DoubleVerify Holdings

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

DoubleVerify is a leading software platform for digital media measurement and analytics, providing advertisers with insights into the performance and effectiveness of their campaigns, as well as verification and fraud detection solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: DoubleVerify (DV) operates in the digital advertising space, a rapidly evolving and complex industry. Its core offering revolves around providing advertisers with transparency and accountability in their digital ad spending. DV’s platform utilizes data-driven analytics and artificial intelligence to verify ad viewability, protect against fraud, and ensure brand safety. This is all done programmatically, in real-time.

  • Revenues Distribution: DV primarily generates revenues from its software platform. The company’s revenue is split into two major categories: Activation (69.6% of revenue in 9 months ended September 2022) which includes services like verifying viewability, preventing ad fraud and ensuring brand safety, and Measurement (29.9% of revenue in 9 months ended September 2022), which includes providing data and insights for advertising campaigns and attribution. These are further subdivided into several different offerings such as FullyVerified, supply-side, and attention.

While these categories represent a useful way of categorizing revenue for investors, DoubleVerify’s products and services, which are all delivered programmatically, are interlinked and often bundled. The focus on value from data insights and a more streamlined customer experience could make these categories less helpful in the future.

  • Trends in the Industry: The digital advertising market is characterized by continuous innovation, the rise of programmatic buying, and an increased focus on data-driven decision making. Privacy and data usage rules are rapidly evolving. Increased concerns about ad fraud and brand safety have propelled demand for independent verification and measurement providers like DV. The industry is also seeing a shift towards omnichannel marketing that needs a platform that measures performance across diverse channels. AI is also disrupting and changing the space.
  • Margins: The company’s gross margin is 78.5%. This highlights the fact that it is largely a software company, and not much money needs to be reinvested into cogs. Adjusted EBITDA margins are healthy averaging around 30-35% - this indicates solid operating efficiency.

It should be noted though that adjusted EBITDA is a non-GAAP measure, which has various add-backs and exclusions (including stock compensation) that could be interpreted differently by investors. This makes analysis on a GAAP basis more reliable.

  • Competitive Landscape: The verification and measurement space is populated by a mix of large, established players and niche startups. While many advertisers use in-house solutions for ad-serving, or rely on the analytics included with advertising marketplaces, many prefer the transparency, accountability, and customization offered by independent platforms like DoubleVerify. Some notable competitors include Integral Ad Science, Moat, and Oracle Advertising.

Moat Analysis: DV has a moat that is best described as narrow with potential for broadening:

  • Intangible Assets - Strong Brand Recognition: Over time, the company has developed a brand that is synonymous with high quality, third-party digital ad verification and measurement. Companies trust them to provide data that is impartial and unbiased. This provides them an economic advantage over newer companies.
  • Switching Costs: It has some aspects of switching costs for customers as customers integrate the platform deeply into their advertising workflows. While the actual cost of switching platforms may be low, it requires changes to the process and potential retraining for personnel, both are things advertisers aren’t eager to do.
  • Data Network Effects: Some positive network effects can be noticed due to the increasing amount of data gathered from different publishers and ad exchanges. This data gives the company a competitive advantage as it helps create better benchmarks to predict and verify ad delivery and performance. As such, this creates a better platform, which attracts more advertisers, and then more data, and therefore creating a virtuous cycle. This flywheel has not manifested itself yet, and the network effects are not yet as strong as some other tech businesses.
  • Limitations While DV has many positive aspects, its moat is not that wide and the competitive environment and their financial reports should be monitored closely.
  • Moat Rating: I’m rating DoubleVerify’s moat at a 3 out of 5. While they have some very promising traits that will enable them to build a solid and sustainable moat over time, they also have significant competition that could take market share and make those moats weaker.

Risks to the Moat and Business Resilience

  • Technological Disruption: The digital advertising landscape is characterized by rapid technological changes. Any disruption might make their technology obsolete and create a new playing field. The rise of new players in the field may also lead to a decline in DV’s market power if these new entrants have compelling technology that can challenge DV’s value proposition, and at a cheaper cost.
    • Response/Resilience: The company is investing in its own technology and AI-capabilities, but it should be monitored to see if they have a meaningful strategy in the AI space. The company’s scale and customer base should also aid the company in withstanding some market changes.
  • Competition: The intense competition from other established companies in the space, as well as well funded start-ups, may lead to reduced profitability. Furthermore, market consolidation could see some smaller players get absorbed or bought up to create better-capitalized, more profitable companies. * Response/Resilience: The company has been investing and innovating heavily, hoping to retain its leadership position, which shows some confidence that this threat is something that management is seriously thinking about. * Data Regulation: The ever-changing data regulation landscape across multiple countries is a major risk for all players in the space. Failure to quickly adapt to these regulations, or not complying may result in hefty fines and could seriously hurt profits. * Response/Resilience: Management is investing and building a privacy framework, but it remains to be seen if that would make it easier for companies to use their platform to navigate a quickly changing and highly regulated space.
  • Business Resilience: The company had a rough year in 2022, as it was impacted by budget reductions from their customer base, increased investments and a recessionary macroeconomic environment. As a result, while revenue grew, margins dropped. With more focus on profitability rather than growth, a change in sentiment was noticed, though the company has managed to maintain a decent level of profitability and have a positive financial outlook, which gives it a decent level of resilience.

Financials In-Depth

  • Revenues Over the years they have grown their revenue significantly from $46 million in 2017, to $453 million in 2022. In the three months ended September 2023, they grew revenue by 14% y-o-y, to 145 million. The company’s growth rate, however, has been on a downward trend, partially due to the macro environment.
    • Implications: They seem to have built an essential service for advertisers, and are attracting an increasing amount of new customers. The slowing growth, however, indicates that the company has not yet achieved market saturation and the competition may be catching up, or that the macro conditions are hitting them hard.
  • Gross and EBITDA margins Their gross margin is high around 78-79%, typical of a software-based company. EBITDA margins on the other hand have averaged between 30-40% in previous years, but have declined to around 25% in 2022 and 2023, as they have seen increased costs (including acquisition costs) and decreased revenue from the macro downturn.
    • Implications: While the gross margin indicates that the value proposition of the products are high, and they have strong pricing power, the declining EBITDA margin shows that they still have lots of costs that impact profits. They might have to increase scale (and profitability) to compensate.
  • Return on Invested Capital (ROIC) In 2021 and 2022 the company’s ROIC was 14.4%, and -1% respectively. In 2023, they have shown a more healthy picture with it being around 15%. These figures include goodwill and amortization. The adjusted numbers will be higher.
    • Implications: This highlights the nature of a software/technology business. To start up, there are considerable expenses to build the platform, but afterward, profitability rises very quickly (if the platform is profitable) since there are not many new costs. The adjusted ROIC metrics should also be reviewed to gain a more accurate understanding of value being created.
  • Net Income: In the nine months ended September 30, 2023 they had net income of $22.7 million, but in 2022, they had a loss of about $176 million, indicating a large swing in profitability, or lack thereof.
    • Implications: The net income, while important, does not indicate true profitability, as the large losses from previous periods was attributed to a goodwill impairment. That doesn’t mean, however, that we should ignore losses. If a company is not able to sustain its growth trajectory, or if competition eats into its earnings, then a lot of the value of the company is based on these numbers alone.
  • Cash Flow: The company generates free cash flow, which can be interpreted as a positive.
    • Implications: This indicates they have a sustainable business model and can meet obligations while continuing operations. It also leaves management with flexibility to make strategic decisions.
  • Debt and Equity DV has 52% of capital allocated towards equity. 48% of capital is debt related. Debt has always been higher than equity for the business. Their debt-to-capital has been higher due to financing acquisitions, but is slowly coming down.
  • Implications: The debt to equity ratio, while slightly higher than the equity, should not hamper the business’s long term performance too much, given their high gross profits, and the high probability of growth. The trend of deleveraging has started too, which indicates responsible management.

Understandability: I am giving a rating of 2 out of 5, because while the value proposition of the company is easy to understand-providing value to advertisers by showing fraud in advertising and providing analytics on a campaign- the method of doing this, the technology used for this, and most of the intricacies behind the financial reports are hard to understand for someone without experience in the finance field, or the ad technology industry.

Balance Sheet Health: I am giving a rating of 4 out of 5. Although their debt is high compared to their equity, it is well under control, with healthy revenue, EBITDA and cash flow, allowing for payments in their obligations. There are some lingering risks, due to the macro-economic environment and industry specific factors, but given that management are handling the company well, it gets a rating of 4 out of 5.

Recent Concerns and Problems * Macroeconomic Headwinds: The company noted that their revenue growth is slowing due to overall market slowdowns and reduced budgets by clients. This was due to their exposure to the technology sector, which was particularly hard-hit. * Action Taken The company has responded to this issue by focusing on profitability and cutting nonessential costs. They are also investing in technologies that will further help streamline expenses and improve profitability. * Acquisition Costs: A significant portion of the company’s expenses have gone to funding the acquisition of other businesses, specifically Meetrics. They now are looking to streamline and take synergies from these acquisitions. The long-term success of the company may depend on this. * Management’s Response: They stated in their earnings call that while there has been some challenges, they have been successful in lowering expenses and creating new products/services from their acquisitions, and are confident that their strategy is sound.

Overall, DoubleVerify seems to be a strong player in an essential sector. The core products are needed in the advertising field, and their brand recognition is strong. However, the company has many challenges ahead to fully realize its potential, especially in the areas of growing the network effects, building wider moats, as well as navigating the macro headwinds. The company should be scrutinized closely by any potential investors for these reasons.