Direct Digital Holdings, Inc. Q3 FY2023 earnings call

• The company made significant investments in technology stack, advertising platform, and operational structure, and these investments are yielding benefits in 2023 instead of initially expected in 2024.
• Strategic partnerships have driven growth, such as the collaboration with Amazon Publisher Services integrating Amazon's transparent ad marketplace with Colossus SSP division, and the partnership with HPE GreenLake for building a reliable production environment for Colossus SSP. Also, the partnership with Beeswax has expanded access to multicultural ad inventory.
• Sell side platform saw substantial growth with 400 billion monthly impressions, a 220% year-over-year increase, and over 34 billion monthly bid responses, a 210% year-over-year increase. Sell side revenue per advertiser increased 241%. Buy side served approximately 228 customers and buy side revenue per customer increased 14% year-over-year.
• The company completed the redemption of outstanding publicly traded warrants to protect against shareholder dilution.

In Q3 2023, Direct Digital Holdings' top line revenue reached $59.5 million, a significant increase of $33.5 million or 129% compared to $26 million in the same period of 2022. The sell side advertising segment was the main driver of growth, with revenue growing to $51.6 million for the quarter, contributing $32.8 million of the increase and representing 87% of the total revenue. The buy side advertising segment saw revenue grow 10% year-over-year to $7.9 million, accounting for 13% of the total revenue. Adjusted EBITDA for the quarter was $5.4 million, up from $2.4 million in the same period of 2022, a 123% increase.

• The company is revising its full year 2023 revenue guidance upwards to a range of $170 million to $190 million. - Anticipates sell side gross margin to return to historical targets of 14% to 15% by the end of Q2 2024, with half of the incremental costs associated with sell side technology stack investments expected to continue until approximately March 2024.

• Forward-looking statements are subject to risks that could cause actual results to differ from historical results and forecasts, including those set forth in DRCT's filings with the SEC. - Margin results in the third quarter were affected by the accelerated growth in the sell side advertising segment and related cost impacts.

Q: Could you talk about the impact of investments that were supposed to happen in 2024 but are now happening in 2023?

A: It's a three-pronged approach: technology replatforming was accelerated by the tech team, increased and deeper relationships with buying partners and agency groups, and operational execution coming together.

Q: Given Q3 revenue mix, is there anything that would get in the way of sell side gross margins returning to 14% to 15% by Q2 2024?

A: No, the company is confident sell side business will stay in the 14% to 15% range through 2024.

Q: How to parse out underlying organic growth between increased spend per customer, new partner wins, and expansion of inventory impressions with existing partners?

A: Growth is a combination of all three: increased impressions (from 300 million in Q2 to 400 million in Q3), revenue per advertiser up year-over-year, and growth from both increasing impressions and working deeply with buying communities.

Q: What are the key drivers of beneficial market dynamics?

A: Mix of multicultural publishers in inventory, operational efficiency of the platform, and process in the buying community.

Q: In terms of multicultural space, what's the percent of advertisers targeting multicultural vs general?

A: 40% of US population is in those multicultural groups, and roughly 10% to 20% of inventories are directly geared to those audiences through authentic publications.

Q: Are you seeing additional competition in the niche marketplace?

A: Competitors are out there, but the company is equipped to remain a competitive option for buyers.

Q: What do you see in conversations relative to the broader macro for Q4?

A: The company is bullish on its business due to built relationships, established platform, and growth roadmap despite some peers facing difficulties.

Q: How should we think about growth versus profitability both in Q4 and going forward?

A: Gross profit margins for buy side and sell side are as expected, operating expenses will be at or slightly higher than Q3, continuing to spend on headcount and sales and marketing while balancing growth and profitability.