Evercore.

Robert James Coolbrith, Analyst

I think the platform shift that you're talking about has been going on for some time. So just wondering if the triggering event in July was maybe incremental changes to that platform or a large number of your supply path optimization customers finally making that transition or something else? And then finally, any indication of a step-up in activity around direct connects from that DSP? And then finally, I guess, second question here would be, if you could just revisit the timelines for potential recovery, both around getting those SPO instructions back up and running and optimizing the traffic shaping. If you could just repeat those, that would be great.

Rajeev K. Goel, Co-Founder and CEO

We definitely noticed a significant increase in activity from the DSP, which resulted in decreased spending in July. I can't provide specifics about their timeline or the history of changes they implemented. However, that was our observation on the platform. We have stabilized but are focused on making improvements. There are steps we need to take to adjust the traffic on our platform to better serve that DSP, and we are actively working on that. Now, I'll hand it over to Steve for the second part of your question.

Steven Pantelick, CFO

Yes. I mean just to quickly comment on a little bit more on that color. So that DSP that made that change growing very nicely, double digits in June and then a notable decline negative year-over-year in July. So there was clearly a shift on their side in terms of how they were valuing inventory in terms of what it matters to them and how their platform operates. And remind me the second part, it was...

Robert James Coolbrith, Analyst

I would like to know if the stabilization observed in August suggests that most of your SPO customers have resumed using that platform. Also, can you provide any updates on the timeline for optimizing the traffic shaping and how long it might take to return to normal?

Steven Pantelick, CFO

Sure. Our teams have been in contact with all our SPO partners, informing them that they need to access the platform to reupload their SPO parameters. This is a necessary step for the SPO partners to complete on the DSP. Currently, this process is underway and largely depends on them. Regarding our mitigation efforts, when we noticed the trends starting to slow down in July, we quickly gathered the right teams to evaluate the situation. We learned from a significant change last year that a lot of testing and iteration is required due to the complexity of the ecosystem, which involves processing hundreds of billions of impressions daily. It requires ongoing testing and adjustments to determine what works according to the established criteria. Our strategy is focused on mitigating the impact, and I've included a conservative assumption in our outlook that the effectiveness of these efforts may be limited for this quarter, but we will continue to push forward. Given the significant scale of this DSP, it's going to take time, but we are well-equipped to navigate this challenge. I want to highlight that we have dealt with similar situations before. The major difficulty this time was the lack of visibility into the significant slowdown, prompting our quick response. Additionally, we are in strong financial health with approximately $120 million in cash and no debt, allowing us to generate free cash flow. We are committed to the long term and are confident in our ability to overcome this issue. In the short term, we plan to strengthen our focus on our fastest-growing areas and diversify our DSP mix. We believe we are on the right path and will work through this successfully.

Robert James Coolbrith, Analyst

Got it. Last quick one. Just it sounds like SoCV has been relatively unimpacted. So just here, is the implication there that the DSPs wants to see as much SoCV volume as they can take. There's not really a traffic shaping element there? Or just anything you can tell us about that?

Rajeev K. Goel, Co-Founder and CEO

Yes. Could you please repeat the question?

Robert James Coolbrith, Analyst

Just wondering if there is potentially an implication where is traffic shaping happening in your CTV or SoCV inventory? Or basically, is DSP willing to take as many QTS as they can within those growth channels?

Rajeev K. Goel, Co-Founder and CEO

No, I think the traffic shaping changes, optimization that we are doing in response applies equally across all formats, including video, omnichannel video. I do think in general, video is more resilient just given that's where advertisers are shifting more of their budgets. So we do see that as a secular growth driver.

Operator, Operator

Our next question comes from Eric Martinuzzi at Lake Street.

Eric Martinuzzi, Analyst

Given the consistent increase in the revenue percentage from the SPO channel, is there a possibility of a decline during this reconfiguration period?

Rajeev K. Goel, Co-Founder and CEO

Yes, I can address that. I believe this reconfiguration is more related to our strategy of diversifying to focus on mid-market buyers, who typically do not enter through the SPO channel due to their size. Generally, we observe that the mid-market segment is growing faster than the top 250 advertisers. Therefore, this shift may have a more significant impact on the dilution of SPO spending. This does not indicate a decline in actual dollar amounts, but rather a shift in how we allocate our resources.

Eric Martinuzzi, Analyst

And then a follow-up regarding just the fact that you guys were surprised that this large partner changed how it valued the inventory you were sending it. Is there a risk that other DSPs come to this same conclusion? In other words, how close are you to these DSPs where this kind of comes out of nowhere?

Rajeev K. Goel, Co-Founder and CEO

Yes. I mean, in general, I think we're pretty close to these DSPs, and it's certainly our goal to be as close to them as possible. And I think it behooves the DSP as well to be continuously sharing feedback with us on what they want to see more of or what they want to see less of or how their advertiser requirements and mix is shifting. So I think, in general, we do quite a good job of being close to these DSPs. In this case, we are reacting with limited visibility. So we need to certainly look into that and figure out how we can do a better job.

Operator, Operator

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

Rajeev K. Goel, Co-Founder and CEO

Thank you, Stacie, and thank you all for joining us today. Through the first half of the year, our results came in well ahead of our expectations, driven by CTV growth, growth in sell-side data targeting and Activate. We added new publishers and DSPs to the platform, continue to scale Commerce Media and are seeing significant growth in Connect. We're seeing one of the largest market shifts our industry has seen in years play out at a very fast pace, and we're positioned extremely well given our differentiated approach, an end-to-end platform focused on performance, and we give buyers control and transparency they need in order to scale their ad business. We look forward to seeing many of you at upcoming conferences, including Oppenheimer's Virtual Tech Conference on Wednesday, Rosenblatt's Virtual Tech Summit on August 19 and Wolfe's TMT Conference in San Francisco on September 10. We'll also be on the road over the next few weeks in Denver and New York. Thanks, everyone, for joining us today. Have a great afternoon.