Direct Digital Holdings, Inc. Q2 FY2023 earnings call

• Strong top-line growth across sell-side and buy-side businesses in Q2 2023, with revenue up 67% y-o-y to $35.4 million.
• Sell-side advertising segment processed approximately $300 billion monthly impressions, up 205% y-o-y, and received over 11.2 billion monthly bid responses, up 70% y-o-y.
• Buy-side businesses saw 227 new customers (slight decrease y-o-y) but revenue per customer up 36% y-o-y.
• Favorable market dynamics with middle market businesses seeking more accessible digital advertising; investments in infrastructure starting to show benefits.
• Revenue mix in Q2 2023 was 33% buy-side and 67% sell-side, differing from Q2 2022 mix of 44% buy-side and 56% sell-side.

In Q2 2023, Direct Digital Holdings' revenue was $35.4 million, up 67% from $21.3 million in Q2 2022. The sell-side advertising segment (Colossus) had revenue of $23.6 million, a 98% increase from $11.9 million in Q2 2022, contributing 67% of total revenue. The buy-side advertising segments (Orange 142 and Huddled Masses) had revenue of $11.8 million, a 27% increase from $9.3 million in Q2 2022, contributing 33% of total revenue. Gross profit was $10.1 million in Q2 2023 vs $8.3 million in Q2 2022, but gross margin was 28% in Q2 2023 vs 39% in Q2 2022 due to revenue mix and cost factors.

• Revised full-year 2023 revenue guidance upwards to $125 million to $130 million.
• Expect seasonality to drive growth in Q3 and Q4, with Q3 and Q4 expected to be strong or stronger than Q1 and Q2 historically.
• Confident in achieving the revised guidance due to anticipated market seasonality and company performance.

• Margin impact from buy-side and sell-side business mix and higher operating expenses.
• Fixed costs increased by ~$600,000 in Q2 2023 for server capacity to support sell-side growth, with half of these incremental costs expected to continue through March 2024.
• Forward-looking statements subject to risks outlined in SEC filings that could cause actual results to differ from forecasts.

Q: Could you talk about the strength on the sell side?

A: Mark Walker mentioned new publishers joining the programmatic ecosystem driving impression growth and marketing investments paying off, with efficiency improvements from server investments.

Q: Regarding ad demand seasonality and categories, what's your outlook?

A: Mark Walker expects typical seasonality with Q3 and Q4 stronger than Q1 and Q2, favorable in DMO, educational, and energy sectors where the company is positioned.

Q: What are the positive impacts of the new server transition and cost expectations?

A: Mark Walker said server transition was needed for growth and redundancy, expecting costs to tail off to return margins to 14%-15% range.

Q: On sell-side margins, which factor has a greater impact: technology investments or publisher mix?

A: Mark Walker cited redundancy for sell-side growth as key, not seeing a major margin impact from these factors.

Q: How are early returns on audio advertising?

A: Mark Walker stated they are still testing audio advertising and not yet at scale.