Greetings and welcome to the Direct Digital Holdings' Fourth Quarter and Full-Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brett Milotte, Senior Vice President, Investor Relations, ICR.

Good afternoon, everyone, and welcome to Direct Digital Holdings fourth quarter and FY2022 earnings conference call. My name is Brett Milotte, and I'm representing Direct Digital Holdings from ICR. On today's call are Direct Digital Holdings' Chairman and Chief Executive Officer, Mark Walker; and Chief Financial Officer, Susan Echard. Information discussed today is qualified in its entirety from its Form 8-K and accompanying earnings release, which have been filed today by Direct Digital Holdings, which may be accessed through the SEC's website and DRCT's website. Today's call is also being webcast and a replay will be posted to DRCT's Investor Relations website. Immediately following the speakers' presentation, there will be a question-and-answer session. Please note that statements made during the call including financial projections or other statements that are not historical in nature, may constitute forward-looking statements. These statements are made on basis of DRCT's views and assumptions regarding future events and business performance at the time they are made. We do not undertake any obligation to update these statements. Forward-looking statements are subject to risks which could cause DRCT's actual results to differ from its historical results and forecasts, including those risks set forth in DRCT's filings with the SEC. You should refer to and carefully consider these for more information. This cautionary statement applies to all forward-looking statements made during this call. Do not place undue reliance on any forward-looking statements. During this call, DRCT will be referring to non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available on the earnings release of DRCT filed in Form 8-K today. I will now hand over the conference call to Mark Walker, Chief Executive Officer. Mark?

Thanks, Brett, and good afternoon, everyone. This is our first Q4 full-year earnings call as a public company, and I'm incredibly proud to report strong results for both the quarter and the year. Our first year as a public company demonstrated Direct Digital Holdings operational excellence, expansion and market share growth, which garnered robust financial performance. Before we get into more detail about the full-year, I'd like to begin with a quick summary of our fourth quarter. In Q4 2022, our revenue increased to $29.4 million, an increase of $16.5 million or 128% over the $12.9 million in the same period of 2021, and adjusted EBITDA was flat at $1.8 million. Our supply side platform continues to increase publisher partner engagements in addition to increasing in our impression inventory. In the fourth quarter, our sell-side advertising segment processed approximately 132 billion monthly impressions, an increase of 81% over the same period of 2021 with over 833 billion bid requests for the quarter. In addition, the company's sell-side advertising platforms received over 17 billion bid responses in the fourth quarter of 2022, an increase of over 25% over the same period in 2021 through 170,000 buyers for the quarter, which is a 109% increase over the same period of 2021. On the buy-side, these businesses served approximately 218 customers, an increase of 7% compared to the same period of 2021. While Q4 is historically our strongest quarter, this year we began our process to expand our overall capacity, scale and performance to fuel growth for 2023 and 2024. We achieved these results while we began our transition to HPE GreenLake environment will allow us to continue expanding our growth for the next few years. Looking at the full-year of 2022 was a volatile year in the ad-tech space, primarily driven by…

Thank you, Mark. Before I dive into our financial results, I wanted to quickly make a correction to the full-year earnings per share number we released this morning in our earnings press release. Full-year 2022 earnings per share should have read $0.23 instead of the $0.17, and we have consequently put out a corrected press release. Turning to topline revenue. Our revenue increased to $29.4 million in the fourth quarter of 2022, an increase of $16.5 million or 128% over the $12.9 million in the same period of 2021. We finished the year with total revenue of $88 million, which was in line with our guidance, an increase of $49.9 million or 131% growth over the $38.1 million achieved in 2021. Our sell-side advertising segment ended the year with a strong fourth quarter and drove the majority of this increase. Colossus SSP grew to $22.3 million for Q4 and contributed $15.6 million of the increase, or 231% over the $6.7 million in the same period of 2021. For the full-year, our sell-side segment achieved $58.7 million in revenue, an increase of $46.7 million or 389% growth over the $12 million in 2021. For the fourth quarter, our buy-side businesses, Orange 142 and Huddled Masses grew 15% year-over-year and contributed $0.9 million of our increase, finishing the quarter with $7.1 million in revenue compared to $6.2 million in the same period of 2021. For the full-year, our buy-side segment grew to $29.3 million, an increase of $3.2 million or 12% over the $26.1 million in 2021. For the fourth quarter of 2022, gross profit dollars were $7.4 million compared to $5 million for the fourth quarter of 2021, an increase of $2.4 million as a result of higher revenue. Gross margins for the fourth quarter of 2022 was approximately 25% compared…

Thank you, Susan, and thank you to everyone for joining. We sincerely appreciate your interest in Direct Digital Holdings and the exciting business and opportunity we are building here. We are now going to open the line for some questions.

[Operator Instructions] And our first question comes from the line of Dan Kurnos with The Benchmark Company. Please proceed.

Great. Thanks. Solid finish to the year guys in an obviously uneven environment. I guess, Mark, there's a lot of noise out there, so I'll ask the boring questions first. You gave some color in your prepared remarks around mix away from walled gardens and clearly you guys play in a more performance oriented space, benefiting as well from diversity initiatives. We saw some positive trends there especially [out of guys] like GroupM even. What kind of gives you the confidence in the growth outlook this year and can you give us kind of your view on mix growth in buy-side versus sell-side?

Yes. Good question and good to hear from you Dan. What we've been looking at is, pretty much the overall market and where we – where we have been really kind of carved our niche. And that's in regards to the buy-side, it's in the mid-market. And as you know, we're in nascent markets that are your Tier 2, Tier 3 media markets. And we work primarily with DMOs or Destination Marketing Organizations and then we work with Tier 2 agencies as well as with direct brands. As it relates to the buy-side business, based upon what we saw at the last half of the year versus what we're starting to see at the beginning of this year, we feel like the momentum that we have captured on the buy-side business is still there for at least the first half of this year as well as in what we have seen in regards to the contracted business that we have, the contract business that we have as well as the IO or Insertion Order business that we've seen. Based upon what we have seen in those marketplaces, we have seen that even in this recessionary period, if you will, that the market seems to be stable and holding strong with the middle market as it relates to our buy-side business. When we talk about our sell-side business, we are focused on the multicultural space as well as the general market and some of the components that we have put in place even if there is somewhat of a level of a downturn, when you do think about the Fortune 500 companies and pullback and marketing spend. The amount of greenfield space that we actually are able to grow in adding new publishers as well as DSPs, we feel like we'll be able to overcome any recessionary issues that we might experience in 2023, and those are some of the contingencies we've put in place. In addition to that, we have been specifically in Q4 started the process of re-platforming our Colossus SSP to allow us to really build up that infrastructure that we need to maintain the growth that we are anticipating throughout 2023 as it relates to the addition of new publishers and DSPs working inside of our ecosystem. So those are the pieces that we have in place to help us carry on the growth in the momentum that we experienced in 2022 throughout the 2023 year, and that's how we were getting comfortable with giving the guidance that we have provided.

Got it. That's super helpful. And I know you gave a revenue guide, but at least maybe at a high level, can you give us a sense on how you think margins are able to trend throughout this year and maybe some of the puts and takes on investment?

Yes. Absolutely. So just to give, we will not be giving EBITDA guidance or EBITDA margin guidance for 2023. What I will tell you is we are, as you know, when we built this company, we have been a self-funded organization and we have been very judicious in the capital that we receive, but we also believe maintaining some level of profitability is very important to give us organizational discipline. But what we are also planning for is a level of investments in platform and in salesforce and in people for 2023 to really position us for 2024 in the growth that we're anticipating two years out. With that being stated, what we will say is we are planning and managing to profitability. But we will not be giving EBITDA guidance or EBITDA margin projections as to what that will look like. We'll be managing two topline revenue numbers on the go forward. What we have seen is because we are adding some of the larger publishers, the EBITDA margin on the – I'm sorry, the gross profit margin on the sell-side business, historically has been around the 18%. We are anticipating that to be around the 14%, 15% range because of some of the hardware investments that we're making as well as some of the, I would say, preventative measures as it relates around IVT that we're making and also adding the larger publishers. You see some level of margins, but we are also planning on putting in new projects to help us grow that margin in the 2024 year.

Got it. That's actually really helpful. And just maybe one kind of fun one, that you guys talked about sort of strategic opportunities. I mean, on one hand, we've got DOJ pressure on Google. On the other hand, we've heard Magnetite say that they're starting to see some undifferentiated SSPs start to fall by the wayside. So like how are you thinking about targets for consolidation? If that's what you're thinking, how do we view those targets? Is there any way to frame sort of the size or the structure, what that might look like?

Yes. In regards to our corporate development, our strategic investment approach, what we really look for is technology that we think that can add to our current technology stack. We also look at something that can be accretive as well as that can leverage the operations that we've already built in today. If we see process that we think that we could streamline in order to capture more EBITDA, those are other opportunities that we'll be looking at. But again, it will be very opportunistic and if we go down the path of future acquisition and if we see something that's opportunistic that we think we can bolt-on inside of our platform, it's something that we'll take a hard look at and decide if it makes sense for our business in a go-forward.

Got it. All right. Awesome. Thanks for all the color, Mark. Really appreciate it.

Absolutely.

Our next question comes from the line of Darren Aftahi with ROTH MKM. Please proceed.

Hi. This is Dylan for Darren. Thanks for taking the questions. I wanted to sort of follow-up on gross margins and the compression that you saw there. Appreciate the color on the 14%, 15% outlook. But how much of that is driven by sort of less favorable economics as you move upstream to work with larger publishers that gave you that scale versus some of the investments you might be making in some of the data side and hardware?

Yes. Combo of both. It's a combo of both that we have been experiencing. So I would say it's dead even on both. But what we will say is we have tactics in an approach that we're putting in place. So by 2024, we think that we're going to see a reversal of those margins based on new products we'll be bringing to the marketplace in that timeframe.

All right. Thanks. And on the DMO side, have you seen any expansion in your pipeline? I guess, what I'm trying to say is net new clients or is some of the growth that's happening there that you're taking greater ad spend from your existing DMO clients?

Yes. Good question. Yes, we've actually experienced both. We have won some new DMO contracts. City of Spokane is one of them – I'm sorry, Spokane Airport is one of the new ones that we just recently won. And there's – we have a full fledged strategy to go after more market share in the DMO space. In addition, some of our larger clients who have been historically favorable spends with us have actually increased their spend. So we are growing customer count as well as market share inside of those accounts have also been expanding for us as well. And we think that that's a positive movement from the leadership team that has been pushing our buy-side business and we're excited about how we've been able to grow on that front.

Great. Thank you. And one more if I may. In terms of the sales guidance, should we expect a similar trajectory and cadence of last year where it's sort of much stronger in the second half of the year and really 2Q as well with 1Q is sort of being, I mean, quite low compared to the rest of the quarters?

Absolutely. We typically – our business typically follows the typical seasonality bend of most digital marketing where Q1 is the slowest period, Q4 is the highest. We have no reason to think that that seasonality trend is going to deviate for this year and we're actually planning our business accordingly with Q1 being our slowest period and it builds from there.

Great. Thank you. That's it for me. I'll pass it on.

Absolutely.

Our next question comes from the line of Michael Kupinski with NOBLE Capital. Please proceed.

Thank you, and thanks for taking my questions. Can you talk a little bit more about your headcount, what is it currently, and then what are your hiring plans? I know that you said that you'd like to continue to hire to support faster revenue growth. I'm wondering if your current sales staff that you have and so forth supports the $118 million to $122 million of revenues for this year, or do you feel like you need to hire to achieve that from current levels?

Hey, Michael. This is Susan. Yes. Thanks for the question. We have about 70 people right now, and the headcount that's in place right now will support the growth in 2023. We normally hire those folks about six to eight months ahead of time because it does take a while for these boots on the ground to ramp up. And so we do have the sales team in place to deliver on that revenue and we're currently also planning on hiring additional people in 2023 as we look to the 2024 strategies.

Thank you. And I know that when I look at the quarter, the compensation expenses were a little higher than expected for me. I was just wondering was there – and I know that you might have had some management changes in one of your segments, but I'm just wondering, was that due to the hiring that you had or was that simply planned hiring? Can you just kind of give us some color on that?

Yes. No, in the fourth quarter, of course, we had the higher headcount in the fourth quarter. We made some investments in people and compensation plans and so yes, that's where we ended up for the year.

And just so you're aware, we do hiring in Q4 for us, so that we have boots on the ground ready to run, coming Q1, Q2 of the next year. So part of our Q4 planning is to strategically hire in Q4, so that we can have boots on the ground and get the benefit of those people coming on board coming Q1 and Q2 of the next year. So that's a trend you'll probably continue to see on the go forward.

Perfect. And then just to ask this question because I feel like I have to. Have you noticed any fallout from the SVB from a client perspective? Anything notable there?

Yes. Nothing notable. I mean, we have addressed all the concerns that our customers and vendors have had and have no exposure there. So we haven't seen any disruption in cash coming in and we haven't had any disruption in cash going out. So we feel we're protected as far as any direct impact from that.

Right. And then on the transition to the new servers, has that gone as planned? Have you noticed any issues that have developed? And then I believe you had duplicative cost in the quarter, if you can just remind me about that. And if there was duplicative cost, can you kind of outline about the dollar amount, what that might have been?

Yes. Go ahead.

Yes. Michael, so we did have duplicative cost because we want to make sure that we protect that transition and not have any interruptions whatsoever. That was probably about a 100K in the quarter that we spent with HPE to make sure that we had some redundancy built in and we're going to continue some of that in Q1 as we finish up that transition.

Got it. And then you talked a little bit about the competitive landscape and I was just wondering in terms of whether or not you're seeing any pricing pressures just because of the environment or is it just simply the larger customers that you're going after?

Simply the larger customers that we're going after. They have a little bit of price sensitivity as it relates due to the volume of impressions that they're able to provide. So that's part of the business strategy and other clients have – other of our competitors have had the same components as well. So it's standard.

Got it. That's all I have. Thank you.

Thank you.

Yes.

Our next question comes from the line of Edward Reily with EF Hutton. Please proceed.

Hey guys. Thanks for taking my question. Congrats on the growth on the buyer base within the sell-side segment during the quarter. Just wondering what you guys are doing to maybe incentivize these buyers to continue using your platform versus maybe going through some other sell-side platforms?

Yes. Absolutely. Really it's the relationships that we're able to build on the buy-side of our business with the outreach. The strategy that we take is to build relationships not just with on the DSPs, but we go further upstreams with the agencies and the brands as well. Building those relationships and then providing them with – providing them access to long-tail publishers that are focused in on the multicultural ecosystem and giving them a one-stop shop, where they could buy general market as well as multicultural publishers from a trusted company like ours has proved to be beneficial. In addition to that, the level of technology and the reliability we've been able to provide the marketplace has also been a benefit for customers wanting to do business with us. So once they're engaged, they typically stay and want to continue to transact with us because the way that we've been able to run our business has proven that level of efficiency and they have seen the benefit of that performance in the long run.

Okay. Got it. Thank you for that. All my other questions were asked. Thanks.

Thank you. There are no further questions at this time. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

All right. Thank you.

Thank you.