Direct Digital Holdings, Inc. Q3 FY2025 earnings call

• Buy-side segment saw revenue increase 7% to $7.3 million, representing the majority of consolidated revenue; partnership between Orange 142 (buy-side subsidiary) and ReachTV announced, combining data-driven scale and media expertise.
• Sell-side revenue negatively impacted by lower impression inventory and engagement; developing integrated solutions combining supply-side platform tech and demand-side marketing expertise, with alpha testing with select clients showing positive feedback.
• Leveraging AI for sell-side, with feature set growing nearly 40% this year, 10+ new AI modules, annual savings from automation, and new AI tools in preparation. AI now touches all operational aspects.
• Year-to-date in 2025, total operating expenses reduced by $5.4 million (20% decrease).

Consolidated revenue in the third quarter of 2025 was $8 million compared to $9.1 million in the third quarter of 2024. Sell-side revenue was $600,000 in the third quarter compared with $2.2 million in the third quarter of 2024. Buy-side revenue increased approximately 7% to $7.3 million compared to $6.8 million in the third quarter of 2024. Gross margin for the third quarter of 2025 was 28% compared with 39% in the third quarter of 2024. Operating expenses in the third quarter of 2025 were $6.1 million, a decrease of 25% compared with $7.2 million in the same period of last year. Total operating loss for the third quarter was $3.9 million compared to a loss of $3.7 million in the same period of last year. Net loss in the third quarter improved to $5 million or $0.24 per share compared to a net loss of $6.4 million or $0.71 per share in the third quarter of 2024. Adjusted EBITDA for the third quarter was a loss of $3 million, essentially consistent with the prior year period.

Believes 2026 will be a positive cash flow year; continuing to optimize sell-side costs and work on top-line performance through the ecosystem approach, with favorable results seen in Q3.

• External challenges related to sell-side business in the past led to restructuring.
• Forward-looking statements are subject to risks where actual results could differ from forecasts, as outlined in Direct Digital's SEC filings.

Q: Obviously, not the sell-side result you were looking for. We had talked about direct integration. There's a lot of noise in DSP right now with Trade Desk basically prioritizing OpenPath, and they're obviously a big DSP partner could be. Do you think Amazon is making a bunch of noise? How do we think about your willingness to kind of pursue the historical business model in direct connect and drive volume from the DSP universe through Colossus. And then subsequently, you talked about this platform approach. Obviously, Orange 142 linking up and keeping everything sort of in the ecosystem makes a lot of sense, but you have to be able to drive both advertiser demand and publisher access and inventory to make the ecosystem grow. So just help us get a little bit more clarity on the thought process there.

A: Yes. No, good question, Dan. So we see it as a combination of both. So we think the traditional business model of working directly with DSPs, we still see that as a viable path. We think that some of the Tier 2 DSP partners that are out there are still interested in partnering. And then some of the Tier 1s are still interested in partnering and see that as a viable option. However, for the company and the way that we're viewing our go-forward strategy, more of the ecosystem platform play, we're making more investments going down that path. And that's where we have already started testing and starting to see favorable results and favorable feedback from our clients and doing some level of cost savings that we're able to provide to them. So we think that, that it's going to be for us, multiple revenue streams into the SSP for the go forward, and we're looking for more opportunities and exploring different ways to continue to drive revenue through the SSP that we actually have autonomy to control.

Q: You indicated that there was $2.1 million in revenue from new verticals in the buy-side in the latest quarter. And if I just extract that revenue out in the quarter, it seems like there's quite a bit of attrition. And I was just wondering if you can maybe provide a little color on where we saw the weakness. Was it particular customers, verticals? Maybe just add some color there.

A: Yes. So for us, the way that we viewed it, we definitely are going after new verticals. We're taking a strategy of going after larger customers and purposely avoiding customers that might be a little bit smaller in nature just due to the churn and internal resources that's required to manage. So strategically, we saw it as being valuable to go after different industries and different verticals and go after larger customers in those industries.

Q: And did those larger customers then have higher margin, I would assume? Or maybe can you give us a flavor on what those larger customers brought to the table?

A: Yes. They bring more stability as they are performance-based customers. And so therefore, it's tied directly to results and then we like holding ourselves accountable to deliver on performance. So be a performance-based marketing and be a performance-based clients, we view those as being stickier in the long run.

Q: I was curious, given the fact that your buy-side business carries much improved margins that -- and that with the results that you saw in this quarter, particularly the number of customers you say increased 5%, but yet revenues declined 70%. Why wouldn't you just concentrate most of your effort on the buy-side instead of trying to rebuild and put so much effort into the sell-side?

A: Yes. I think what you're pointing to is just the revenue issue with the sell-side of our business. The reason we like the sell-side of the business is because once you get past the breakeven point, the operating leverage is actually quite favorable, where every incremental 20% actually falls to the bottom line. So for us, being able to figure out how to get back to profitability on the sell-side business helps the overall profitability of the entire entity, and that's really what we're going for.

Q: And then final question. I'm sorry.

A: Michael, a lot of the things that we've been doing with AI are allowing us to grow on the sell side without significantly increasing our fixed cost to meet that capacity. So that's the positive part of being able to generate higher revenue on the sell-side.

Q: Obviously, you made mention and did a lot of financings and a lot of opportunities to raise equity and so forth. Can you just kind of give us some thought about with the recent financings and so forth, where does the company stand? Are you at positive shareholder equity at this point? Or can you kind of just give us your thoughts on where you stand at this point?

A: Yes. So we completed another conversion of debt to preferred after the end of the quarter of $10 million. So we believe we're definitely positive after the end of the quarter.