Direct Digital Holdings, Inc. Q3 FY2024 earnings call

• In late March 2024, Direct Digital Holdings announced a top-line revenue guidance target for 2024 of $170 million to $190 million. However, in mid-May 2024, Adalytics Research LLC's false and defamatory blog post against Colossus SSP caused business disruption. - The company implemented an optimization strategy, diversified revenue, and conducted a cost savings review. - Entered into a $20 million equity reserve facility with New Circle Principal Investments. - Launched Colossus Connections to accelerate direct integration with leading demand-side platforms, having signed two leading DSP partners expected to go live in 2025. - Unified buy-side divisions Orange 142 and Huddled Masses to focus on small and midsized clients and emerging technologies like AI, machine learning, and emerging channels.

For the third quarter of 2024, Direct Digital Holdings' revenue was $9.1 million, a decrease of $50.4 million or 85% compared to the third quarter of 2023. Colossus SSP revenue fell to $2.2 million in Q3 2024, a 96% year-over-year decline from $51.6 million in the same period of 2023. On the buy side, revenue was $6.9 million, a 12% year-over-year decline from $7.9 million in the third quarter of 2023. Gross profit in the third quarter of 2024 was $3.5 million, a 70% decrease from $11.8 million in the third quarter of 2023. Gross margins in Q3 2024 were approximately 39% compared to 23% in the same period last year.

• Full-year revenue guidance for FY 2024 is $60 million to $70 million. - Full-year revenue guidance for FY 2025 is $90 million to $110 million as the company rebuilds to previous levels.

• In mid-May 2024, Adalytics Research LLC published a false and defamatory blog post against Colossus SSP, leading to unexpected business disruption among partners, advertisers, and clients, resulting in revenue reduction and the need to revise guidance.

Q: Good afternoon. Welcome back. Mark, talk through confidence in the marketplace with you guys right now.

A: Yeah, Dan. Great to hear from you. In terms of financial markets, getting BDO as auditor and timely filings restore confidence. In the marketplace, feedback from major Holdco companies and brands is favorable, with buy and sell sides showing positive signs and buying patterns picking up momentum.

Q: You've talked about a diversification strategy. I remember before all this started, we were talking about a different go-to-market that had resulted in a forecast revenue reduction, but we were talking through IDs. Now you guys are leaning into third-party DSPs a little bit stronger. You've got two signs so far. Just help us think through the opportunity sets there. And relative to where you were before, either how long it takes to get back or what the TAM looks like relative to the marketplace that you were attacking before?

A: Yes. I think the TAM looks relatively the same. We started the diversification strategy, with the buy side having a strong leaning into education, travel and tourism sectors, and the sell side expanding connections. Diversification on both buy and sell sides is key.

Q: And as publishers come back online, Mark, how do you view the hot topic this day and age is audience curation, and it's seemingly more and more done on the sell side. I know that you're just rebuilding your volume. So, it's probably a bit early for me to be asking, but you just talked about different mechanism of delivery. So, I'm curious how you view that opportunity.

A: Yeah. As you said, audience curation is definitely a hot topic. And we believe that, that's a very important segment for us to be a part of and for us to attack. We think that there are opportunities for us to leverage different partners to help with that curation. And so, you'll hear about more on that front in the upcoming future from us.

Q: Just on your optimization within the company. Clearly, rebuilding volume is going to take a while to get back for adjusted EBITDA to turn positive. How do you think about running a bit leaner, understanding that you also have to lean into growth? When will we get more color on kind of what the cost savings plan ultimately yields?

A: Yeah. Actually, I'm going to turn that over to Diana to answer for you. Diana Diaz: Sure. We talked about this a bit in our public filings. We looked at our staffing in early July, made some reductions in staff, paused hiring, and looked at other areas of discretionary spend to reduce in the short term while rebuilding. We knew we'd have additional compliance costs in the summer, incurred those, and aim to remain lean as we rebuild over the next year. Mark Walker: And I think if you remember, we were one of the most efficient ad tech companies on a revenue per employee. We look to manage to that number, and into 2025, we'll stay in alignment with those metrics.

Q: I was wondering, obviously, you were in the process of building up your infrastructure to scale up, particularly on the sell side. And I was just wondering if you have the ability regarding servers and so forth to scale that down. I just wanted to know what the fixed cost ramifications might be in terms of the business that you have with them.

A: Yeah. One of the things that made our business model unique is the ability to scale up and down based on demand. Compared to other sell-side platforms with heavy structured fixed costs, ours is flexible. This allowed us to adjust cost structure in the summer to lower OpEx and get to profitability faster for the sell-side business.

Q: And hopefully, as you kind of build and look towards 2025 and that revenue ramp, hopefully, you can build back better. And I was just wondering if you can give us a sense of that revenue guide. Is it largely rebuilding the volume with the one client, or are you anticipating that there will be broadening of the revenue outside of that particular client? Just kind of give us a sense of the overall advertising outlook that you're anticipating for 2025?

A: Yeah. I think it's going to be both. Diversification on our buy side is important. You'll see us continue to grow the buy-side business, and there will be diversification on that front too. So, diversification is the theme for 2025.

Q: Given the potential mix in revenue as you kind of looked towards 2025, you mentioned about buy side and having better margins, obviously. I was just wondering can you give us a sense of what your thoughts are on the expense side and whether or not you will be adjusted EBITDA positive in 2025. Can you just kind of give us your general thoughts about that?

A: Yeah, I'm going to turn that over to Diana. Diana Diaz: Okay. Thanks. So, we'll start to see EBITDA increasing through the quarters as revenue builds. Looking to 2022, the revenue structure and growth pattern are similar, and EBITDA will increase quarter-to-quarter as volume increases.