Integral Ad Science (IAS) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the reporting period Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements and related notes for the specified reporting periods Condensed Consolidated Balance Sheets This chapter presents the company's financial position, detailing assets, liabilities, and equity at specific reporting dates Condensed Consolidated Balance Sheets (in thousands): | Item | June 30, 2025 | December 31, 2024 | Change (vs. Dec 31, 2024) | | :----------------------------------- | :------------ | :---------------- | :------------------------ | | ASSETS | | | | | Total current assets | $268,505 | $254,457 | +$14,048 | | Property and equipment, net | $3,880 | $4,004 | -$124 | | Internal use software, net | $59,923 | $53,636 | +$6,287 | | Intangible assets, net | $124,204 | $140,943 | -$16,739 | | Goodwill | $677,752 | $673,025 | +$4,727 | | Total assets | $1,172,249 | $1,151,571 | +$20,678 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | Total current liabilities | $73,678 | $84,166 | -$10,488 | | Total liabilities | $98,631 | $143,560 | -$44,929 | | Total stockholders' equity | $1,073,618 | $1,008,011 | +$65,607 | | Total liabilities and stockholders' equity | $1,172,249 | $1,151,571 | +$20,678 | - Total assets increased by $20.7 million to $1,172.2 million as of June 30, 2025, compared to December 31, 2024, primarily driven by increases in current assets, internal use software, and goodwill[9] - Total liabilities decreased by $44.9 million, mainly due to a reduction in current liabilities and long-term debt, while total stockholders' equity increased by $65.6 million[9] Condensed Consolidated Statements of Operations and Comprehensive Income This chapter presents the company's financial performance, detailing revenue, expenses, net income, and comprehensive income Condensed Consolidated Statements of Operations and Comprehensive Income (in thousands, except per share data): | Item | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | YoY Change (3M) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | YoY Change (6M) | | :----------------------------------- | :------------------------------- | :------------------------------- | :-------------- | :------------------------------- | :------------------------------- | :-------------- | | Revenue | $149,204 | $129,005 | +15.66% | $283,270 | $243,535 | +16.39% | | Total operating expenses | $128,252 | $114,856 | +11.66% | $250,867 | $228,849 | +9.62% | | Operating income | $20,952 | $14,149 | +47.95% | $32,403 | $14,686 | +120.64% | | Net income | $16,408 | $7,690 | +113.37% | $24,401 | $6,435 | +279.20% | | Net income per share – basic and diluted | $0.10 | $0.05 | +100.00% | $0.15 | $0.04 | +275.00% | | Total comprehensive income | $19,714 | $7,497 | +162.96% | $29,513 | $5,183 | +469.42% | - Revenue increased by 16% for both the three and six months ended June 30, 2025, compared to the same periods in 2024, reaching $149.2 million and $283.3 million, respectively[11] - Net income significantly increased by 113% to $16.4 million for the three months and by 279% to $24.4 million for the six months ended June 30, 2025, compared to the prior year periods[11] Condensed Consolidated Statements of Changes in Stockholders' Equity This chapter outlines changes in stockholders' equity, including common stock, additional paid-in capital, and retained earnings Condensed Consolidated Statements of Changes in Stockholders' Equity (in thousands, except shares): | Item | Balance, Dec 31, 2024 | 6 Months Ended June 30, 2025 Changes | Balance, June 30, 2025 | | :----------------------------------- | :-------------------- | :------------------------------------ | :------------------- | | Common Stock (Shares) | 162,871,266 | +2,402,385 | 165,273,651 | | Common Stock (Amount) | $163 | +$2 | $165 | | Additional paid-in capital | $964,765 | +$36,092 | $1,000,857 | | Accumulated other comprehensive income (loss) | $(3,666) | +$5,112 | $1,446 | | Retained earnings | $46,749 | +$24,401 | $71,150 | | Total stockholders' equity | $1,008,011 | +$65,607 | $1,073,618 | - Total stockholders' equity increased by $65.6 million during the six months ended June 30, 2025, primarily due to net income of $24.4 million, stock-based compensation of $34.4 million, and foreign currency translation adjustments of $5.1 million[15] - Common stock shares outstanding increased by over 2.4 million, driven by vested RSUs, MSUs, and ESPP purchases[15] Condensed Consolidated Statements of Cash Flows This chapter presents the company's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands): | Cash Flow Activity | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | YoY Change | | :----------------------------------- | :------------------------------- | :------------------------------- | :--------- | | Net cash provided by operating activities | $58,766 | $24,802 | +$33,964 | | Net cash used in investing activities | $(22,141) | $(20,159) | -$1,982 | | Net cash used in financing activities | $(32,941) | $(57,474) | +$24,533 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $3,684 | $(52,831) | +$56,515 | | Cash, cash equivalents and restricted cash at end of period | $93,653 | $73,375 | +$20,278 | - Net cash provided by operating activities significantly increased to $58.8 million for the six months ended June 30, 2025, up from $24.8 million in the prior year, primarily due to higher net income and favorable working capital adjustments[21][187][188] - Cash used in financing activities decreased by $24.5 million, mainly due to a lower repayment of long-term debt ($35.0 million in 2025 vs. $60.0 million in 2024)[21][190][191] Notes to the Condensed Consolidated Financial Statements This chapter provides detailed explanations of accounting policies, revenue, debt, income taxes, and other financial disclosures - Integral Ad Science (IAS) is a global digital advertising verification company, providing cloud-based technology for independent measurement and verification of digital advertising across various channels and formats[24] - The company operates in the U.S. (New York, California, Illinois) and internationally, including the U.K., Ireland, France, Germany, Spain, Italy, Singapore, Australia, Japan, India, and the Nordics[24] Revenue Disaggregation by Channel (in thousands): | Channel | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | YoY Change (3M) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | YoY Change (6M) | | :---------------- | :------------------------------- | :------------------------------- | :-------------- | :------------------------------- | :------------------------------- | :-------------- | | Optimization revenue | $67,856 | $58,474 | +16.04% | $132,662 | $110,935 | +19.59% | | Measurement revenue | $57,045 | $52,686 | +8.27% | $105,417 | $99,001 | +6.48% | | Publisher revenue | $24,303 | $17,845 | +36.19% | $45,191 | $33,599 | +34.51% | | Total revenue | $149,204 | $129,005 | +15.66% | $283,270 | $243,535 | +16.39% | - The company's effective tax rate for the three months ended June 30, 2025, was 22.3%, down from 39.0% in the prior year, and for the six months, it was 24.9%, down from 42.7%, primarily due to permanent tax differences and discrete items[64][65] Stock-Based Compensation Expense (in thousands): | Expense Category | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | YoY Change (3M) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | YoY Change (6M) | | :----------------------- | :------------------------------- | :------------------------------- | :-------------- | :------------------------------- | :------------------------------- | :-------------- | | Cost of revenue | $96 | $82 | +17.07% | $176 | $206 | -14.56% | | Sales and marketing | $6,345 | $3,435 | +84.73% | $11,118 | $9,173 | +21.21% | | Technology and development | $5,400 | $4,799 | +12.52% | $10,206 | $9,198 | +10.96% | | General and administrative | $7,003 | $6,688 | +4.71% | $12,869 | $12,165 | +5.79% | | Total | $18,844 | $15,004 | +25.60% | $34,369 | $30,742 | +11.79% | - Total non-cancelable purchase commitments as of June 30, 2025, were approximately $381.7 million for periods through 2029, primarily related to third-party cloud hosting and data services[95] - A securities class action complaint was filed in June 2025 against the Company, certain officers, and Vista Equity Partners, alleging violations of the Securities Exchange Act of 1934; the Company intends to vigorously defend itself and is currently unable to assess the likelihood or range of potential losses[96] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition, results of operations, liquidity, and non-GAAP measures Overview This chapter introduces Integral Ad Science as a global media measurement and optimization platform - IAS is a leading global media measurement and optimization platform, offering independent verification of digital advertising across various devices and formats using cloud-based technology and AI/machine learning[112][116] - The platform processes over 280 billion digital interactions daily, providing actionable insights through IAS Signal™ to improve media quality for brands, agencies, publishers, and platform partners[116] - Solutions include pre-bid optimization and post-bid measurement/blocking for viewability, ad fraud prevention, brand safety, contextual targeting, and Total Visibility, helping advertisers optimize spend and publishers improve inventory yield[117] Macroeconomic and Geopolitical Conditions This chapter discusses the impact of macroeconomic conditions and foreign currency fluctuations on the company's operations - The U.S. economy experienced continued GDP growth, modest unemployment increase, real wage growth, and decelerating inflation in H1 2025, with elevated interest rates maintained by the Federal Reserve[118] - The company has not experienced material impacts from macroeconomic conditions in the first half of 2025, but its business is sensitive to overall advertising demand and economic health of advertisers[118][119] - Foreign currency fluctuations, primarily involving the British Pound and Euro against the U.S. dollar, impact consolidated results[118] Our Business Model This chapter describes the company's revenue model, based on measured digital ad volume and usage-based fees - Revenue is generated based on the volume of purchased digital ads measured by the company's solutions, with customers primarily paying usage-based fees[120] - The company's media quality solutions cover ad viewability, brand safety, optimization, context control, and ad fraud prevention for advertisers and publishers[120] - Contracts increasingly include minimum commitments, tiered pricing, or flat fees, offering greater flexibility and platform access[136] Key Factors Affecting Our Performance This chapter identifies key performance drivers, including innovation, customer expansion, international growth, and seasonality - Key performance drivers include innovation in high-growth segments (Optimization, Social, CTV, Adjacent Product Expansion), increasing sales within the existing customer base through cross-selling, acquiring new customers, and expanding internationally[121][122][123][124][126] - The company is investing in international markets, resulting in 13% growth in international revenue year-over-year for FY2024, with Latin America, EMEA, and APAC identified as substantial growth opportunities[124] - The business experiences seasonality, with higher ad spending in Q4 due to the holiday shopping season and lower activity in Q1; year-over-year comparisons are considered more reflective of overall performance[125][127] Key Business Metrics This chapter presents key performance indicators, including net revenue retention and the number of large advertising customers Key Performance Indicators: | Metric | June 30, 2025 | June 30, 2024 | Change | | :------------------------------------------ | :------------ | :------------ | :----- | | Net revenue retention of advertising customers (%) | 110% | 112% | -2 pp | | Total number of large advertising customers | 240 | 232 | +8 | - Net revenue retention of advertising customers decreased to 110% for the trailing-twelve-month period ended June 30, 2025, from 112% in the prior year, primarily due to lower advertising revenue growth (12% in 2025 vs. 15% in 2024)[132] - The total number of large advertising customers (spending at least $200,000 annually) increased to 240 as of June 30, 2025, from 232 in the prior year; revenue from these customers represented 87% of total advertising revenue[133] Components of Results of Operations This chapter details the components of revenue and operating expenses, including cost of revenue, sales, marketing, and technology - Revenue is primarily derived from advertisers (buy-side) and publishers (sell-side) based on the volume of measured digital ads, with pricing models including usage-based fees, minimum commitments, tiered pricing, or flat fees[135][136] - Operating expenses include Cost of Revenue (data center, hosting, revenue share, personnel), Sales and Marketing (personnel, advertising), Technology and Development (personnel, consultants, software development), General and Administrative (executive, finance, legal, HR, IT, consulting), Depreciation and Amortization (intangible assets, equipment), and Foreign Exchange (gain) loss, net[137][138][139][140][141][142] - Interest income (expense), net, covers interest on borrowings, commitment fees, and amortization of debt issuance costs, net of interest income; provision for income taxes is based on pre-tax income, statutory rates, non-deductible expenses, and tax credits[143][144] Results of Operations This chapter provides a detailed analysis of the company's financial performance, including revenue, operating income, and net income Consolidated Statement of Operations Data (in thousands, except percentages): | Item | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | % Change (3M) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | % Change (6M) | | :----------------------------------- | :--------------------------- | :--------------------------- | :------------ | :--------------------------- | :--------------------------- | :------------ | | Revenue | $149,204 | $129,005 | 16% | $283,270 | $243,535 | 16% | | Cost of revenue | $34,349 | $27,094 | 27% | $64,475 | $53,255 | 21% | | Sales and marketing | $35,798 | $29,572 | 21% | $67,926 | $61,397 | 11% | | Technology and development | $20,099 | $17,487 | 15% | $39,799 | $35,465 | 12% | | General and administrative | $26,546 | $24,679 | 8% | $52,742 | $46,059 | 15% | | Depreciation and amortization | $17,242 | $15,709 | 10% | $33,705 | $30,789 | 9% | | Foreign exchange (gain) loss, net | $(5,782) | $315 | (1936)% | $(7,780) | $1,884 | (513)% | | Operating income | $20,952 | $14,149 | 48% | $32,403 | $14,686 | 121% | | Interest income (expense), net | $157 | $(1,536) | (110)% | $85 | $(3,462) | (102)% | | Net income before income taxes | $21,109 | $12,613 | 67% | $32,488 | $11,224 | 189% | | Provision for income taxes | $(4,701) | $(4,923) | (5)% | $(8,087) | $(4,789) | 69% | | Net income | $16,408 | $7,690 | 113% | $24,401 | $6,435 | 279% | - Revenue growth for the three and six months ended June 30, 2025, was primarily driven by a 16% and 20% increase in optimization revenue, respectively, and a 36% and 35% increase in publisher revenue, largely due to Publica's growth[150][162] - Operating income saw substantial increases of 48% (3 months) and 121% (6 months), while net income surged by 113% (3 months) and 279% (6 months) year-over-year[147][160] - Foreign exchange shifted from a net loss to a significant gain, decreasing by $6.1 million (3 months) and $9.7 million (6 months), mainly due to Euro and British Pound movements against the U.S. Dollar[156][169] Non-GAAP Financial Measures This chapter defines and reconciles non-GAAP financial measures, primarily Adjusted EBITDA, for performance evaluation - Adjusted EBITDA is a key non-GAAP financial measure used by management to evaluate business performance and monitor operations, defined as net income before depreciation, amortization, stock-based compensation, interest, taxes, acquisition/restructuring costs, and foreign exchange gains/losses[172] Adjusted EBITDA Reconciliation (in thousands, except percentages): | Item | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income | $16,408 | $7,690 | $24,401 | $6,435 | | Depreciation and amortization | $17,242 | $15,709 | $33,705 | $30,789 | | Stock-based compensation | $18,844 | $15,004 | $34,369 | $30,742 | | Interest (income) expense, net | $(157) | $1,536 | $(85) | $3,462 | | Provision for income taxes | $4,701 | $4,923 | $8,087 | $4,789 | | Acquisition, restructuring and integration costs | $276 | $1,048 | $350 | $1,174 | | Foreign exchange (gain) loss, net | $(5,782) | $315 | $(7,780) | $1,884 | | Asset impairments and other costs | $48 | $0 | $48 | $0 | | Adjusted EBITDA | $51,580 | $46,225 | $93,094 | $79,275 | | Adjusted EBITDA margin | 35% | 36% | 33% | 33% | - Adjusted EBITDA increased to $51.6 million (3 months) and $93.1 million (6 months) for June 30, 2025, compared to $46.2 million and $79.3 million in the prior year periods, respectively[175] Liquidity and Capital Resources This chapter discusses the company's liquidity sources, principal commitments, and compliance with credit facility covenants - As of June 30, 2025, the company's liquidity sources included $90.7 million in cash and cash equivalents and available balance on its Revolver credit facility[176] - Principal commitments include $29.8 million in operating lease obligations through November 2032 and $381.7 million in non-cancelable purchase commitments for hosting and data services through 2029[177] - The Credit Agreement, amended on June 17, 2025, provides for $300.0 million in revolving credit loans, maturing on June 17, 2030; as of June 30, 2025, the company had no principal outstanding on the Revolver and was in compliance with all financial covenants[181][183] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section addresses the company's exposure to market risks, primarily from inflation and interest rates, with no material changes - The company's primary market risk exposure stems from potential changes in inflation or interest rates[197] - No material changes in market risks were identified as of June 30, 2025, compared to the disclosures in the Annual Report on Form 10-K for December 31, 2024[198] - The company does not hold financial instruments for trading purposes[197] Item 4. Controls and Procedures This section details the evaluation of disclosure controls and internal control over financial reporting, concluding effectiveness - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2025[198] - There were no material changes in the company's internal control over financial reporting during the three months ended June 30, 2025[199] - The report acknowledges the inherent limitations of controls, noting they may not prevent or detect all misstatements and their effectiveness can deteriorate over time[200][201] PART II. OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section refers to Note 14 for details on legal proceedings, including a securities class action complaint - The company is involved in various legal proceedings and claims from time to time, as detailed in Note 14 of the financial statements[203] Item 1A. Risk Factors This section refers to the Annual Report on Form 10-K for a comprehensive discussion of material risk factors - Material risk factors affecting the company are discussed in Part 1, Item 1A 'Risk Factors' of the Annual Report on Form 10-K for the year ended December 31, 2024[204] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report during the period - No unregistered sales of equity securities or use of proceeds occurred during the reporting period[205] Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported[206] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company's operations - Mine safety disclosures are not applicable to the company[206] Item 5. Other Information This section discloses insider trading arrangements adopted by the CEO and Chief Accounting Officer during the three months ended June 30, 2025, under Rule 10b5-1(c) of the Exchange Act - CEO Lisa Utzschneider adopted a Rule 10b5-1 trading plan on June 12, 2025, covering the sale of up to 240,000 exercisable options, expiring September 30, 2026[207] - Chief Accounting Officer Alex Gil adopted a Rule 10b5-1 trading plan on June 12, 2025, for the sale of up to 70,335 shares obtained from vested restricted stock units, expiring June 12, 2026[207] Item 6. Exhibits This section lists all exhibits filed or furnished, including corporate documents, agreements, and certifications - The exhibits include corporate governance documents (Certificate of Incorporation, Bylaws), employment agreements for Lisa Utzschneider and Alpana Wegner, a Restricted Stock Unit Award Agreement for Alpana Wegner, and the Second Amendment to the Credit Agreement[208] - Certifications from the Chief Executive Officer and Chief Financial Officer, pursuant to Exchange Act Rules and 18 U.S.C. Section 1350, are also included[208]