Hello, everyone and welcome to PubMatic's Third Quarter 2023 Earnings Call. My name is Christian [ph] and I will be your Zoom operator today. Thank you for your attendance. This webinar is being recorded. I will now turn the call over to Stacie Clements with The Blueshirt Group.

Good afternoon, everyone and welcome to PubMatic's earnings call for the third quarter ended September 30, 2023. This is Stacie Clements with The Blueshirt Group and I'll be your operator today. Joining me on the call are Rajeev Goel, Co-Founder and CEO; and Steve Pantelick, CFO. Before we get started, I have a few housekeeping items. Today's prepared remarks have been recorded. After which Rajeev and Steve will host live Q&A. [Operator Instructions]. A copy of our press release can be found on our website at investors.PubMatic.com. I would like to remind participants that during this call, management will make forward-looking statements, including, without limitation, statements regarding our future performance, market opportunity, growth strategy and financial outlook. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. These forward-looking statements are subject to the inherent risks, uncertainties and changes in circumstances that are difficult to predict. You can find more information about these risks and uncertainties and other factors in our reports filed from time to time with the Securities and Exchange Commission, including our most recent Form 10-K and any subsequent filings on Forms 10-Q or 8-K which are on file with the Securities and Exchange Commission and are available at investors.PubMatic.com. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. All information discussed today is as of November 8, 2023 and we do not intend and undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. And today, in addition, today's discussion will include references to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net income and free cash flow. These non-GAAP measures are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our press release. And now, I will turn the call over to Rajeev.

Thank you, Stacie and welcome, everyone. We delivered above expectations for both revenue and adjusted EBITDA. The upside in revenue was driven by an increase in monetized impressions across all formats. And once again, our durable model led to increased profitability, margin expansion and healthy free cash flow. This quarter, we continue to add new logos and deepen existing publisher and buyer relationships. Total activity from SPO deals grew to an all-time high of 45%, aided partly by the launch of Activate. And customers and partners are seeing great results from our expanded solution suite. This quarter highlights the momentum we're building in the business and fuels our growth expectations for the fourth quarter of mid-single-digit year-over-year revenue growth. I recently spent a week with customers and prospects at Advertising Weak New York and I've never been more energized about our long-term growth opportunities. Our customer interactions indicate that sell-side technology that sits closest to the publisher and therefore, to the consumer is key to driving long-term sustainable growth in the programmatic ad market. Several key trends are driving this and we believe our buyer and publisher relationships are strengthening as a result. First, buyers are embracing programmatic advertising to automate the purchase of high-value connected TV and video ad inventory. Sell-side technology companies like PubMatic enable us access at scale across the open Internet. Second, consumer privacy changes have resulted in increased global regulation and the looming deprecation of the third-party cookie. These trends have fueled tremendous innovation across the industry and many new solutions are best leveraged when the technology sits closer to the consumer and publishers. At PubMatic, we are the technology platform at the point of consumer consent. And lastly, as our industry matures, there's been an ongoing imperative for greater control over the digital advertising…

Q3 revenue was $63.7 million and adjusted EBITDA was $18.2 million, or 29% margin, both above guidance. We exceeded our revenue expectations for the quarter by selling more video and display impressions than projected. We also continued to execute against our key operating priorities this year which sets us up well going into 2024. We converted the majority of our revenue beat into incremental profit dollars which highlights our ability to expand margins. Our CapEx optimization and working capital efficiency resulted in $17.2 million in free cash flow, the highest quarterly level in nearly two years. Turning to the revenue details, we saw solid improvements for both video and display revenues as the quarter progressed. We drove an incremental 10% monetized impressions above expectations for the combined August and September periods. And CPMs were relatively stable from July onwards. These positive factors helped us offset a challenging July and allowed us to substantially close the gap to our prior year revenues. Omnichannel video revenues came in better than expected and grew sequentially from Q2 by 7%. While down approximately 4% [ph] year-over-year due to the soft July, we saw monetized impressions accelerate sequentially through the quarter. As a percent of total revenue, omnichannel video revenues increased to 33%. Display revenues were 67% of total revenue and declined less than anticipated at 4% [ph] year-over-year. Revenues improved sequentially through quarter driven by incremental impressions sold. These display results were particularly notable as we managed through Yahoo's technology transition related to its own and operated inventory which is predominantly desktop display. Yahoo has now shut down its sell-side platform. We anticipate it will take several quarters for us to ramp up Yahoo monetization as they migrate their inventory to a new technology stack. In Q3, our revenues excluding Yahoo owned and operating…

Thank you, Steve. [Operator Instructions]. Our first question comes from Matt Swanson at RBC.

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

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

And then maybe kind of on the other side of the question you mentioned ACTIVATE invert, $75 billion TAMs. But thinking about -- you got to start somewhere with a number that big. Where are like the most actionable places do you think we'll start seeing this show up even more so in '24? I guess kind of what -- what part of that $75 billion seems the most achievable near term.

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

Our next question comes from Shweta Khajuria at Evercore Capital Markets.

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

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

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

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

Our next question comes from Justin Patterson at KeyBanc.

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

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

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

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

Our next question comes from Jason Helfstein, Oppenheimer.

So just -- can you just clarify on CTV. So did you see pricing stabilize, I guess, as we're like in October? Or is it basically volume has stabilized. Maybe comment, Steve, on how the trends you show on CTV impact of the gross margin in the quarter? And then Rajeev, just like a longer-term question, with the bifurcation of IDs, making it kind of more confusing for advertisers, it seems like it makes them more aligned upon their DSPs. Just how does that kind of play into your strategy?

Sure. So with respect to CTV pricing, the statement that I made was relative to stability to July. As I called out last earnings that the overall macro pressure has -- macro environment has put pressure on CPMs over the last year. But the deposit base from our perspective, it's been relatively stable since the end of July. And so the benefits that we're seeing is really our monetized impression. So more impressions that we are selling across all formats, CTV being an important one. And we saw a very strong growth in the third quarter, monetized impressions for both video and display, as I referenced. And we expect, for example, in the fourth quarter, video to have double-digit monetized present growth on a year-over-year basis. So what you're seeing is the foundation of our business which is volume really is quite healthy and we're just navigating through sort of the current environment. Now from a gross margin perspective, there are many things that we do to grow and support that, not the least of which, of course, is the optimization we've done on infrastructure. On a year-over-year basis, we are going to be -- have reduced our CapEx by 70%. The majority of that goes into the cost of revenue line. So my expectation going into the future is that our gross margin will continue to tick up. And then we'll have the incremental benefit as CTV revenues grow and only video revenues grow because the marginal profitability for those formats are quite high. Overall, we reached 33% of overall revenues coming from video in the third quarter and I anticipate some share gains in the fourth quarter as well.

So Jason, on your ID question, I commented on 29 IDs now integrated into our platform. So that, I think, speaks to the level of complexity and choice or optionality that buyers have. The key focus for us is really on interoperability. So making sure that whatever idea, a particular buyer chooses, they can find a maximum amount of inventory or impressions on our platform relative to those ideas. But I think the broader trend here is really the increasing relevance for sell-side technology in the ecosystem. So the technology that sits close to the consumer and the publisher which, of course, is where we sit is increasingly important because typically IDs are only one part of an advertiser's audience targeting strategy post cookie. They're also looking at first-party data. They're looking at contextual data. They're looking at maybe cohorts or segments of users. And many of those things, all of those things are better when they're done on the sell side because that's where the consent is coming from the consumer. There's no incremental hop. There's more efficiency from a carbon perspective. So there's a lot of benefits that come from moving targeting to the sell side and that seems to be in line with what privacy regulators are looking for where they want to see less bidstream data flowing across the ecosystem. And so that's really represented in our Connect platform. And as we talked about in the prepared remarks, we're seeing increasing traction with that as the potential for the Google Chrome cookie deprecation draws near. Thank you.

Our next question comes from James Heaney at Jefferies.

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

So yes, we announced an integration -- advanced integration with FreeWheel, I guess, about a month or so back which really opens up opportunity for customers -- our customers that are using ACTIVATE to be able to access significantly more CTV inventory, inventory that's sitting on the FreeWheel platform. And so for us, as you mentioned, James, FreeWheel is a leading ad server for CTV, -- many traditional broadcasters use FreeWheel both in the U.S. and within Europe. We've had a long-standing partnership with FreeWheel and so this just really expands our partnership into our latest supply path optimization product offering of ACTIVATE. It should give us significantly more impression or inventory opportunity which we think will make activate more attractive to buyers and should lead to higher revenue flowing through ACTIVATE over time.

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

Sure. You're right. We grew sequentially from the third quarter -- from the second quarter which is obviously important from the momentum of the business. As I commented on earlier, what you're seeing broadly speaking but I'll comment specifically on C2B is over the course of the last 3 or 4 quarters, there has been gradual declines in CPMs for CTV. So when you look at a point in time, the cumulative effect of that is more significant. So the positive news is that we've been growing our monetizing pressures significantly double digits. And we anticipate that to continue into the fourth quarter. So overall, we feel that the business is in quite healthy shape. And for the various points we raised regarding our initiatives around SPO, the progress that we commented on in our prepared comments regarding the private marketplace and programmatic guarantee all support the long-term vitality of our CTV business.

And our next question comes from Mauricio Munoz at Raymond James.

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

So I'll take the investment, nice to connect with you. So from our perspective, something that we've learned over many years is that we have taken the opportunity in challenging macro environments to get more traction, gain market share. And we've been able to do that through investment in innovation, people and infrastructure. And so the last 1.5 years have been exactly that environment and we've continued to invest -- we've had some of the most rapid development cycles than we've had in the history of our company. And the reason we can do that is because we have such a strong financial base. We have a terrific business in terms of the core fundamentals. We have strong margins. We generate significant free cash flow. And we know that when we've invested in the business, we're able to generate significant upside. So we're not going to change that. And so the only decision that we need to work through which is what we're doing right now is the rate of investment looking ahead into the future. And so we fully anticipate to keep our foot on the accelerator because of the significant opportunity out there for us. The regive called out the importance of the sell-side platform, that's just getting more important. We're going to be a significant beneficiary as consolidation continues. And so we're going to reinvest some amount of our incremental profitability back into the business and we fully expect to continue to grow the top line and our market share over time. Mauricio, on the second part of your question, when we think about what are the most exciting growth opportunities in the industry, it's really around supply path optimization, so getting closer to buyers and capturing a greater share of their ad budgets and return for greater efficiency and greater control on their part, omnichannel video, so both connected TV as well as online video. Just as a reminder, online video is still multiples of the size of connected TV in terms of TAM or opportunity commerce media and then addressability. And so these are squarely aligned with where our investment portfolio sits over the last 18 months. And that, of course, is not by accident. As Steve described, when we get into a downturn or a soft patch in terms of the macro environment, we really think about where is the industry headed when the inevitable upturn comes and then we align our innovation or investment portfolio accordingly. So our intent is to be really well positioned with the fastest-growing segments when we come out of this downturn, right which hopefully we'll start to see in the next couple of quarters, although nobody knows for certain. And hopefully, we'll also see a firming up of the display market which is still about 2/3 of our business. And all of that combined should push us to market share gains, as Steve mentioned.

Our next question comes from Dan Day at Riley.

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

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

And if I could just follow up with one on convert, other product you're looking to scale here. Just how are connotations with retailers and the other commerce partners going so far? There's a couple of kind of more established specialized retail media ad tech vendors out there targeting that admin to long tail. So just talk us through how you cut through that and differentiate is the easy answer that there's room for multiple solutions. They don't -- they're not choosing one or the other is retail media a little different and they might not want to work with 10-plus SSPs like they do in the Open Web.

Sure. Yes. Dan, I can take that one. So I think there is a case of truth to what you're saying, certainly which is that the industry is still quite early in the Commerce Media evolution and opportunity. So yes, there are obviously some folks that are already playing in this space. But we see the vast majority of the opportunity really has been white space. And so we are going after opportunities where we can bring together a suite of offerings with on-site monetization, sponsor listings as well as display and video, along with off-site monetization. So that's inventory, our audience extension and use of first-party data to be able to scale retailer’s budgets. So with the launch of Converto, we have a unified platform that can bring all of these use cases together and deliver that to commerce media participants. And we're seeing that as commerce media participants look to scale their business from maybe an initial set of dollars to a bigger portion of their ad business than having a comprehensive platform can be quite useful. So that's really where we're focused in terms of the opportunity set.

And our next question comes from Maxwell Michaelis at LakeStreet.

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

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

We have time for one more question. Matt Condon from JMP.

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

So a key part of Privacy Sandbox from Google is shifting the auction environment and the data used in that auction environment into the browser, right, to make that privacy safe. So that is a pretty, I think, significant shift in terms of the infrastructure required to monetize an ad impression. And so we've got a team of engineers that are working on this. As I mentioned, we're working with Google and testing those APIs. I think it's still quite early going. I think there's still a number of unknowns as we are in conversation with the Google team about how things will work and how they'll scale. So I would say it's still pretty early going in terms of validating do these APIs work and how transactions will be processing will be scaled up. But to your question, it is, I think, a pretty meaningful shift in terms of infrastructure. And I think given that we own and operate our own infrastructure and have a great degree of control and flexibility, we feel like we should be in a good position to be able to build in the way that we want to build it.

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

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