Direct Digital Holdings, Inc. Price & Performance (DRCT)

Good afternoon, everyone, and welcome to Direct Digital Holdings fourth quarter and full year twenty twenty four earnings conference call. My name is Brett Mellot, and I'm representing Direct Digital Holdings from ICR. On today's call are Direct Digital Holdings' Chairman and Chief Executive Officer, Mark Walker and Chief Financial Officer, Diana Diaz. Information discussed today is qualified in its entirety with the Form eight ks and accompanying earnings release. Which was filed today by Directors of Holdings. Which may be accessed at the SEC's website and DRCT's website. Today's call is also being webcast, and a replay will be posted to DRCT's Investor Relations website. Usually following the speakers' presentation, be a question and answer session. Please note that the statements made during the call, including any financial projections other statements that are not historical in nature, may constitute forward looking statements. These statements are made on the basis of DRCT's views and assumptions regarding future events, and business performance at the time they are made. We do not undertake any obligation to update these statements. Forward looking statements are subject to risks, which could cause DRCT's results to differ from its historic results and forecasts, including those risks set forth in DRCT's filings with the SEC.

And you should refer to those for more information. This cautionary statement applies to all forward looking statements made during this call. During this call, DRCT will refer you to non GAAP financial measures. These non GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliation to non GAAP financial measures to the most directly comparable GAAP measures available in the earnings release that DRCT filed in its Form eight ks today. I'll now hand the call over to Mark Walker, Chief Executive Officer. Mark? Thanks, Brett, and thank you to everyone joining our fourth quarter and full year 2024 earnings call. For the full year, I'm pleased that we delivered revenue in line with our significantly revised guidance. Twenty twenty four proved to be a challenging year for the company to say the least. But I'm incredibly proud of the team for responding quickly initiating a clear strategy, and mobilizing to execute against that strategy. Today, Direct Digital is rescaling with a significantly strengthened model customers, partners, and shareholders alike. Just to remind everyone, at this time last year, Direct Digital Holdings released its Q4 full year results for 2023. Announcing a top line revenue guidance target of 170,000,000 to 190,000,000 representing 15% year over year growth at the midpoint.

By early May, Direct Digital Holdings supply side platform Colossus SSP had achieved revenues far ahead of the previously stated guidance and the company was well on its way to our record quarterly result. At that time, we were fighting what we believe was an ongoing short attack since December of twenty twenty three. And believe that the worst was behind us. Unfortunately, there was a secondary attack. A second false and defamatory blog post against our supply side platform Colossus SSP, in mid May twenty twenty four. Caused an unexpected business disruption amongst our partners advertisers, and clients. Due to a major customer pausing its connection with Colossus. The connection with this major customer who is an intermediary in the digital ecosystem has resumed. However, volumes have not yet returned to prepause levels this caused a meaningful reduction in our f y twenty twenty four revenues. And is also expected to impact 2025. That said, despite the challenges faced this past year, delivered fourth quarter results in line with our revised revenue guidance range. We have been working diligently with our multinational holdco agency partners our Fortune 500 brand partners, and demand side partners to resume business which many already have.

Starting last year, we initiated a plan to one, further expand our sources of our revenue to create a more diversified business throughout all segments, And two, conduct a cost savings review which has resulted in significant operating expense reduction sequentially when compared to the first half of the year. Concerning our diversification strategy, in the third quarter of twenty twenty four, we announced the launch of Colossus Connections, an aggressive initiative to accelerate our direct integration efforts with leading demand side platforms and we have already signed up two of the leading partners in the marketplace. This initiative will optimize supply pack efficiency for our advertising clients through direct connections with top demand side platforms. Ultimately providing advertisers with improved access to demand and cost savings. In addition, we are pursuing alternative intermediaries and pathways to send buyer spend to our publishers. We've seen sequential improvement from existing direct connections we're expecting to see greater revenue impacts as we move through 2025. As alternative pathways are solidified and as integrations are completed, in the second half of twenty twenty five. As part of our continuing sell side strategy, we work diligently with our partners to keep our key sell side relationships intact while building back ad spend in previous levels.

This plan will continue to take shape over time through 2025 as we focus on diversifying optimizing, and future proofing our sell side platform. On the buy side, since we unified our two divisions, Orange one forty two and Huddle masses, we have been keenly focused on small and mid sized clients who are increasingly shifting advertising budgets to digital and require support to navigate its complexities and optimize their ad spend. Further, we see that small and mid sized brands are looking for a more high touch and tailored client by side relationship. These clients are a key focus for our newly combined buy side operation. We are now better equipped deliver this level of premium service to our clients as they navigate emerging technologies and high growth channels such as AI, connected TV, and retail media. We have already brought on clients in new verticals which are expected to generate additional incremental revenue of 5,000,000 to 10,000,000 in 2025. Full impact starting in the second quarter of twenty twenty five. With that, I will discuss some high level points related to the fourth quarter. With Diana providing further details about the quarter later in the call. Revenue for the fourth quarter was down as expected.

Compared to the prior year due to continuing negative impact on sell side revenue resulting from business disruption in May of twenty twenty four. Continued impact on the buy side from certain customer spend declines partially offset by new buy side customer growth and non recurring political spend on the sell side. Despite the overall decline in revenue, gross margin increased from 23% in the prior year to 32% in the fourth quarter twenty twenty four. Due to a higher mix of buy side revenue in the current quarter. We realized cost savings and operating expenses of 2,100,000.0 in the fourth quarter twenty twenty four reflecting the flexibility in our cost structure. In addition to our focus on building back our top line, and as mentioned on our call last quarter, we have undertaken a series of cost savings and operational optimization strategies. Which have resulted in a more diversified efficient business model positioning us for success in the coming years. We were able to withstand the dramatic impact to our revenue through improved gross margin and operating cost savings, which is a testament to our robust business model and the success of our cost saving initiatives. Looking forward into 2025, we're encouraged by the growth we are seeing in segments of the ad tech arena specifically around curation and data enrichment.

We are reiterating revenue guidance of 90,000,000 to a hundred 10,000,000 for 2025. Underscoring our confidence in our ability to scale up both our buy side and sell side business. In particular, we expect the second half of the year to deliver strong gains as we experience the full effect of new direct sell side partners coming online While our first quarter tends to be slower than the fourth quarter, related to seasonality in our sell side business. We are seeing sequential improvement in the first quarter of twenty five over November and December 2024 we believe our streamlined approach will continue to enable us to capture market share strengthen our leading advertising marketing technology offer. I will now hand things over to Diana Diaz, our chief financial officer, who will walk through some of the financial highlights in further detail.

Thank you, Mark. I'll start with a few more details related to the fourth quarter two thousand twenty four results. Related to revenue, our fourth quarter twenty twenty four revenue was $9,100,000 a decrease of $31,900,000 over the $41,000,000 in the same period of 2023. Cell side revenue fell to $2,700,000 for the fourth quarter compared to $33,400,000 in the same period of 02/2023. As stated before, the key driver for this reduction was the suspension by one of our large customers following the defamatory article against the company. This customer, which is an intermediary in the DSP marketplace, place, has since restored its connection and is continuing to scale. Making up about 11% of the fourth quarter sell side revenue in 02/2024. We were pleased to see a onetime positive bump in sell side revenue in the fourth quarter of twenty twenty four of about $600,000 driven by outsized political spend in October. However, we'd like to emphasize that while this was a welcome boost, it is not representative of our repositioned business. While this was a nonrecurring revenue impact, it demonstrates the opportunistic and dynamic nature of our business model which was able to move and adapt when opportunities arise.

On our buy side for the fourth quarter, we saw revenue decrease to $6,400,000 compared to $7,600,000 in the same period of 2023. The $1,200,000 decrease in buy side revenue for the quarter was due to a $1,700,000 decrease in spending from customers no longer actively purchasing from the company including about $600,000 from completion of certain one time campaigns in 02/2023. Partially offset by growth from existing and new customers of 8%. Due to the decrease in revenue, gross profit dollars decreased to $2,900,000 in the fourth quarter from $9,300,000 in the prior year. However, because of the change in mix, of buy side and sell side business, gross margin for the fourth quarter improved from 23% in 2023 to 32% in 2024. Related to operating expenses, our fourth quarter twenty twenty four operating expenses were $7,700,000 a decrease of $10,400,000 over the $18,100,000 in the same period of 2023. Operating expenses for the fourth quarter were negatively impacted in 2023 by an unusual charge for $8,800,000 related to payments to a few publishers And in 02/2024, by about $400,000 in cost to regain compliance with respect to delinquent SEC filings. Excluding these unusual items, adjusted operating expenses were $7,200,000 in the first quarter of twenty twenty four, a decrease of $2,100,000 or 23% over $9,300,000 in the same period of 02/2023.

Adjusted operating expenses, which excludes the unusual compliance costs, for the second half of twenty twenty four of $13,500,000 decreased by $1,900,000 or 12% from $15,400,000 for the first half of twenty twenty four. Operating loss for the fourth quarter was $4,300,000 compared to an operating loss of $8,800,000 in the same period of 2023. The unusual operating expense items contributed $400,000 of operating loss for the fourth quarter of twenty twenty four and $8,800,000 of impact to operating income in the same period of 02/2023. Adjusted EBITDA for the February was a loss of $3,400,000 compared to an adjusted EBITDA loss of $6,600,000 in the same period of 2023. Excluding the unusual operating expense items, adjusted EBITDA loss for the fourth quarter was $3,000,000 in 2024, compared to adjusted EBITDA income of $2,200,000 in the same period of 2023. Turning to the balance sheet. We ended the year with cash and cash equivalents of $1,400,000 compared to $5,100,000 as of the end of twenty twenty three. Total cash plus our accounts receivable balance as of year end was $6,400,000 compared to $42,300,000 as of the February. We are actively advancing multiple funding and equity financing pathways with the goal that these efforts will restore Nasdaq compliance strengthen the company's financial position, and support key growth initiatives.

Now to touch on our guidance. Our guidance assumes that The US economy not have any major economic conditions to deteriorate or otherwise significantly reduce advertiser demand. We plan to offer annual guidance and update it throughout the year. With our visibility today, we are reiterating our fiscal year 2025 revenue guidance in the range of $90,000,000 to $110,000,000 underscoring our confidence and our ability to scale up both the buy side and sell side businesses. And as Mark said, we expect the second half of the year to deliver strong gains as we experience the full effect of new direct sell side partners coming online. As we continue to refocus the company, our lower cost structure optimize performance, and focus on driving efficiencies across the business are key to our accelerated path to return to profitability. We continue to be judicious in adding any new costs and we remain confident in our business to deliver strong performance for our shareholders this year. And I'd like to turn it back over to Mark for some closing comments.

Thank you, Diana. And thank you to everyone for joining. As always, we appreciate your interest in Direct Digital Holdings, are looking forward to answering your questions. Operator, please open the line.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, And with that, our first question comes from the line of Dan Kurnos with The Benchmark Company. Please go ahead.

Yes, thanks. Good afternoon. Mark, just maybe I have several. Let's just start kinda high level. Number one, just in q four, we know there was a lot of noise in kind of the d v plus arena. Obviously, heard from Trade Desk, Magnet, PubMatic, everybody. You know, political was kind of a plus. You guys are recovering from, obviously, the attacks which you successfully defended against, but, you know, it takes a while to scale back. So I'm just trying to [indiscernible] kinda how we should think about the cadence. I know you've said strong growth in the back half of this year, but how much was Q4 impacted by kind of post election malaise, which we sort of heard about And how should we think about these clients these clients then coming back to you in kind of Q1 and then ramping?

Yes. No. Good question, Dan, and good to hear from you as well. Yeah. I would say, you know, for the first time, it's especially this cycle, political represented more of a percentage than it historically has. Typically, it had been 10% to 15%. This time, it represented probably in the 50% to 60% range of spend that came through. And I think, as you know, based upon what you probably heard from your other peers, political was very strong all the way through November. December was softer than what we would anticipate for Q4. And so we were a little bit surprised by that. But what we are seeing and we're kind of in a different cycle right now since the last four years, we've had steady growth consistently occurring. We're seeing sequential growth month over month in regards to our overall performance. But for us, and how we rebuild back, it's really about this is not about our buyer antenna, it's not about it's not our publisher inventory, which as you seen by the stats, the numbers are there. It's really about us for pathways. And so we've been working on developing new pathways to connect our buyers and sellers, and that's through the Direct Connection piece, which we're anticipating to see that come to fruition in the back half of the year based upon the contracts that we have signed and the other ones that we're currently negotiating.

And then we're also anticipating having alternative pathways for our buyers to actually purchase the inventory that we represent, leverage leveraging different deals and P and Ps that we already have established. So for us, we don't see it as more of an if it comes back, it's more about when and timing and the quarter. And so we're seeing us getting, back to a a good healthy run rate, for the last half of the year. Got it.

That's helpful. So let's talk about some of those initiatives. Right? You know, obviously, a lot of change has happened we're seeing Google pull back on the SS side as they deal with all the remedy stuff. So the marketplace is kinda influx, Pmax of a mess. You guys doing the direct connecting makes a ton of sense. We're seeing a bunch of other folks do that. You talked about top DSPs. I wonder, given your inventory, and kind of who you represent on the side, if there's not some kind of niche or middle market guys that you could kind of attack? And then so maybe kind of talk through how we should think about how aggressive you stay on on the side? And I would also love to hear about how you're thinking about you know, kind of curation. It's sort of it's very topical, but know, we're not seeing a ton of money, figured out in the marketplace yet. So maybe hit those two topics for us.

Yeah. Absolutely. So for us, we see, the opportunity. One, you know, we have excellent holdco partnership relationships. In those buyer dollars, we think we're always going to have access to those dollars coming through our pipes. And so we definitely will continue to nurture and manage those relationships as we see fit. But the opportunity that we also see is really in the middle market the middle market dollars flowing through our pipe. If you will, our SSP, we think that that's actually an opportunity to expand and grow. I think you've seen some DSPs and S SSPs really focus on what they call the premium partnerships. We think that there's a ripe opportunity in the middle market, and that's really kind of how we manage the business for the last four years. So actually on the buyer side and also on the sell side, we see that as our sweet spot, and we're planning on doubling down into that marketplace. We think it provides us two benefits. One, [indiscernible] lack of concentration of dollars. We think that, that's a major benefit for us. And focus on the middle market. But then also, we think it's ripe for additional And from what we've seen, that middle market has been a little bit slower to actually transition over to the digital space.

So we see it as a real greenfield for us. In growing and being able to fuel our our overall growth strategy and also the repeated CAGR that we've been able to perform over the last five, six years.

And the curation piece, Mark? Sorry.

I know it a long question. Yeah. And then yeah. No. No. No. No. Good good call. Hey. Is the release to curation we do think that there is an opportunity for curation, and it's something that we're with many of our partners, right now. We think that there is an opportunity, but we're still working through figuring out what's the best way for us to apply that to our partners. What we are seeing at least off the onset, it's a case by case basis. So that's kind of the strategy that we're looking at curation. We'll be talking about that, more so in the in the future. But the other opportunity that we also see as it relates to curation is really with our buy side partners. We work with about two fifty different two twenty five to two fifty different buy side partners. We think there's a curation opportunity with middle market, and we think what what sets us, unique and what also makes us have a competitive advantage in serving the middle market is the fact that our buy side employees and our sell side employees talk and have the capability of actually leveraging curation a competitive advantage that we actually take to the marketplace to to interact with our buy side clients.

So we think that gives us a unique, a unique value proposition and selling point. And so you'll see us talking more, specific about curation in the middle market and to our buy side partners as well as on the sell side as capabilities that we have.

Super helpful. Last one, I promise. Just thoughts on attacking video. I know it's not gonna a huge component historically, then we started talking about [indiscernible] top heavy at the moment. The bottom side has has been challenged, but still a great opportunity for programmatic execution. So just curious how you're thinking about attacking, you know, kind of that landscape if you if that's part of the strategy here.

Yeah. It it actually is the, what we're seeing specifically on the sell side platform, if people are looking for, lower cost CPMs, as it relates to the CTV, OTT video space, And we think that there is a prime opportunity for us to provide that into the marketplace. When you think about media buying Excuse me.

And your lines will be placed on this call. [indiscernible] Yeah.

Excuse me, ladies and gentlemen, please continue to stand by. Your conference will resume momentarily. Thank you. Ladies and gentlemen, your conference will now resume. Mark, please go ahead.

Yes. Hey, Dan, I don't know if you finished if it cut off before the curation piece or did you get everything you wanted to hear or do I need to repeat it? I I heard you say, you're seeing lower cost CBC. On the on the sell side, you're seeing clients come in asking for lower cost CPMs in the CPDOT t video space, but I didn't hear the rest after that. Yeah. So what we're what we were saying is in regards to the partners that we are working with, and from what we have seen in the marketplace, there seems to be a demand for lower cost CPMs. That are on the mid to lower end of the spectrum. And we think that there's an opportunity for Colossus SSP and Direct Digital to be able to fulfill fulfill that demand in the marketplace. And so many of the things that we're working to do is really to focus in on that and provide CTV partners and video partners and OTT partners that actually fit in that into the space. And we think that we can have a competitive advantage there.

Got it. No. Thank you for all the color, and I apologize for asking so many questions. I apparently blew up your phone. But I will get back in the queue.

No. It's all good. Thank you. And your next question comes from the line of Michael Kupinski with NOBLE Capital Markets. Please go ahead.

Good afternoon, everyone.

A couple of questions. Mark, you indicated that some of the revenue initiatives appear to be at least on the buy side of your business. And I was wondering if this represents a shift or maybe a rebalancing on your focus on growing your sell side business.

Yes. No, good question. Yes, we we definitely have and this has been our strategy for the last two years. We've been focused on bringing on the buy side of our business and really looking at expanding it. We made some internal investments as it relates to our sales processes in the marketplace. And so what we're starting to see is some of the fruition of come to bear. Last year, we put all of our sales teams on specific CRM system and made that a lot more uniform, but then also put different sales processes in place. In order to try to increase demand into our buy side business. And so I think part of what you're seeing right now is the work to actually go after and continue to grow that piece of the business especially because it's at a higher margin. We think that in the long run, especially with some of the cost saving measures we've taken in place, will help us get back to profitability, but also expand profitability once we get the top line higher as it relates to the buy and the sell side business. So it's not really a recalibration, but it's been a two year focus for us.

And we're starting to see fruits come from it. Gotcha. And then on the cost side, I was wondering if you obviously said that you've taken out some cost Can you give us a sense of how much the cost savings will be on an annualized basis? And then trying to get a sense of the amount of fixed cost that you've taken out and if you're including variable cost in your expectation for 2025. Yeah. What I'm going to do is I'm going to give you kind of our overall comprehensive strategy, and I'm going to turn it over to Diana to actually get more into the details But the way that we built our business model, and I think you probably have seen it, by looking at our balance sheet and our income statement, We have very little CapEx as it relates. And part of the way that we built it, knowing that ability to scale without increasing your fixed cost was important to us. And so part of the reason that we've been able to absorb and defend against some of the attacks that we have been It's just because of the variability that we've been able to build inside of our structure and our overall business.

So we were able to take cost out, without cutting what I would say muscle and bone, but cutting a little bit of fat. As it relates to the end of last year and we're going to see benefit of that going through 2025 as well in the way that we've operating our the way that we set up our operating structure. So I'm going turn it to Diana to give you some more details around that she can tell you kind of what that model looks like on the go forward.

Sure. We focused in the earnings release and the script on operating expenses because you know, we wanted you to be able to calibrate there. We we had some costs that will be nonrecurring, 1,700,000.0 of of compliance costs related to getting our our filings complete. Then we had the the first half versus the second half reduction in costs that we wanted to point out. So I would expect there could be another $1.5 to $2,000,000 of savings that we would see on a full year basis. For 2025.

So that's that's what we're looking at.

Thank you for the color. And then based on your revenue trajectory and your revenue guidance for 2025 and focus on higher margin buy side. Can you kind of give us a sense when do you anticipate you might swing towards positive cash flow?

As look at the real gains coming in in the second half of the year, that's that's really where we see us getting back to our more normal cadence. Third and fourth quarter.

Perfect. Alright.

Good luck. Sounds great. Thank you. You. You.

And I'm showing no further questions at this time. I would like to turn it back to our CEO, Mark Walker, for closing remarks. [indiscernible] If there's no more questions, then we will see you next quarter.

Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. May now disconnect.