The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in the section titled "Forward-Looking Statement" included in this Quarterly Report on Form 10-Q and the sections titled "Risk Factors" and "Forward-Looking Statements" included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Our historical results are not necessarily indicative of the results that may be expected for any period in the future, and our interim results are not necessarily indicative of the results we expect for the full fiscal year or any other period. Unless the context otherwise requires, the terms "Company," "Integral Ad Science Holding Corp. ," "IAS," "we," "us," "our," or similar terms refer toIntegral Ad Science Holding LLC and its consolidated subsidiaries before the corporate conversion, andIntegral Ad Science Holding Corp. and, where appropriate, its subsidiaries after the Corporate Conversion. 30 -------------------------------------------------------------------------------- Overview We are a leading digital media quality company by revenue. With our cloud-based technology platform and the actionable insights it provides, we deliver independent measurement and verification of digital advertising across all devices, channels, and formats, including desktop, mobile, connected TV ("CTV"), social, display, and video. Our proprietary andMedia Rating Council (the "MRC") accredited Quality Impressions® metric is designed to verify that digital ads are served to a real person rather than a bot, viewable on-screen, and appear in a brand-safe and suitable environment in the correct geography. Without an independent evaluation of digital advertising quality, brands and their agencies previously relied on a wide range of publishers and ad platforms to self-report and measure the effectiveness of campaigns without a global benchmark to understand success. We are an independent, trusted partner for buyers and sellers of digital advertising to increase accountability, transparency, and effectiveness in the market. We help advertisers optimize their ad spend and better measure consumer engagement with campaigns across platforms, while enabling publishers to improve their inventory yield and revenue. As a leading media quality partner, we have deep integrations with all the major advertising and technology platforms including Amazon, Facebook, Google, Instagram, LinkedIn, Microsoft, Pinterest, Snap, Spotify,TikTok , The Trade Desk, Twitter,Xandr , Yahoo, and YouTube. Our platform uses advanced artificial intelligence ("AI") and machine learning ("ML") technologies to process over 100 billion daily web transactions on average. With this data, we deliver real-time insights and analytics to our global customers through our easy-to-use reporting platform, IAS Signal™, helping brands, agencies, publishers, and platform partners improve media quality and campaign performance. Our pre-bid and post-bid verification solutions enable advertisers to measure campaign performance and value across viewability, ad fraud prevention, brand safety and suitability, and contextual targeting for ads on desktop, mobile in-app, social, and CTV platforms. Our pre-bid programmatic solution is directly integrated with DSPs to help optimize return on ad spend ("ROAS") by directing advertising budgets to the best available inventory. With our Context Control solution, advertisers can leverage more than 300 contextual segments from the Company on a pre-bid basis to avoid undesirable content or target towards content that is more suitable for their campaigns. Additionally, our Total Visibility® offering provides marketers with actionable insights to optimize their campaign spend and drive higher yield by focusing on the most efficient and cost effective pathways. Our solutions help hundreds of publishers globally deliver high quality ad inventory that is fraud free, viewable, brand safe and suitable, and geographically targeted. Macroeconomic and Geopolitical Conditions Current adverse macroeconomic and geopolitical conditions, including the conflict inUkraine , heightened inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates, currency fluctuations, challenges in the supply chain and the ongoing effects of the COVID-19 pandemic may adversely affect our results. In response to heightened levels of inflation in 2022, central banks, including theU.S. Federal Reserve and theEuropean Central Bank , have increased interest rates. Our operating expenses are denominated in the currencies of the countries in which our operations are located, and our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. TheU.S. dollar may continue to strengthen against these foreign currencies if theFederal Reserve further raises the federal funds rate, which may result in downstream impacts to global exchange rates and further adverse impacts to our reported results.
Our business depends on the overall demand for advertising and on the economic health of advertisers that benefit from our platform. Economic downturns or unstable market conditions cause advertisers to decrease their advertising budgets, which in turn reduces spend though our platform.
Throughout the COVID-19 pandemic, we have had sufficient liquidity and capital resources to continue to meet our operating needs and service our debt. However, if macroeconomic conditions deteriorate or there are unforeseen developments with respect to the current COVID-19 pandemic our results of operations may be adversely affected. 31 -------------------------------------------------------------------------------- Our Business Model We generate revenue based on the volume of purchased digital ads that our solution measures. Advertisers use our digital marketing solutions for ad viewability, brand safety, optimization, context control, and ad fraud prevention. Advertisers pay us based on the total volume of impressions, which is our primary contracting model. Certain contracts with advertisers have pricing with a minimum commitment and/or fixed fee, plus overage, based on a predetermined number of impressions. We maintain an expansive set of integrations across the digital advertising ecosystem, including with leading programmatic and social platforms, which enables us to cover all key channels, formats and devices. We generate revenue from sell-side customers from contracts that are generally for twelve-month terms (with an auto renewal provision), and a fixed fee each month (tied to a total number of impressions), and an overage cost per thousand impressions ("CPM") that is applied when impressions exceed the impression threshold for a particular tier.
Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:
Innovate and Develop New Products for Key High-Growth Segments
•Programmatic. We aim to deliver transparency to programmatic ad buying via innovative solutions including contextual targeting and brand safety and suitability.
•Social. We plan to develop deeper integrations with social platforms, also known asWalled Gardens , including feed-based brand safety and suitability, to be able to deliver continued transparency to our customers.
•Connected TV. We plan to continue to expand CTV-specific verification solutions and contextual capabilities to address the fast-growing CTV segment.
•Adjacent product expansion. We aim to expand our platforms to address new areas of verification and measurement needs for our clients.
For example, with the introduction of our pre-bid contextual capability in 2020, we not only enhanced our core verification offering, but we were also able to expand into contextual targeting addressing new needs and providing new value to our customers. Similarly, in 2019, our CTV solution expanded our presence into this important and emerging digital channel. In 2021, we acquiredPublica LLC , a leading CTV ad platform and launched our brand safety solution for in-feed video ads onTikTok .
Increase Sales Within Our Existing Customer Base
We aim to increase the use of our products among existing customers across more campaigns and impressions. Given our comprehensive product portfolio, we believe we can cross-sell additional or new solutions to provide end-to-end coverage to more clients from pre-bid viewability to post-buy verification, fraud prevention, safety, suitability, and targeting.
Acquire New Customers and Increase Market Share
Our ability to acquire new customers and increase our market share is dependent upon a number of factors, including the effectiveness of our solutions, marketing and sales to drive new business prospects and execution, client digital marketing investment adoption, new products and feature offerings, global reach and the growth of the market for digital ad verification. There is a market opportunity to provide advertisers directly or through advertising agencies with verification services, specifically around ad viewability, ad fraud prevention and brand safety and suitability. Based on aMarch 2021 analysis byFrost & Sullivan , we estimate the global market opportunity for our ad verification solutions to be$9.5 billion and expect it to grow at a 16.2% CAGR from 2021 to 2025. We plan to work with the top 500 global advertisers by targeting high-spend verticals and brands with a natural sensitivity for brand safety, brand suitability, and ROAS needs. We believe we will increase our market share by strengthening our work with the leading social platforms, enhancing our programmatic solutions, deriving benefit from our broad global position, and leveraging our differentiated data science and market-leading contextual capabilities. 32 --------------------------------------------------------------------------------
Expand Customer Base Internationally
Our ability to expand our customer base internationally is dependent upon a number of factors, including effectively implementing our business processes and go-to-market strategy, our ability to adapt to market or cultural differences, the general competitive landscape, macroeconomic conditions, our ability to invest in our sales and marketing channels, the maturity and growth trajectory of our services by region and our brand awareness and perception. Global marketers are becoming increasingly cognizant of the value of sophisticated verification strategies and, as such, we believe there is growing demand for our services internationally. We believe that theLatin America and the APAC regions may represent substantial growth opportunities, and we are investing in developing our business in those markets by way of expanded in-market customer service investment and by leveraging our global relationships. We aim to continue to grow outside theU.S. inEurope and other established markets such asAustralia andJapan , and view ourselves as best positioned to continue penetrating these markets given our market-leading global footprint.
Seasonality
We experience fluctuations in revenue that coincide with seasonal fluctuations in the digital ad spending of our customers. The global advertising industry experiences seasonal trends that affect the vast majority of participants in the digital advertising ecosystem. Most notably, advertisers have historically spent relatively more in the fourth quarter of the calendar year to coincide with the holiday shopping season, and relatively less in the first quarter of each calendar year. We expect these seasonality trends to continue, and our ability to manage our resources in anticipation of these trends will affect our operating results. Consequently, the fourth quarter of each calendar year usually reflects the highest level of measurement activity, and the first quarter of each calendar year reflects the lowest level of activity. Our revenue, cash flow, operating results and other key operating and performance metrics may vary from quarter to quarter due to the seasonal nature of our clients' spending on advertising campaigns and macroeconomic conditions. While our revenue is highly re-occurring, seasonal fluctuations in ad spend may impact quarter-over-quarter results. We believe that the year-over-year comparison of results more appropriately reflects the overall performance of the business.
Key Business Metrics
In addition to ourU.S. GAAP financial information, we review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. The key business metrics are presented based on our advertising customers, as revenue from these customers represents substantially all the revenue.
The following table sets forth our key performance indicators for the periods set forth below:
(as of the end of the period)
2022 2021 Net revenue retention of advertising customers (%) 120 % 129 % Total advertising customers 2,152 2,045 Total number of large advertising customers 184 183
Net revenue retention of advertising customers
We define net revenue retention of advertising customers as a metric to reflect the expansion or contraction of our advertising customers' revenue by measuring the period-over-period change in trailing-twelve-month revenues from customers who were also advertising customers in the prior trailing-twelve-month period. As such, this metric includes the impact of any churned, or lost, advertising customers from the prior trailing-twelve-month period as well as any increases or decreases in their spend, including the positive revenue impacts of selling new services to an existing advertising customer. The numerator and denominator includes revenue from all advertising customers that we served and from which we recognized revenue in the earlier of the two trailing-twelve-month periods being compared. For purposes of discussing our key business metrics, we define an advertising customer as any advertiser account that spends at least$3,000 in the applicable trailing-twelve-month periods. We calculate our net revenue retention of advertising customers as follows:
Numerator: The total revenue earned during the current trailing-twelve-month period from the cohort of advertising customers in the prior trailing-twelve-month period.
33 --------------------------------------------------------------------------------
Denominator: The total revenue earned during the immediately preceding trailing-twelve-month period from such cohort of advertising customers in such trailing-twelve-month period.
The quotient obtained from this calculation is our net revenue retention rate of advertising customers.
Our calculation of net revenue retention of advertising customers may differ from similarly titled metrics presented by other companies.
Our net revenue retention of advertising customers decreased from 129% as ofSeptember 30, 2021 to 120% as ofSeptember 30, 2022 . The decrease in the net revenue retention of advertising customers as ofSeptember 30, 2021 compared toSeptember 30, 2022 was primarily due lower revenue growth during the trailing-twelve-month period of 25% in 2022 compared to 34% in 2021.
Total advertising customers
We view the number of advertising customers as a key indicator of our scale and growth and the adoption of our platform. We determine our number of advertising customers by counting the total number of advertiser accounts who have spent at least$3,000 in the trailing-twelve-months. The total number of advertising customers has limitations as an operating metric as it does not reflect the product mix chosen by our advertising customers, the order frequency, or the purchasing behavior of our advertising customers. Because of these and other limitations, we consider, and you should consider, total advertising customers in conjunction with our other metrics, including net revenue retention, net income (loss), adjusted EBITDA, and average revenue per advertising customer.
Total number of large advertising customers
Historically, our revenue has been driven primarily by a subset of large advertising customers who have leveraged our platform substantially from a usage standpoint. We determine our total number of large advertising customers by counting the total number of advertising accounts who have spent at least$200,000 in the trailing-twelve-month period. We believe the recruitment and cultivation of large advertising customers contributes to our long-term success. Our total number of large advertising customers increased from 183 as ofSeptember 30, 2021 to 184 as ofSeptember 30, 2022 .
Components of Results of Operations
Revenue
We derive revenue primarily from advertisers and programmatic services offered through a demand side platform to our customers across the digital advertising platform, which is our performance obligation. Fees associated with our contracts include impression-based fees driven by impression volume and a CPM. We deliver our products and solutions to serve two customer types (i) buy-side (advertisers and agencies) and (ii) sell-side (publishers, advertising/audience networks, and supply side platforms). We generally generate revenue by charging a CPM based on the volume of purchased digital ads that we measure and optimize on behalf of these customers. There are no separate fees to access our platform. Depending on our customer needs, our contracts have (i) usage-based pricing, (ii) monthly, quarterly or annual minimum commitments, or (iii) fixed fees. Usage based pricing is our primary contracting model. For these minimum commitment contracts, if a customer uses fewer impressions than the minimum, there are no discounts or prorating to adjust the minimum fees, and if a customer uses more impressions than the minimum, an overage fee is applied on such usage. We recognize revenue when control of the promised services is transferred to customers. Revenue from the cloud-based technology platform is primarily recognized based on impressions delivered to customers. An "impression" is delivered when an advertisement appears on pages viewed by users. A significant majority (i.e., over 90%) of the Company's contracts are usage-based contracts with no substantive minimum commitments. We have certain contracts for which pricing is variable through tiered pricing arrangements or include annual base fees that do not coincide with the calendar year, requiring an estimate of the transaction price attributable to each year. The majority of our contracts have a duration of one year or less. 34 --------------------------------------------------------------------------------
Operating Expenses
Cost of revenue. Cost of revenue consists of data center costs, hosting fees, revenue share with our DSP partners and personnel costs. Personnel costs include salaries, bonuses, equity-based compensation, and employee benefit costs, primarily attributable to our customer operations group. Our customer operations group is responsible for onboarding, integration of new clients and providing support for existing customers, including technical support for our technology platform and product offering. We allocate overhead such as rent and occupancy and information technology infrastructure charges based on headcount. Sales and marketing. Sales and marketing expense consists primarily of personnel costs, including salaries, bonuses, equity-based compensation, employee benefits costs and commission costs, for our sales and marketing personnel. Sales and marketing expense also includes costs for advertising, promotional and other marketing activities. We allocate overhead such as rent and occupancy and information technology infrastructure charges based on headcount. Sales commissions are expensed as incurred. Technology and development. Technology and development expense consists primarily of personnel costs of our engineering, product, and data sciences activities, as well as software licenses. Personnel costs including salaries, bonuses, equity-based compensation and employee benefits costs, third-party consultant costs associated with the ongoing development and maintenance of our technology platform and product offering. We allocate overhead such as rent and occupancy and information technology infrastructure charges based on headcount. Technology and development costs are expensed as incurred, except to the extent that such costs are associated with software development that qualifies for capitalization, which are then recorded as capitalized software development costs included in internal use software, net on our consolidated balance sheet. General and administrative. General and administrative expense consists of personnel costs, including salaries, bonuses, equity-based compensation, and employee benefits costs for our executive, finance, legal, human resources, information technology, and other administrative employees. General and administrative expenses also include outside consulting, legal and accounting services, allocated facilities costs, and travel and entertainment primarily related to intra-office travel and conferences. Depreciation and amortization. Depreciation and amortization expense consists primarily of depreciation and amortization expenses related to customer relationships, developed technologies, trademarks, favorable leases, equipment, leasehold improvements and other tangible and intangible assets. We depreciate and amortize our assets in accordance with our accounting policies. Maintenance and repairs, which do not extend the useful life of the respective assets, are charged to expense as incurred. Intangible assets are amortized on a straight-line basis over their estimated useful lives or using an accelerated method. Useful lives of intangible assets range from four years to fifteen years.
Foreign exchange loss, net. Foreign exchange loss, net, is impacted by movements in exchange rates and the amount of foreign-currency denominated cash, receivables, intercompany balances, and payables, which are impacted by our billings to customers, payments to sellers and intercompany transactions.
Interest expense, net
Interest expense, net. Interest expense consists primarily of interest payments on our outstanding borrowings under our Prior Credit Agreement (as defined below), New Credit Agreement (as defined below) and amortization of related debt issuance costs net of interest income.
Employee retention tax credit
Employee retention tax credit. Employee retention tax credit was recognized in connection with our submission for employee retention credits under the CARES Act.
Loss on extinguishment of debt
Loss on extinguishment of debt. Loss on extinguishment of debt was incurred in connection with the repayment of outstanding debt under our Prior Credit Agreement.
35 --------------------------------------------------------------------------------
Provision (benefit) from income taxes
Provision (benefit) from income taxes. The provision (benefit) from income taxes resulted primarily from the current period book income (loss) multiplied by the effective tax rate. Results of Operations The following table sets forth our consolidated statement of operations for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands except percentages) Revenue$ 101,343 $ 79,014 $ 290,913 $ 221,041 Operating expenses: Cost of revenue (excluding depreciation and amortization shown below) 19,171 13,845 53,864 38,191 Sales and marketing 28,190 19,578 77,961 62,990 Technology and development 19,459 14,609 54,071 47,554 General and administrative 20,150 16,081 56,081 57,670 Depreciation and amortization 12,617 16,100 37,585 45,098 Foreign exchange loss, net 4,064 5 3,503 407 Total operating expenses 103,651 80,218 283,065 251,910 Operating income (loss) (2,308) (1,204) 7,848 (30,869) Interest expense, net (2,619) (5,753) (5,859) (17,880) Employee retention tax credit 6,981 - 6,981 - Loss on extinguishment of debt - (3,721) - (3,721) Net income (loss) before income taxes 2,054 (10,678) 8,970 (52,470) (Provision) benefit from income taxes (1,287) 898 (5,083) 4,855 Net income (loss)$ 767 $ (9,780) $ 3,887$ (47,615) Net income (loss) margin 1 % (12) % 1 % (22) % 36
--------------------------------------------------------------------------------
The following table sets forth our consolidated statement of operations data expressed as a percentage of total revenue for the periods indicated:
Three Months Ended September
Nine Months Ended September
30, 30, 2022 2021 2022 2021 Revenue 100 % 100 % 100 % 100 % Operating expenses: Cost of revenue (excluding depreciation and amortization shown below) 19 % 18 % 19 % 17 % Sales and marketing 28 % 25 % 27 % 28 % Technology and development 19 % 18 % 19 % 22 % General and administrative 20 % 20 % 19 % 26 % Depreciation and amortization 12 % 20 % 13 % 20 % Foreign exchange loss, net 4 % - % 1 % - % Total operating expenses 102 % 102 % 97 % 114 % Operating income (loss) (2) % (2) % 3 % (14) % Interest expense, net (3) % (7) % (2) % (8) % Employee retention tax credit 7 % - % 2 % - % Loss on extinguishment of debt - % (5) % - % (2) % Net income (loss) before income taxes 2 % (14) % 3 % (24) % (Provision) benefit from income taxes (1) % 1 % (2) % 2 % Net income (loss) 1 % (12) % 1 % (22) %
Comparison of the Three Months Ended
Three Months Ended September 30, $ % 2022 2021 change change (in thousands except percentages) Revenue$ 101,343 $ 79,014 $ 22,329 28 % Operating expenses: Cost of revenue (excluding depreciation and amortization shown below) 19,171 13,845 5,326 38 % Sales and marketing 28,190 19,578 8,612 44 % Technology and development 19,459 14,609 4,850 33 % General and administrative 20,150 16,081 4,069 25 % Depreciation and amortization 12,617 16,100 (3,483) (22) % Foreign exchange loss, net 4,064 5 4,059 81178 % Total operating expenses 103,651 80,218 23,433 29 % Operating income (loss) (2,308) (1,204) (1,104) 92 % Interest expense, net (2,619) (5,753) 3,134 (54) % Employee retention tax credit 6,981 - 6,981 100 % Loss on extinguishment of debt - (3,721)$ 3,721 (100) % Net income (loss) before income taxes 2,054 (10,678) 12,732 (119) % (Provision) benefit from income taxes (1,287) 898 (2,185) (243) % Net income (loss)$ 767 $ (9,780) $ 10,547 (108) % 37
--------------------------------------------------------------------------------
Revenue
Total revenue increased by$22.3 million , or 28%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . Three Months Ended September 30, $ % 2022 2021 change change (in thousands) Programmatic revenue$ 47,067 $ 33,723 $ 13,344 40 % Advertiser direct revenue 38,955 34,444 4,511 13 % Supply side revenue 15,321 10,847 4,474 41 % Total revenue$ 101,343 $ 79,014 $ 22,329 28 % Total revenue increased primarily due to a significant increase in our programmatic revenue of$13.3 million , or 40%, attributable to growth in volume of impressions of 28% and an increase of 9% in average CPMs. The increase in average CPMs was attributable to significant growth of our Context Control solution. Revenue from our advertiser direct customers increased by$4.5 million , or 13%, reflecting growth in volume of impressions of 13%, as well as increased growth from our customer base. Revenue from our supply side customers increased by$4.5 million , or 41%, primarily due to the impact of the acquisition of Publica.
Operating expenses
Cost of Revenue. Cost of revenue increased by$5.3 million , or 38%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . This increase was driven by a$2.5 million increase in data center and hosting fees resulting from overall revenue growth and migration of data centers toAmazon Web Services cloud, an increase of$2.3 million in revenue share to our DSP partners on account of our growth in programmatic revenue, an increase in compensation expenses of$0.3 million and$0.2 million of stock-based compensation expense, due to increased headcount. Sales and marketing. Sales and marketing expenses increased by$8.6 million , or 44%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . This increase was primarily due to an increase in compensation expenses of$3.0 million to support our growth and international expansion,$2.0 million in stock-based compensation expense, an increase in sales commissions of$1.3 million due to higher revenue growth,$0.2 million related to other staff related costs, an increase in restructuring severance costs of$0.3 million , an increase of$0.5 million in marketing and advertising expenses, an increase of$0.8 million in travel expenses and an increase of$0.3 million in software license fees. Technology and development. Technology and development expenses increased by$4.9 million , or 33%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . This increase was primarily due to a$1.3 million increase in stock-based compensation expense, an increase in compensation expenses of$2.7 million , an increase in hosting and license fees of$0.8 million to support our growth,$0.2 million due to higher allocation of overhead costs, and an increase in restructuring severance costs of$0.2 million . This was offset by decreases related to professional fees of$0.3 million . General and administrative. General and administrative expenses increased by$4.1 million , or 25%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . This increase was primarily due to$2.7 million stock-based compensation expense, an increase in compensation expenses of$2.2 million due to increased headcount, an increase of$1.7 million in professional fees incurred for audit, tax, legal and other services, an increase in travel and entertainment costs of$0.2 million , and an increase of$0.2 million for software licenses and computer maintenance. This was offset by a decrease of$1.3 million related to acquisition costs, a decrease in insurance costs of$0.4 million related to public company costs,$0.4 million due to decreased lease expense,$0.2 million due to lower allocation of overhead costs, and a decrease for bad debt reserves of$0.5 million . Depreciation and amortization. Depreciation and amortization expenses decreased by$3.5 million , or 22%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . This decrease results from decreased depreciation of our property and equipment of$0.2 million and decreased amortization of our intangible assets of$3.7 million , resulting from the use of the accelerated method to amortize the asset. This was partially offset by amortization expense related to our internal-use software, which increased$0.4 million in the three monthsSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . 38 --------------------------------------------------------------------------------
Foreign exchange loss, net. Foreign exchange loss, net increased by
Interest expense, net
Interest expense, net. Interest expense decreased by$3.1 million , or 54%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . The decrease in interest expense was primarily attributable to partial repayment of our long-term debt of$10.0 million , net and a reduction in the interest rates as a result of refinancing our debt.
Employee retention tax credit
Employee retention tax credit. Employee retention tax credit was$6,981 for the three months endedSeptember 30, 2022 compared to no employee retention credit for the three months endedSeptember 30, 2021 . The employee retention tax credits were filed pursuant to the CARES Act.
Loss on extinguishment of debt
Loss on extinguishment of debt. There was no loss on extinguishment of debt for the three months endedSeptember 30, 2022 compared to$3.7 million for the three months endedSeptember 30, 2021 . The loss was incurred in the prior year in connection with the repayment of outstanding debt under ourPrior Credit Agreement.
(Provision) benefit from income taxes
(Provision) benefit from income taxes. Provision (benefit) from income taxes increased by$2.2 million , or 243%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . The tax provision increased mainly due to higher book income for the three months endedSeptember 30, 2022 , and executive compensation as the Company became subject to the provisions of Section 162(m) of the Internal Revenue Code as a result of becoming a public company and discrete items, including stock-based compensation.
Comparison of the Nine Months Ended
Nine Months Ended September 30, 2022 $ % 2022 2021 change change (in thousands except percentages) Revenue$ 290,913 $ 221,041 $ 69,872 32 % Operating expenses: Cost of revenue (excluding depreciation and amortization shown below) 53,864 38,191 15,673 41 % Sales and marketing 77,961 62,990 14,971 24 % Technology and development 54,071 47,554 6,517 14 % General and administrative 56,081 57,670 (1,589) (3) % Depreciation and amortization 37,585 45,098 (7,513) (17) % Foreign exchange loss, net 3,503 407 3,096 761 % Total operating expenses 283,065 251,910 31,155 12 % Operating income (loss) 7,848 (30,869) 38,717 (125) % Interest expense, net (5,859) (17,880) 12,021 (67) % Employee retention tax credit 6,981 - 6,981 100 % Loss on extinguishment of debt - (3,721) 3,721 (100) % Net income (loss) before income taxes 8,970 (52,470) 61,440 (117) % (Provision) benefit from income taxes (5,083) 4,855 (9,938) (205) % Net income (loss)$ 3,887 $ (47,615) $ 51,502 (108) % 39
--------------------------------------------------------------------------------
Revenue
Total revenue increased by
Nine Months Ended September 30, $ % 2022 2021 change change (in thousands) Programmatic revenue$ 135,537 $ 92,090 $ 43,447 47 % Advertiser direct revenue 110,210 102,323 7,887 8 % Supply side revenue 45,166 26,628 18,538 70 % Total revenue$ 290,913 $ 221,041 $ 69,872 32 % Total revenue increased primarily due to a significant increase in our programmatic revenue of$43.4 million , or 47%, attributable to growth in volume of impressions of 29% and an increase of 14% in average CPMs. The increase in average CPMs was attributable to significant growth of our Context Control solution. Revenue from our advertiser direct customers increased$7.9 million , or 8%, reflecting growth in volume of impressions of 8% as well as increased growth from our customer base. Revenue from our supply side customers increased$18.5 million , or 70%, primarily due to the impact of the acquisition of Publica.
Operating expenses
Cost of Revenue. Cost of revenue increased by$15.7 million , or 41%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . This increase was driven by a$7.1 million increase in data center and hosting fees resulting from overall revenue growth and migration of data centers toAmazon Web Services cloud, an increase of$8.0 million in revenue share to our DSP partners on account of our growth in programmatic revenue, an increase in stock-based compensation expenses of$0.2 million and compensation expenses of$0.3 million to support our growth and international expansion. Sales and marketing. Sales and marketing expenses increased by$15.0 million , or 24%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . This increase was primarily due to an increase in sales commissions of$2.7 million due to higher revenue growth, an increase in compensation expenses of$8.3 million to support our growth and international expansion, an increase in recruiting expenses of$0.4 million , an increase in restructuring severance costs of$1.5 million , an increase of$2.1 million in marketing and advertising expenses, increase in software license fees of$0.5 million , subscriptions of$0.3 million , telecommunications expenses of$0.3 million and an increase of$1.4 million in travel expenses. These increases were partially offset by a decrease of$2.6 million in stock-based compensation expense, which was higher in the nine months endedSeptember 30, 2021 due to the modification of the Company's stock awards at the time of the IPO and the charge recognized for all vested options. Technology and development. Technology and development expenses increased by$6.5 million , or 14%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . This increase was primarily due to an increase in compensation expenses of$7.2 million , an increase in hosting and license fees of$1.2 million to support our growth, an increase in professional fees of$0.8 million , and$0.4 million due to higher allocation of overhead costs. These increases were partially offset by$1.9 million in stock-based compensation expense, which was higher in the nine months endedSeptember 30, 2021 due to the modification of the Company's stock awards at the time of the IPO and the charge recognized for all vested options, and a decrease of$1.1 million related to restructuring severance costs. 40 -------------------------------------------------------------------------------- General and administrative. General and administrative expenses decreased by$1.6 million , or 3%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . This decrease was primarily due to higher stock-based compensation expense of$12.3 million in the nine months endedSeptember 30, 2021 due to the modification of the Company's stock awards at the time of the IPO and the charge recognized for all vested options, a decrease in facilities expenses of$1.0 million due to the sublease of the facility previously used as ourNew York corporate headquarters, a decrease in acquisition costs of$1.9 million , a decrease in reserves for bad debts of$0.1 million , higher allocation of overhead costs of$0.3 million , and a decrease in IPO related professional fees of$1.3 million incurred during the nine months endedSeptember 30, 2021 . This decrease was offset by increases in compensation expenses of$4.9 million due to increased headcount, an increase in recruiting expenses of$0.7 million , an increase in insurance costs of$2.3 million related to public company costs, an increase of$4.9 million in professional fees incurred for audit, tax, legal and other services, an increase of$1.1 million for software licenses and computer maintenance, an increase of$0.5 million in travel expenses, and an increase of$1.0 million for restructuring severance costs. Depreciation and amortization. Depreciation and amortization expenses decreased by$7.5 million , or 17%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . This decrease results from decreased depreciation of our property and equipment of$0.7 million and decreased amortization of our intangible assets of$8.0 million , resulting from the use of the accelerated method to amortize the asset. These decreases were partially offset by an increase in amortization expense related to our internal-use software of$1.2 million . Foreign exchange loss, net. Foreign exchange loss, net increased$3.1 million , or 761% for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . The loss results from fluctuations primarily attributable to the currency movements between the British Pound and Euro relative to theU.S. Dollar.
Interest expense, net
Interest expense, net. Interest expense decreased by$12.0 million , or 67%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . The decrease in interest expense was primarily attributable to reduced Paid in Kind ("PIK") interest expense of$0.4 million and a decrease in interest expense by$11.5 million due to partial repayment of our long-term debt of$110.0 million , net and a reduction in the interest rates as a result of refinancing our debt.
Employee retention tax credit
Employee retention tax credit. Employee retention tax credit was$7.0 million for the nine months endedSeptember 30, 2022 compared to no employee retention tax credit for the nine months endedSeptember 30, 2021 . The employee retention tax credits were filed pursuant to the CARES Act.
Loss on extinguishment of debt
Loss on extinguishment of debt. There was no loss on extinguishment of debt for the nine months endedSeptember 30, 2022 compared to$3.7 million for the nine months endedSeptember 30, 2021 . The loss was incurred in the prior year in connection with the repayment of outstanding debt under ourPrior Credit Agreement.
(Provision) benefit from income taxes
(Provision) benefit from income taxes. (Provision) benefit from income taxes increased by$9.9 million , or 205%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . The tax provision increased mainly due to higher book income for the nine months endedSeptember 30, 2022 , non-deductible executive compensation as the Company became subject to the provisions of Section 162(m) of the Internal Revenue Code as a result of becoming a public company, and discrete items, including executive compensation. 41 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
We use supplemental measures of our performance, which are derived from our consolidated financial information, but which are not presented in our consolidated financial statements prepared in accordance withU.S. GAAP. Adjusted EBITDA is the primary financial performance measure used by management to evaluate our business and monitor ongoing results of operations. Adjusted EBITDA is defined as income (loss) before depreciation and amortization, stock-based compensation, interest expense, income taxes, acquisition, restructuring and integration costs, IPO readiness costs, foreign exchange gains and losses, and other one-time, non-recurring costs. Adjusted EBITDA margin represents the Adjusted EBITDA for the applicable period divided by the revenue for that period presented in accordance withU.S. GAAP. We use non-GAAP financial measures to supplement financial information presented on aU.S. GAAP basis. We believe that excluding certain items from ourU.S. GAAP results allows management to better understand our consolidated financial performance from period to period and better project our future consolidated financial performance as forecasts are developed at a level of detail different from that used to prepareU.S. GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures provide our shareholders with useful information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling them to make more meaningful period-to-period comparisons. Although we believe these measures are useful to investors and analysts for the same reasons they are useful to management, as discussed below, these measures are not a substitute for, or superior to,U.S. GAAP financial measures or disclosures. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes. The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for net income (loss) prepared in accordance withU.S. GAAP and should be read only in conjunction with financial information presented on aU.S. GAAP basis. Reconciliations of Adjusted EBITDA and Adjusted EBITDA margin to their most directly comparableU.S. GAAP financial measures, net income (loss) and corresponding margin, are presented below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items.
Adjusted EBITDA
Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Net income (loss) $ 767$ (9,780) $ 3,887$ (47,615) Depreciation and amortization 12,617 16,100 37,585 45,098 Stock-based compensation 14,247 8,141 33,107 49,673 Interest expense, net 2,619 5,753 5,859 17,880 Provision (benefit) from income taxes 1,287 (898) 5,083 (4,855) Acquisition, restructuring and integration costs 1,518 2,314 4,396 4,893 IPO readiness costs - 56 - 1,094 Loss on extinguishment of debt - 3,721 - 3,721 Foreign currency transaction gains 4,064 - 3,551 - Employee retention tax credit (6,981) - (6,981) - Impairment of assets 6 - 55 - Adjusted EBITDA$ 30,144 $ 25,407 $ 86,542 $ 69,889 Revenue$ 101,343 $ 79,014 $ 290,913 $ 221,041 Net income (loss) margin 1 % (12) % 1 % (22) % Adjusted EBITDA margin 30 % 32 % 30 % 32 % 42
--------------------------------------------------------------------------------
Liquidity and Capital Resources
General
As ofSeptember 30, 2022 , our principal sources of liquidity were cash and cash equivalents totaling$73.6 million , which was held for working capital purposes, as well as the$65.0 million available balance under our New Revolver, described further below. We expect that our cash and cash equivalents on hand atSeptember 30, 2022 will enable us to continue to make investments in the future. We expect our operating cash flows to further improve as we increase our operational efficiency and experience economies of scale. We believe our existing cash and cash equivalents, availability under our New Revolver and cash provided by operations will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months and beyond. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and services offerings and, continued market acceptance of our products. In the future, we may enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, it could reduce our ability to compete successfully and harm our results of operations. Some of our customers pay in advance for subscriptions, a portion of which is recorded as deferred revenue. Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is later recognized as revenue in accordance with our revenue recognition policy. As ofSeptember 30, 2022 andDecember 31, 2021 , we had deferred revenue of$0.3 million and$0.2 million , respectively, all of which was recorded as a current liability and is expected to be recorded as revenue in the next twelve months, provided all other revenue recognition criteria have been met.
Credit Facilities
OnJuly 19, 2018 , we entered into a Credit Agreement (the "Prior Credit Agreement") with a syndicate of lenders, comprised of the$325.0 million (the "Term Loan") and the$25.0 million (the "Revolving Loan"), with maturity dates ofJuly 19, 2024 andJuly 19, 2023 , respectively. Pursuant to the Incremental Facility Assumption Agreement No. 1, dated as ofNovember 19, 2019 , the Term Loan was increased to$345.0 million . As explained below, onSeptember 29, 2021 , the Company repaid the outstanding balances and terminated the Prior Credit Agreement. In addition to the cash pay interest, the Prior Credit Agreement included PIK interest at a rate of 1.25% per annum. All PIK interest due was paid by capitalizing such interest and adding such applicable PIK interest to the principal amount of the outstanding Term Loan. EffectiveFebruary 1, 2021 , and subject to maintaining a total leverage ratio less than 6.50 to 1.00, additional PIK interest was not accrued pursuant to the Prior Credit Agreement. The interest rate during the period prior to the repayment was 6.0%. OnSeptember 29, 2021 , we entered into a new credit agreement with various lenders (the "New Credit Agreement" or the "New Revolver"), which provides for an initial$300.0 million in commitments for revolving credit loans, which amount may be increased or decreased under specific circumstances, with a$30.0 million letter of credit sublimit and a$100.0 million alternative currency sublimit. In addition, the New Credit Agreement provides for the ability to request incremental term loan facilities, in a minimum amount of$5.0 million for each facility. Borrowings under the New Credit Agreement may be used for working capital and other general corporate purposes, including for acquisitions permitted under the New Credit Agreement. 43 -------------------------------------------------------------------------------- The interest rates applicable to revolving borrowings under the New Credit Agreement are, at our option, either (i) in the case ofU.S. dollar loans, (x) a base rate, which is equal to the greater of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.5%, and (c) the Adjusted LIBOR (subject to a floor of 0.0%) for a one month Interest Period (each term as defined in the New Credit Agreement) plus 1%, or (y) the Adjusted LIBOR (subject to a floor of 0.0%) equal to the LIBOR (as defined in the New Credit Agreement) for the applicable Interest Period multiplied by the Statutory Reserve Rate (each term as defined in the New Credit Agreement) or (ii) in the case of RFR Loans (as defined in the New Credit Agreement) denominated in sterling or euro, (x) the applicable RFR (as defined in the New Credit Agreement) or (y) the applicable Term RFR (as defined in the New Credit Agreement), plus in the case of each of clauses (i) and (ii), the Applicable Rate (as defined in the New Credit Agreement). The Applicable Rate (i) for base rate loans range from 0.75% to 1.50% per annum, (ii) for LIBOR loans range from 1.75% to 2.50% per annum, (iii) for RFR Loans denominated in sterling range from 1.7826% to 2.5326%, and (iv) for RFR Loans denominated in euro range from 1.7965% to 2.5456%, in each case, based on the Senior Secured Net Leverage Ratio (as defined in the New Credit Agreement). Base rate borrowings may only be made in dollars. The Company is required to pay a commitment fee during the term of the New Credit Agreement ranging from 0.20% to 0.35% per annum of the average daily undrawn portion of the revolving commitments based on the Senior Secured Net Leverage Ratio (as defined in the New Credit Agreement). The interest rate atSeptember 30, 2022 was 4.6%. The New Credit Agreement contains covenants requiring certain financial information to be submitted quarterly and annually. In addition, we are also required to comply with certain financial covenants such as maintaining a Net Leverage Ratio (as defined in the New Credit Agreement) of 3.50 to 1.00 or lower and maintaining a minimum Interest Coverage Ratio (as defined in the New Credit Agreement) of 2.50 to 1.00. As ofSeptember 30, 2022 , the Company was in compliance with all covenants contained in the New Credit Agreement. Based upon current facts and circumstances, we believe existing cash coupled with the cash flows generated from operations will be sufficient to meet our cash needs and comply with covenants. Cash Flows
The table below presents a summary of our consolidated cash flows from operating, investing and financing activities for the periods indicated.
Nine Months
Ended
2022
2021
Net cash provided by operating activities$ 47,560 $ 37,656 Net cash used in investing activities (12,472)
(176,851)
Net cash (used in) provided by financing activities (29,195)
153,207
Net increase in cash and cash equivalents, and restricted cash $ 5,893$ 14,012 Effect of exchange rate changes on cash and cash equivalents, and restricted cash (5,396)
(2,042)
Cash, cash equivalents, and restricted cash, at beginning of period 76,078
54,721
Cash, cash equivalents and restricted cash, at end of period$ 76,575 $ 66,691 Operating Activities For the nine months endedSeptember 30, 2022 , net cash provided by operating activities was$47.6 million , resulting from a net income of$3.9 million adjusted for non-cash expenses of depreciation and amortization of$37.6 million , stock-based compensation of$33.1 million , foreign exchange losses of$3.5 million , bad debt expense of$0.6 million , amortization of debt issuance costs of$0.3 million partially offset by Employee retention tax credit of$7.0 million , a decrease in working capital of$24.0 million , and a deferred tax benefit of$0.7 million . For the nine months endedSeptember 30, 2021 , net cash provided by operating activities was$37.7 million , resulting from a net loss of$47.6 million adjusted for non-cash expenses of depreciation and amortization of$45.1 million , stock-based compensation of$49.7 million , a loss on the extinguishment of debt of$3.7 million , amortization of debt issuance costs of$1.0 million , bad debt expense of$0.8 million , and non-cash interest expense of$0.4 million , partially offset by a decrease in working capital of$5.4 million , and a deferred tax provision of$10.0 million .
Investing Activities
Cash used in investing activities was$12.5 million for the nine months endedSeptember 30, 2022 , reflecting capitalized costs related to our internal use software of$10.0 million , payment of$1.6 million for Context and Amino Payments acquisitions, and the purchase of property and equipment of$0.9 million . 44 -------------------------------------------------------------------------------- Cash used in investing activities was$176.9 million for the nine months endedSeptember 30, 2021 , reflecting payment for the acquisition of Publica, net of acquired cash of$166.2 million , capitalized costs related to our internal use software of$10.0 million and the purchase of property and equipment of$0.6 million . Financing Activities Cash used in financing activities was$29.2 million for the nine months endedSeptember 30, 2022 , reflecting cash paid for share repurchases of$23.7 million , a repayment of outstanding short-term debt of$1.8 million , repayment of outstanding long-term debt of$25.0 million , offset by proceeds from issuance of debt of$15.0 million , proceeds of$5.9 million in stock options exercised and cash received from the ESPP of$0.4 million . Cash provided by financing activities was$153.2 million for the nine months endedSeptember 30, 2021 , reflecting proceeds from the IPO, net of underwriting discounts and commissions of$281.6 million , issuance of new debt of$235.0 million , and$1.1 million in stock options exercised. This was offset by a repayment of outstanding debt of$355.9 million ,$1.2 million in common stock repurchases,$4.7 million in deferred offering costs, payments for debt issuance costs of$2.3 million and$0.3 million in principal payment on our capital leases.
Contractual Obligations and Commitments
Our principal commitments consist of obligations under operating leases for office space, our purchase commitments related to hosting and data services and repayments of long-term debt. We lease office space under operating leases, which expire on various dates throughMarch 2027 and the total non-cancelable payments under these leases were$28.7 million as ofSeptember 30, 2022 . Total non-cancelable purchase commitments related to hosting services as ofSeptember 30, 2022 were$110.5 million for periods through 2026. The New Revolver matures in 2026. Indemnification Agreements In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. In addition, in connection with the completion of this offering we intend to enter into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.
JOBS Act
We qualify as an "emerging growth company" pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). For as long as we are an "emerging growth company," we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies," including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory "say-on-pay" votes on executive compensation and shareholder advisory votes on golden parachute compensation. The JOBS Act also permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to "opt-in" to this extended transition period for complying with new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that comply with such new or revised accounting standards on a non-delayed basis. 45 --------------------------------------------------------------------------------
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions, impacting our reported results of operations and financial condition There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting estimates described in "Note 2-Basis of presentation and summary of significant accounting policies" to our consolidated financial statements appearing in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Recent Accounting Pronouncements
For a description of our recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see Note 2 to our condensed consolidated financial statements: "Basis of presentation and summary of significant accounting policies-Accounting pronouncements not yet adopted" included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
© Edgar Online, source