Viant Technology - Q2 2023

Transcript

Operator (participant)

Hello, everyone, and welcome to Viant's second quarter 2023 earnings conference call. My name is Catherine, and I will be your operator today. Before I hand the call over to Viant's leadership team, I'd like to go over just a few housekeeping notes for the program. As a reminder, this webinar is being recorded. After the speaker's remarks, there'll be a question and answer session. If you plan to ask a question, please ensure you set your Zoom name to display your full name and firm. If you'd like to ask a question during the time, please use the Raise Hand function located at the bottom of your screen. Thank you for your attendance today, I will now turn the call over to Ben Tapper with Viant Technology.

Ben Tapper (VP of Investor Relations)

Thank you, Catherine. Good afternoon, welcome to Viant Technology's second quarter 2023 earnings conference call. On the call today are Tim Vanderhook, Co-founder and Chief Executive Officer, Chris Vanderhook, Co-founder and Chief Operating Officer, and Larry Madden, Chief Financial Officer. I'd like to remind you that we will make forward-looking statements on our call today, including our guidance for Q3 2023 and our platform development initiatives that are based on assumptions and subject to future events, risks, and uncertainties that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of today, and we undertake no obligation to update or revise these statements except as required by law.

For more information about these factors that may cause actual results to differ materially from forward-looking statements and our entire safe harbor statement, please refer to the news release issued today, as well as the risks and uncertainties described in our quarterly report on Form 10-Q for the quarter ended June 30, 2023, under the heading Risk Factors on... and other filings with the SEC. During today's call, we will also present both GAAP and non-GAAP financial measures. Additional disclosures regarding these non-GAAP measures, including a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures, are included in the news release issued today, which has been posted on the investor relations page of the company's website and in our filings with the SEC. I would now like to turn the call over to Tim Vanderhook, Chief Executive Officer of Viant. Tim?

Tim Vanderhook (CEO)

Thanks, Ben, and thanks everyone for joining us today. I'm excited to share that we had a great second quarter as we built on our momentum through the first quarter amid an improving macro environment. We significantly exceeded our guidance range on both revenue and adjusted EBITDA. The increasing adoption rates of our Household ID, advanced reporting, and Data Platform products drove our outperformance in the quarter as customers look for smarter and more efficient ways to deliver their ad campaigns. At the same time, leveraging our internally developed AI drove our own productivity. As we look into the rest of the year and throughout 2024, we see a number of tailwinds accelerating our growth. First, the continued application of artificial intelligence. Second is Google's deletion of cookies in 2024, and third, the ongoing transition of $60 billion of linear television moving into connected TV.

I want to share a bit more on each of these areas and provide more clarity on how we see them driving our growth and profitability. The promise of artificial intelligence is not really new for the ad tech industry. At Viant, we're working aggressively toward our vision of building an autonomous ad platform. Similar to the way the automotive industry has its sights set on self-driving cars to boost the number of vehicles sold per year, we believe an autonomous ad platform that leverages AI to help advertisers achieve superior campaign performance will grow our total addressable market. Our goal is to leverage AI to make the programmatic ad opportunity available to millions of small and mid-sized businesses by making it simple for them to reach new customers and grow their businesses.

We envision AI as the key to scaling our customer count from the hundreds into the millions, and unlike autonomous vehicles, our industry hasn't fully realized this vision yet. However, we have been focused on laying the groundwork of automation and training deep learning models that solve programmatic traders' problems one by one, to help them improve their campaign results in a more automated fashion. One great example of this is the release of our new AI-powered Bid Optimizer late in the second quarter. This translated into immediate benefits for our advertisers in the form of more efficient CPM pricing. For customers who have opted into the AI-powered Bid Optimizer, we have achieved a CPM savings on average of over 35% for the same publisher ad inventory.

Bid Optimizer is achieving incredible results for our clients and is a great example of how Viant is leveraging newly developed AI to increase the value of our ad platform to our customers, which drives them to consolidate more of their ad budget into our platform. We believe that the application of AI into programmatic is the largest market opportunity since the invention of real-time bidding itself. These new AI-powered solutions are allowing us to deliver a best-in-class experience and results to our customers. We have an exciting product pipeline, and I'm excited to share more with you in the future. On the second point I touched on, Google's impending deletion of cookies, which they have recently stated is set to start in Q1 of 2024. This will create additional revenue opportunities for Viant.

I'd like to remind investors that Viant's patented technology gives marketers the ability to execute omni-channel advertising using our Household ID, and this does not rely on the cookie like other solutions in the market. Our Household ID has achieved more than 80% availability across all ad requests that we see. We believe that Google's pending deletion of cookies and other identifiers will further accelerate the growth of ad spend flowing through our platform. On the third opportunity, linear TV to streaming. The adoption of streaming services will continue to shift marketers' dollars, and we see an additional $60 billion of ad spend coming into the programmatic ad market. In CTV, our Household ID is available on over 90% of all ad requests, which is a significant advantage in this fast-growing space.

I'm happy to report that we outpaced the market in Q2 with strong double-digit growth in CTV. There are multiple factors that contributed to this growth, but our ability to measure return on ad spend against a household rather than a device is critical in a cookieless environment like CTV. It's important to remember why CTV gets so much attention. Nearly 70% of Americans engage with CTV, and there's still significant room to grow. As linear TV dominance wanes, no single measurement protocol has been developed. With the application of our Viant Household ID, marketers can confidently apply the ad spend previously allocated to linear TV to a far more sophisticated CTV ecosystem. With the use of Viant's ad platform, those marketers can run campaigns in this high-growth channel with the same precision and visibility expected from a programmatic platform.

To close, we had a very strong second quarter. We're making immediate strides on our AI initiatives that are translating directly into value for our customers and our shareholders. We're well positioned and excited to share the strong financial results we're expecting for Q3 as well, which Larry will touch on in a bit. We are accelerating our momentum into the second half, and we look forward to providing an update on our product pipeline at an innovation event this fall, with more details on that to come soon. Now I will hand the call over to Chris to discuss more around our products and customers.

Chris Vanderhook (COO)

Thanks, Tim. Q2 was another strong quarter of wins across our client base, with particularly strong results within the mid-market, where we believe our efficiency, attribution, and measurement capabilities, along with our unrivaled customer support, have made us a go-to choice for marketers whose objective is maximizing their return on ad spend. In the past, I've discussed crucial elements that differentiate the Viant platform and make us such a formidable solution in the mid-market. First and foremost, you must offer the best product, which means the lowest CPM to deliver the best return on ad spend. Second, you must demonstrate superior performance in the form of comprehensive measurement and reporting. Finally, you have to provide the support infrastructure to ensure the customer experience is seamless.

With more than 14,000 ad agencies in the U.S. alone, the mid-market is a large and dynamic marketplace and one in which we are particularly well suited to win. In much the same way mid-market agencies have become attractive choices for brands looking to establish themselves in innovative and creative ways, so too are their preferred tech partners. In this way, Viant is working with these mid-market agencies and brands to break free from a tired paradigm of one-size-fits-all platforms by offering industry-leading tools, approaches, and service. The benefits of the self-service programmatic model are well known. At Viant, we specialize in multiple pathways to get our clients up to speed on our platform. Our intuitive user interface and focus on automation further enhances that ramp-up, while our unique data tools enable targeting, forecasting, reporting, and ultimately visibility that is largely unavailable anywhere else.

I want to talk a little bit more about two specific areas of our DSP that truly differentiate us. Each, in their own right, are vital to the success of mid-market customers. For several quarters, we've discussed investments we've been making in the Viant Data Platform. With a long history of effectively and safely leveraging massive data sets to drive our customers' success, the Viant Data Platform, in many ways, is the culmination of that journey. How to manage data and how to extract value from that data are two questions faced by nearly all of our clients. They want to be able to use their first-party data in conjunction with their advertising campaigns. Through integrations with industry-leading data warehouses and clean room providers, we're able to provide secure solutions that deliver real-time insights that can be inserted directly into campaign design and implementation.

None of our competitors have a tool suite this comprehensive, and more importantly, none of our competitors have Viant's track record to leverage that data in a commercially viable and privacy-friendly way. The Viant Data Platform is being leveraged by our largest customers and has future-proofed their programmatic advertising strategy for the impending deletion of third-party cookies by Google next year. Clients that leverage our Household ID along with the Viant Data Platform are able to deliver relevant ads while still being able to measure the impact of those ads in a cookie-less world. Next, I want to share more information on our supply path optimization initiative, Direct Access. Direct Access is a program that develops the most efficient supply path for our customers by creating partnerships with premium content owners to monetize their content directly, while lowering costs for advertisers by eliminating the reselling of inventory amongst middlemen.

Our focus for the Direct Access program has centered on CTV. Tim discussed the strong results we're seeing in the CTV space, Direct Access is helping to drive that success. With a more efficient supply chain, advertisers see lower cost of media with a higher win rate in ad auctions, as well as lower instances of fraud, which all boils down to better campaign performance and higher return on ad spend. Notably, we've partnered with many of the largest connected TV content owners in the industry, representing some of the most premium inventory being watched by consumers. Although still early, our Direct Access program is gaining a lot of attention by both new and existing customers who are seeking lower CPMs on premium, premium inventory by leveraging a more efficient supply path.

In the second quarter, Direct Access represented more than 10% of CTV spend, and we expect that to increase throughout the year as we see steady adoption by our clients. Additionally, I'm proud to announce Viant's recent inclusion in Prebid.org. Prebid is open source technology that provides an alternative path for premium publishers to take bids directly on their advertising inventory rather than through multiple resellers. This leads to better economics for publishers and advertisers alike, and ultimately a more efficient programmatic ecosystem. We expect to release new technology in this area as more and more publishers look to gain direct access to our customers' demand across all channels. With that, I'll close by saying we've wrapped an excellent first half of the year, and we're encouraged by the strong buying signals we're seeing from our customers as we move into the second half.

We continue to focus on delivering best-in-class product, and we believe the gains we've made so far this year are only the beginning. Thank you, and I'll now turn it over to Larry to provide more details on our financial performance.

Larry Madden (CFO)

Thanks, Chris. Before I begin, I'd like to remind everyone that we have posted a presentation to our investor relations website that includes supplemental financial information to accompany today's call. As Tim mentioned, we successfully capitalized on our first quarter momentum, exceeding our revenue and adjusted EBITDA guidance for Q2 and achieving the high end of our guidance for contribution ex-TAC. Revenue for the quarter was $57.2 million, an increase of 12% versus the prior year period, 37% higher than Q1, and exceeding the high end of our guidance. Contribution ex-TAC for the quarter was $33.7 million, an increase of 6% versus the prior year period, 20% higher than Q1, and at the high end of our guidance.

We continue to see improving signs with regards to ad spend, as evidenced by Q2 revenue and contribution ex-TAC growth rates accelerating from Q1 levels. We expect this encouraging trend to persist and strengthen throughout the second half of the year. In terms of customer verticals, we saw a strong rebound across our retail and consumer goods verticals, with both delivering solid double-digit growth in the quarter. Spending across our travel, online gambling, and automotive verticals also remained strong. In terms of channels, we saw a robust growth in CTV in the quarter, driven in part by the promising outcomes of our Direct Access program. Additionally, our customers continued to positively respond to our unique ability to deliver highly targeted messaging at the household level in this cookieless environment. In the second quarter, CTV accounted for over 1/3 of total advertisers' spend on our platform.

From a format perspective, video, encompassing both CTV and mobile video, accounted for more than half the spend on our platform and had strong growth in the quarter. Streaming audio, though still in its early stages, also experienced solid double-digits growth in the quarter. The promising upward trajectory of streaming audio in many ways mirrors the early success we had with CTV, reaffirming our commitment to remaining at the forefront of the driving forces behind present and future ad spending. Advertiser spend per active customer increased 7% on a year-over-year basis, and our percent-of-spend customers spent on average more than three times that of fixed-price customers. It is important to highlight that the cohort effect created by the power and scale of our self-serve DSP continues to widen the gap between our percent-of-spend customers and fixed-price customers.

Our percentage of spend customers not only exhibit higher retention rates, they also have a greater propensity to expand their business with us. We ended the quarter with 314 active customers, a net decline of 13 customers during the period. As discussed on previous earnings calls, our philosophy around customer growth centers on cultivating deeper relationships with high-quality customers capable of higher spending levels. As part of that strategy, we are gradually shifting away from servicing lower-end customers while actively attracting and onboarding customers with greater long-term value potential. This strategic shift allows us to focus on building enduring partnerships that contribute to sustainable growth and success. Moving on to operating expenses. In the quarter, our non-GAAP operating expenses totaled $26.9 million, reflecting a year-over-year decrease of 23%. This reduction reflects our commitment to driving operating leverage across the business.

While achieving these cost efficiencies, we remain equally dedicated to investing in future growth, as demonstrated by a notable 39% increase in the size of our product and engineering teams over the same period. Our approach is to strike a balance between efficiency gains and investing in the teams and technologies that will propel our long-term success. The integration of generative AI technologies across our organization has also had a profound impact, resulting in a significant increase in productivity. These transformative initiatives have enabled us to achieve remarkable end results with fewer resources, further strengthening our confidence in our ability to substantially grow our operating margins. One metric we use internally to measure productivity is revenue by per employee, which grew 27% in the current quarter versus the prior year period.

By leveraging cutting-edge AI, we are well positioned to continue driving both innovation and operational efficiency. For the second quarter, we generated adjusted EBITDA of $6.8 million, well above the high end of our guidance, and representing an increase of approximately $10 million from the prior year period, and $7.2 million from the prior quarter. Adjusted EBITDA margin as a percentage of contribution ex-TAC was 20.2% for the quarter, representing a 30 percentage point improvement from the prior year period. For the second quarter, non-GAAP net income, which excludes stock-based compensation, totaled $5.1 million, which compares to a non-GAAP net loss of $5.9 million in the prior year period. Non-GAAP earnings per Class A share totaled $0.06 in the current quarter, which compares to a loss of $0.08 in the prior year period.

In terms of share count, we ended the quarter with 62.4 million Class A and Class B common shares outstanding. We also ended the quarter with $204 million in cash, which translates to a noteworthy $3.27 per share outstanding. We had $224 million of positive working capital and no debt at quarter end, we continue to have access to a $75 million undrawn credit facility. This solid financial foundation positions us extremely well to fully capitalize on the substantial market opportunity ahead of us. As we look ahead to Q3, we're optimistic about the accelerating growth rates of our business and the continuing improvement in the advertising environment. For the third quarter, we expect revenue in the range of $56 million-$59 million, representing a year-over-year increase of 18% at the midpoint.

We expect contribution ex-TAC in the range of $35 million-$37 million, a year-over-year increase of 12% at the midpoint. non-GAAP operating expenses are expected to be $28.5 million-$29.5 million, representing a year-over-year decline of 14% at the midpoint. Finally, we expect adjusted EBITDA to be in the range of $6.5 million-$7.5 million, which represents a year-over-year increase of $8.8 million at the midpoint. In closing, Q2 marked another quarter of strong execution. The power of our platform, combined with our unparalleled service, continued to be strong drivers in attracting new business and fostering growth in existing relationships. As the broader economy shows encouraging signs of improvement, we are well positioned to build on our momentum and further grow our market share.

Our robust financial profile, disciplined cost management, and relentless focus on execution position us to achieve strong top line growth and EBITDA margin expansion going forward. Above all, our dedication to delivering long-term value to both our customers and shareholders remains at the core of our mission. With that, we have concluded our prepared remarks, and I will now turn it back over to the operator to open the video to questions. Operator?

Operator (participant)

We have now reached our questions and answers part of the presentation. If you'd like to ask a question during this time, please use the Raise Hand function located in the bottom of your screen. First, I would like to call upon Maria Ripps from Canaccord. Maria, you can now speak in.

Maria Ripps (Managing Director and Senior Research Analyst)

All right. Thanks so much for taking my questions. Can you hear me okay?

Larry Madden (CFO)

Yes.

Tim Vanderhook (CEO)

Yes.

Maria Ripps (Managing Director and Senior Research Analyst)

Yeah, well, thanks so much. Could you maybe touch on how sort of the macro environment progressed throughout Q2 and so far in Q3 relative to your expectations? Were better-than-expected results more of a function of strong, maybe stronger, broader macro environment, or you've seen some signs that sort of suggesting that of investments in the platform are enabling you to, to take market share?

Tim Vanderhook (CEO)

Yeah. Larry, you want to take the first one?

Larry Madden (CFO)

Yeah. I mean, I think the key here is, and we said this last quarter, is it's, it's truly stabilized. Coming out of January, really the second half of last year into January, there was much more uncertainty. Really, since that point, we have seen a stabilization across the board. Q2 grew faster than Q1. We expect that trend to continue in Q3. Part of that, in Q3 at least, is easier comps, given that we were impacted last Q3 and Q4 by the macro challenges. We are also winning a larger share of our customer budget. It's, it's really twofold in terms of the acceleration of growth rates. We're not assuming that the economy is going to improve in Q3. We're, we're assuming it remains stable as it is today.

Tim Vanderhook (CEO)

On the second question, I do believe we're gaining market share in the mid-market. Product is performing very, very nicely. Our team is executing very well, and we offer what they need, which is the Household ID, the data platform, the level of analytics that the holdcos have to offer their customers. I do believe it was macroeconomic improving somewhat, but I also believe that we are gaining market share in that mid-market area.

Larry Madden (CFO)

I would, I would add one, one other point to that, is where we're seeing the improvement in areas like retail and CPG, which had been down for a couple of quarters, that came back nicely in Q2. That's more of a macro, macro development.

Maria Ripps (Managing Director and Senior Research Analyst)

Got it. That's very helpful. Then, how much of incremental upside do you think it's reasonable to expect as a result of third‑party cookie deletion next year? Do you think most marketers are sort of prepared for this transition at this point?

Tim Vanderhook (CEO)

I would say that most marketers are not prepared for the transition. They continue to operate with the current platforms that utilize cookies until they, they don't work anymore. There's no, no point to make a change until they do. In terms of how to size the upside opportunity, my personal opinion towards it is that it's an enormous wall of money that's currently being spent that needs to get replatformed into platforms that operate in this new world of consumer privacy-friendly or a lack of identifiers in, in the old ways. To me, a huge wall of cash that will be replatformed. Our platform has been out for multiple years now, being tested, poked, prodded, questioned, and yet it continues to deliver results that marketers are looking for in these environments.

I think we're very well positioned as that shift away from cookies happens.

Chris Vanderhook (COO)

I think the larger one, just in terms of the market, Maria, if you look back to Apple's changes with the IDFA, you saw the impact that that had on Meta and Snap immediately. A few quarters later, you saw that hit even YouTube. You know, most people aren't focused on what's happening in 2024 here, when Google deletes the cookie. They've been somewhat muted around the Google's mobile ad ID, but the same exact thing is gonna happen. We not only expect it to hit open web players that are completely cookie-based, we think that we'll be a beneficiary of that, but we also believe that this is gonna hit Meta, it's gonna hit, you know, Snap, Google, all these other walled gardens, that more money is still set to come out of those.

Tim Vanderhook (CEO)

Yeah. Our estimate is Apple's iOS was about a third of the ad spend. That's how we you know, our best guess on social platforms like that. The Google change should have a twice the size impact on those businesses, so it'll be a tough challenge for them.

Maria Ripps (Managing Director and Senior Research Analyst)

Got it. That's very helpful. Thank you so much for the call.

Operator (participant)

Thank you. Next up, we have Laura Martin from Needham.

Laura Martin (Managing Director and Senior Analyst)

Hi, guys. I'll ask two. The first one, I'm very curious that your third leg was the $60 billion, moving from linear TV to connected television, and I think it's great you guys are doing the Direct Access. My question to you is: Have you really gotten any inclination that advertisers on linear are willing to substitute content-based buying and targeting with audience-based buying and targeting, which is required if they're really gonna move money into the open internet?

Tim Vanderhook (CEO)

I would say my answer is yes. I think if that, that answer was no, digital would have never grown in the first place. And all we've seen is that digital eats analog technologies over time, 'cause they're more sophisticated and produce better returns for the publishers and better results for the advertisers. So there is no doubt in my mind that addressable advertising crushes traditional broadcast advertising, and in no way, shape, or form is competitive. So digital will far outcompete linear. That was part of my, my address remarks. I think the big challenge is that linear is measured from a Nielsen panel that gets gross rating points. Digital is measured in actuals, which are real impressions delivered, verified, and there's just a difference there in the way that they're measured, and marketers are trying to resolve those two.

It is certainly, I wouldn't characterize anyone that I've spoken to as not willing to spend in, in streaming or addressable CTV. It's just that they're waiting for consumers to fully adopt that channel.

Laura Martin (Managing Director and Senior Analyst)

Okay, super cool. Then the second thing I was really interested in is this 35% number. You implemented AI, and now you're getting your customers, because you're a buy-side platform, 35% lower prices for the same content?

Tim Vanderhook (CEO)

Unreal, huh? Unreal results.

Laura Martin (Managing Director and Senior Analyst)

It sort of gives. I mean, unfortunately, I take the negative side of this. Like, what the hell were you guys doing before overcharging your clients 35%? I mean, that's sort of the way. Why is it you're able to get such great improvements by, by now using AI? Because AI, machine learning's been out there for, like, five years, and what's new is generative AI. Are you using generative AI? Is that why these improvements are so radical?

Tim Vanderhook (CEO)

I wouldn't classify it as generative AI. I would classify it as deep learning versus machine learning. That's really the difference of the two that were applied, and you're right, 35% is an enormous number and one that we're really proud of. I think that one thing that is important is we achieved 35% savings on what we believe is already the lowest CPMs getting cleared through all competitive DSPs. We do believe we had the lowest CPMs, and we just raised the bar again, and that is our goal. If you, if you watch any of the discussions that I have in the industry, we go to war with the sell side to drive pricing down, and we unleash technologies, data, algorithms, everything we can to work on behalf of that advertiser.

This is just another breakthrough innovation that's changed the game for the buy side, and one that's gonna reap huge benefits for us as we continue to compete in the market.

Chris Vanderhook (COO)

I think one thing to point out, you know, nearly all of our customers are all self-service at this point, and so they themselves control bid pricing. That's, that's one piece. Our platform always has worked well to, to achieve the lowest price when they, when they are bidding. In the end, the customer has the control, and I think with our new AI Bid Optimizer here, we're not only we're doing it behind the scenes when they, when they opt into it, but it's still giving them the insights that not only, number one, that they still remain in control of the bid price, but it's working harder on their behalf. I would say that the CPM savings is massive, and this is great, and the clients love it. What it also does, it's a multi-KPI-based optimization.

We, clients find that even with this, their pacing and their ad performance is more streamlined, more even as well, and so there's other benefits here. We've gotten great response from our customers out of it.

Tim Vanderhook (CEO)

It's part of the reason in the prepared remarks, we feel the AI opportunity is more important than the invention of the real-time bidding protocol itself, because of the numbers that we're seeing internally when it's applied and trained properly and given the chance to go. It really is a transformative technology for ad tech in general, and I think for many other industries as well.

Laura Martin (Managing Director and Senior Analyst)

Great. Thank you very much. Great numbers.

Tim Vanderhook (CEO)

Thank you.

Chris Vanderhook (COO)

Thanks, Laura.

Larry Madden (CFO)

Thanks.

Operator (participant)

Thank you. Our next question will be from Andrew Boone, from JMP.

Andrew Boone (Managing Director)

Hi, guys. Congrats on those strong results. The key takeaway for me this quarter is the inflection in profitability, right? EBITDA came in much better than we expected. If I go back and I look at 2020 and 2021, assuming a stable macro environment, do you guys have a path to kind of high 20s margins next year? How do we think about you guys balancing the profile of growth versus profitability?

Tim Vanderhook (CEO)

Yeah, it's hard to comment on next year. Larry, please comment if you, if you'd like to. I think what we're focused on is the application of artificial intelligence on internally as well as externally for our clients, then we're gonna see adoption rates of these technologies. You know, AI is also a, a scary concept for some users of it. They don't know how it's gonna do. They don't want to mess up results. It's watching the adoption rates. You know, in a perfect world, certainly those numbers you talk about are achievable in a perfect world. Again, customers have to adopt it, the product has to perform, but certainly, the early results we're seeing are encouraging.

Larry Madden (CFO)

I would add, in terms of next year, you know, we'll continue to make strategic investments, and continue to innovate, but I would say that I would not expect to see our operating expenses growing anywhere near what our contribution ex-TAC and revenue will grow. Hence, to answer your question, our, our EBITDA margins will be higher next year than they are this year.

Andrew Boone (Managing Director)

That's helpful. Then I wanted to go back to the mid-market, right? You guys answered this in a, in a certain respect with Maria's question, but how do you guys think about the needs of a middle-market agency, and how are they different than the holdcos, and how are you guys addressing that, right? How are you guys winning that business?

Tim Vanderhook (CEO)

Yeah.

Andrew Boone (Managing Director)

Thanks so much.

Tim Vanderhook (CEO)

Number one, I think the, right off the bat, the, the mid-market agencies and the mid-market customers in general, they need... It, it's all about campaign performance. They, they have to see the return on ad spend. These aren't customers who, in Laura Martin's question, you know, like, you know, in the holdcos, you get a lot of broadcast-style buying, where they're just buying content, and you're delivering ads. You know, you're delivering, you know, X millions of impressions of ads. The, the bar that you have to clear from an ad performance isn't very high. When it gets to the mid-market, these customers are, are staring at customer acquisition costs. It has to perform. That's number one. A big, a big component of that is the price that you are paying for the ad impressions.

We're really standing out there, as we highlighted with our AI Bid Optimizer. The second I'll say is, is that the mid-markets don't carry the level of staff that we typically see in trading or in programmatic trading, so the platform has to be a lot more automated. They demand it just because they don't have that same level of headcount. Again, we have a huge focus on automation, that's why we continue to win there. In the end, the mid-market needs exactly what the holdcos have by partnering with Google, Meta at huge levels and billion dollars of ad spend. They need a sophisticated ad platform that's able to get the right ad in front of the right user and pay the right price.

I think that's where the DSP steps in and helps them accomplish those goals very efficiently from an employee productivity perspective.

Andrew Boone (Managing Director)

Thank you, guys.

Tim Vanderhook (CEO)

Thanks, Andrew.

Operator (participant)

Thank you. Next up, we have Andrew Marok from Raymond James.

Andrew Marok (VP of Equity Research)

Yes, thank you for taking my questions. Understanding that you're making intentional efforts in terms of which customers to allocate resources to, I guess, in light of that customer list optimization, how many of the remaining 314 customers do you think are ones that you can forge these higher value relationships with? I guess, how does that impact your sales strategy and potentially the sales and marketing line as well?

Tim Vanderhook (CEO)

You know, the, the predominant amount of them are those types of customers, without a doubt. We, we feel really good around the engagement with our customers right now. I think what you're highlighting is just the decision that we made with lower spending customers who don't show the same level of adoption as the higher spending ones, that we basically, it's not that we kick them off, the platform, but, if they don't spend a certain amount, they're, they're gonna have higher pricing. We, we do expect some of those to continue to drop off. Again, the customers we want, although we're in the mid-market, we're, we're aiming for customers that are gonna spend in the tens of millions. That's really where we're focused.

Larry Madden (CFO)

At this stage, yeah. It's important to scale with customers that can scale with you.

Andrew Marok (VP of Equity Research)

Great. Then, with Direct Access, you know, we've seen a, a good number of peers introducing these kinds of disintermediating products, whether coming from the demand side into the supply side or vice versa. I guess, can you talk about how you see that space evolving if everyone has a direct product, and then how does Viant kind of set themselves apart in that future scenario?

Tim Vanderhook (CEO)

Yeah. Well, one, I don't think it's so much so about disintermediating. What I think it is from our standpoint, again, buy side, we represent the advertiser. It's about getting them the lowest possible price or eliminating unnecessary tech tax in the middle. There's a lot. Look, in programmatic, historically, there's been a lot of middlemen trading that I think the buy side has really been focused on, on driving out, and I think that's what you're seeing. Anyone who has direct relationships with publishers, they're gonna, you know, continue to do well there. This is just I would say this has been going on for probably three to four years, this concept of supply path optimization.

That's really what it's about, is they want the most direct path to the content owner, and they don't want a bunch of unnecessary people in the middle taking a tax. That's really what it's about. In the end, price drives, you know, is a huge component of, of campaign performance, and at the end of the day, customers rely on us to drive that campaign performance. Again, we're gonna remain completely on the buy side. These aren't sell side initiatives. It's giving the sell side direct access to our customers' demand.

Andrew Marok (VP of Equity Research)

Appreciate the color. Thank you.

Tim Vanderhook (CEO)

Thank you, Andrew.

Operator (participant)

Our next question is from Jason Kreyer, from Craig-Hallum.

Jason Kreyer (Senior Research Analyst)

Hey, guys. Thank you. great results. you talked a lot about mid-market. After the quarter, we saw the announced bankruptcy of one of your competitors. I think they had a presence in the mid-market. Just curious if you see an opportunity for further share gain on the heels of that.

Tim Vanderhook (CEO)

Yeah, I believe you're referring to the bankruptcy of MediaMath that happened right at the end of Q2 there. We had many shared customers with MediaMath. We believed we were gaining market share from MediaMath regardless of the bankruptcy, obviously, they filed bankruptcy, which was tough to see for the employees, but I think it's due to we offer a superior product, and that was just capitalism playing out. We saw benefits the day of MediaMath's bankruptcy filing. We had many shared customers, we saw budgets flowing out of MediaMath and into our platform. We were evaluating MediaMath from an acquisition perspective. Unfortunately, we couldn't get conviction on their cost structure. It was just, you know, upside down there.

Ultimately, we felt like our product was going to beat them competitively and organically, and so we decided not to deploy capital there, which I think proved to be a good decision. We gained many gained many more ad dollars, not necessarily new customers, but more ad dollars in the platform the day they did file bankruptcy. I think, you know, one, they're just one competitor in the mid-market. We compete against Yahoo a lot in the mid-market, head-to-head, and we're very focused on beating them in that area as well, too, and we've done a good job at that. I think overall, we're gaining market share from multiple people, and what happened to MediaMath was an unfortunate event.

Jason Kreyer (Senior Research Analyst)

One numbers follow-up for Larry. The GAAP revenue outperformance was greater than the contribution ex-TAC performance. I don't know if that's related to a shift between revenue models, between fixed-price and percent of spend. That would be my speculation. Just wondering if you can add or unpack the difference.

Larry Madden (CFO)

Yeah, I mean, first of all, as compared to last year, the growth rates across spend, revenue, and contribution ex-TAC have are beginning to converge, so they're getting closer. Last year, that was not the case when we were going through the mix shift. That being said, there, there may be some variability of relative growth rates in any given quarter, based on mix, based on seasonality of customer spend, but we don't expect growth rates for the different top-line metrics to be materially different from one another, certainly not like they were in, last year. Longer term, as fixed-price continues to become a smaller and smaller percentage of total revenue, we do expect, contribution ex-TAC rates, growth rates to outpace revenue growth rates.

We'll see that quarter by quarter, but long term, we do expect that to be the scenario.

Jason Kreyer (Senior Research Analyst)

Thank you.

Operator (participant)

Our last question of the day is from Chris Kuntarich from UBS.

Tim Vanderhook (CEO)

Hi, Chris, you there?

Chris Vanderhook (COO)

I think you're on mute, Chris.

Chris Kuntarich (Internet Equity Research Analyst)

Apologies. Can you guys hear me now?

Tim Vanderhook (CEO)

Yep.

Chris Kuntarich (Internet Equity Research Analyst)

Great. Can we just talk about some cost efficiencies? It seems like you guys have gotten great leverage there. Just visibility into the ability to take further cost efficiencies as you guys are growing your headcount in the R&D group at 39%.

Tim Vanderhook (CEO)

Yeah, I mean, a lot of the, the, w- the cost efficiencies, we knew we had a predominant amount of them already in the bag, from the actions that we took at the end of last year. I would just say the productivity gains that we're seeing by leveraging AI tools internally has been tremendous. Whether that be in our marketing group, them leveraging LLMs, whether that be, I would say, on our data science team, and anyone in our analytics groups, utilizing that for customers on top of campaign performance data, and then in engineering as well. I mean, just doing... You know, using basic tools like GitHub's Copilot, we're seeing just incredible productivity gains there. We think we're only scratching the surface. That's really where we're looking.

I think there's some offset to those. As we leverage AI tools more, there are some technology cost increases there, but nowhere near the benefits that we're gaining from it. That, that's a big focus, that's gonna remain in the back half of the year.

Chris Kuntarich (Internet Equity Research Analyst)

Got it. Just as we kind of think about some of the idiosyncratic wins that you guys hear, the AI Bid Optimizer definitely stands out, and where you're getting the 35% CPM savings here. Just curious, like, if you could potentially quantify what the contribution was in the quarter, or if just more anecdotally, you're seeing more budgets open up, it's bringing more bringing you guys to more conversations on the table. Just help us frame up the upside from that.

Tim Vanderhook (CEO)

Well, it's a revenue driver as well. It's important to talk about the business model as we roll this out. When we achieve savings for our customers, we make a percentage of that savings, so we charge. In general, it's about 20% of savings, and as we create value for our customers, it creates value and grows our revenue. Adoption was very early, Chris, in Q2, so we wanted to just share some of the data points on some of these exciting numbers. Adoption is low. The positive is that scales into the future, and it's just another revenue driver for Viant as we exit 2023 and enter 2024 with more widespread adoption by the customer base.

When you have 35% savings in the initial data points, that helps accelerate adoption through our sales team, and, and I think that's a big one.

Chris Vanderhook (COO)

I was just gonna say that, you know, if a customer has. Typically, what they do is they go on the platform, they put in their budget. If you're getting 35% lower CPMs, that means you get more ad impressions. More ad impressions is more reach. You know, you're influencing consumers, therefore, that turns into more customers, and the campaign performance is therefore increased. That's why we talk so much around price. It's, it might be, it depends on who it is, but it may be the largest determiner of campaign performance, is the price that you pay. You know, easy example, if you paid a $10 CPM versus a $5 CPM, you know, the $10 CPM price has to perform twice the rate of the $5.

Campaign, you know, CPM pricing is so important to performance. When we hit the performance level versus other platforms they may be using, it helps us win share of dollars. It's just this circular effect that although, as Tim says, early, we're really excited about it, and we expect the adoption to steadily increase throughout the end of the year.

Chris Kuntarich (Internet Equity Research Analyst)

Got it. As we think about this kind of ramping, I understand from the adoption side, maybe just from the upside to that 35%, are we gonna be having a conversation around 40%, 50%, kind of, lower CPMs, this time for 3Q earnings, or is it kind of 35%, and it, it's held pretty steady in your early findings?

Tim Vanderhook (CEO)

Yeah, 35% is the average. So we saw as high as high 40s, high double-digit 40s, and so on some advertiser campaigns, it all depends on what they're doing. We also saw further increases on top of our own prior bid optimization using machine learning. There's many benchmarks. Some customers use a third-party AI algorithm to try and predict bids, and we were able to beat those as well, too. I think that's the value of when all these products are integrated into the DSP, not various third parties doing it. It's a range, and it's also a range by channel as well, CTV, display, online video.

There's a wide disparity of pricing out there on CPMs and, and what it's worth, so the ability for us to come in and apply a consistent algorithm across every channel format on behalf of the trader and make sure it's working on their behalf. You know, one big important thing is, a human can only check a campaign so many times, but a deep learning model can actually check it all the time consistently and make more changes than a human. Man versus machine, machine's always gonna be able to perform those tasks more consistently, more often, which drives huge savings.

Chris Vanderhook (COO)

I think what we're, what we're seeing, I want to just talk. I shared this on our last earnings, our last earnings call. When we talk about Direct Access, something that's different, when you combine the two, really what we're seeing is not that publishers are getting lower CPMs, interestingly. They're getting higher CPMs because what we see is, is that the win rate in the auction, actually, our win rate goes up. What we're identifying is in the middle, we're, we're finding that there are multiple intermediaries that, you know, really are getting squeezed. When you combine our efforts on Direct Access and then our AI Bid Optimizer, we're finding true market price. That's really what we're, what we're getting to.

That is always changing, clearly, right? One quarter to the next market may be stronger. You know, certain publishers may be selling out, so maybe pricing, you know, increases from one quarter to the next. In the end, clients want to make sure they're getting a fair shake, and we're making sure that they're getting that.

Chris Kuntarich (Internet Equity Research Analyst)

Got it. Thanks for the color.

Chris Vanderhook (COO)

Perfect.

Operator (participant)

That concludes our questions portion.

Tim Vanderhook (CEO)

Great. Well, I'd like to thank everyone for joining the earnings call. I want to thank the Viant team for an incredible execution in the second quarter, and we will see you all at an innovation day later, this year, and at our next earnings call. Thanks for joining.

Operator (participant)

Thank you, everyone, for joining us today. This now concludes today's webinar. You may now disconnect. Have a great day.