DoubleVerify(DV) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, and disclosures on market risk and controls Item 1. Condensed Consolidated Financial Statements This section presents DoubleVerify Holdings, Inc.'s unaudited condensed consolidated financial statements for the periods ended September 30, 2023, and December 31, 2022 (Balance Sheets), and for the three and nine months ended September 30, 2023 and 2022 (Statements of Operations, Stockholders' Equity, and Cash Flows). It also includes detailed notes explaining the company's business, accounting policies, revenue disaggregation, recent acquisition (Scibids), goodwill, intangible assets, property, leases, fair value measurements, long-term debt, income tax, earnings per share, stock-based compensation, and other supplemental information Condensed Consolidated Balance Sheets This section presents the company's financial position, including assets, liabilities, and equity, as of September 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets Summary | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Total Assets | $1,175,179 | $1,037,028 | | Total Liabilities | $163,894 | $160,169 | | Total Stockholders' Equity | $1,011,285 | $876,859 | - Total assets increased by $138.15 million (13.3%) from December 31, 2022, to September 30, 2023, primarily driven by increases in goodwill and intangible assets due to the Scibids acquisition[14][30] Condensed Consolidated Statements of Operations and Comprehensive Income This section details the company's financial performance, including revenue, operating income, and net income, for the three and nine months ended September 30, 2023 and 2022 Condensed Consolidated Statements of Operations and Comprehensive Income Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $143,974 | $112,254 | $400,312 | $318,782 | | Income from operations | $18,236 | $14,397 | $48,084 | $30,424 | | Net income | $13,347 | $10,331 | $38,361 | $25,200 | | Basic EPS | $0.08 | $0.06 | $0.23 | $0.15 | | Diluted EPS | $0.08 | $0.06 | $0.22 | $0.15 | - Revenue increased by 28% for the three months and 26% for the nine months ended September 30, 2023, compared to the same periods in 2022. Net income saw a 29% increase for the three months and a 52% increase for the nine months[15] Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in the company's equity, including common stock, additional paid-in capital, and retained earnings, for the period ended September 30, 2023 Condensed Consolidated Statements of Stockholders' Equity Summary | Metric (in thousands) | As of Sep 30, 2023 | As of Jan 1, 2023 | | :-------------------------------- | :----------------- | :---------------- | | Common Stock | $170 | $165 | | Additional Paid-in Capital | $857,561 | $756,299 | | Retained Earnings | $165,878 | $127,517 | | Total Stockholders' Equity | $1,011,285 | $876,859 | - Total stockholders' equity increased by $134.4 million from January 1, 2023, to September 30, 2023, primarily due to an increase in additional paid-in capital from stock-based compensation and common stock issued for acquisitions, and an increase in retained earnings from net income[17] Condensed Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2023 and 2022 Condensed Consolidated Statements of Cash Flows Summary | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $67,686 | $58,361 | | Net cash (used in) investing activities | $(79,549) | $(27,719) | | Net cash provided by (used in) financing activities | $3,645 | $(8,547) | | Net (decrease) increase in cash, cash equivalents, and restricted cash | $(8,607) | $21,080 | - Cash provided by operating activities increased by $9.3 million, while cash used in investing activities significantly increased by $51.8 million, primarily due to the Scibids acquisition. Financing activities shifted from a net use of cash to a net provision of cash[19] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. Description of Business This note describes DoubleVerify Holdings, Inc.'s core business as a digital media measurement and analytics platform - DoubleVerify Holdings, Inc. is a leading software platform for digital media measurement and analytics, aiming to create stronger, safer, more secure digital transactions for global advertisers. Its proprietary metric, DV Authentic Ad, measures digital ad quality (brand suitability, viewability, real person, intended geography)[21] - The company's software interface, DV Pinnacle, delivers real-time performance data to customers and is integrated across the digital advertising ecosystem, including programmatic platforms, social media channels, and digital publishers[21] 2. Basis of Presentation and Summary of Significant Accounting Policies This note outlines the basis of financial statement preparation and key accounting policies, including estimates and judgments - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP and SEC rules for interim reporting, condensing certain information. Management makes significant estimates and judgments in areas like revenue recognition, income taxes, goodwill/intangible asset valuation, and stock-based compensation[25][26] - Cash equivalents include short-term highly liquid investments with original maturities of three months or less, such as treasury bills, money market funds, and savings accounts[27] 3. Revenue This note disaggregates revenue by type and provides insights into revenue recognition policies and trends Revenue Summary | Revenue Type (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Activation | $81,700 | $62,170 | $229,534 | $175,696 | | Measurement | $51,263 | $38,847 | $137,637 | $111,584 | | Supply-side customer | $11,011 | $11,237 | $33,141 | $31,502 | | Total revenue | $143,974 | $112,254 | $400,312 | $318,782 | - Activation revenue increased by 31% for both the three and nine months ended September 30, 2023, while Measurement revenue increased by 32% and 23% respectively. Supply-side revenue saw a slight decrease of 2% for the three months but a 5% increase for the nine months[29] 4. Business Combinations This note details recent acquisitions, including the Scibids Technology SAS acquisition, and their financial impact - On August 14, 2023, DoubleVerify acquired Scibids Technology SAS, an AI technology leader for digital campaign optimization, for a total consideration of $121.37 million, comprising cash ($67.24 million), common stock ($52.94 million), and contingent consideration ($1.19 million)[30][31] Acquired Assets Summary | Acquired Assets (in thousands) | Acquisition Date | | :----------------------------- | :--------------- | | Intangible assets (Technology, Customer relationships) | $33,000 | | Goodwill | $92,053 | | Total assets acquired | $133,387 | - The acquisition aims to combine DoubleVerify's data with Scibids' AI for enhanced advertiser insights and control. Goodwill includes the acquired workforce and future growth opportunities[30][36] 5. Goodwill and Intangible Assets This note provides details on the company's goodwill and intangible assets, including changes and useful lives Goodwill and Intangible Assets Summary | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Goodwill | $431,307 | $343,011 | | Total Intangible Assets, Net | $147,306 | $135,429 | - Goodwill increased by $88.3 million, primarily due to the Scibids acquisition ($92.05 million). Intangible assets, net, increased by $11.88 million[39] Intangible Asset Class Details | Intangible Asset Class | Weighted-Average Remaining Useful Life (in years) | | :--------------------- | :---------------------------------------------- | | Trademarks and brands | 9 | | Customer relationships | 7 | | Developed technology | 2 | 6. Property, Plant and Equipment This note presents the company's property, plant, and equipment, net of accumulated depreciation Property, Plant and Equipment Summary | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Total property, plant and equipment, net | $55,764 | $47,034 | - Net property, plant and equipment increased by $8.73 million, driven by increases in capitalized software development costs and leasehold improvements[41] 7. Leases This note details the company's lease arrangements, including lease costs and weighted-average lease terms Lease Cost Summary | Lease Cost (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total lease cost | $3,270 | $2,954 | $8,991 | $9,799 | Lease Metric Details | Lease Metric | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------------ | :----------- | :----------- | | Weighted-average remaining lease term - operating leases (in years) | 13.7 | 14.2 | | Weighted-average discount rate - operating leases | 4.6% | 4.5% | 8. Fair Value Measurement This note provides information on fair value measurements of financial instruments, including cash equivalents and contingent consideration Fair Value Item Summary | Fair Value Item (in thousands) | As of Sep 30, 2023 | As of Dec 31, 2022 | | :----------------------------- | :----------------- | :----------------- | | Cash equivalents (Level 1) | $60,651 | $11,710 | | Contingent consideration (Level 3) | $1,193 | $0 | - Cash equivalents significantly increased, while contingent consideration of $1.19 million was recognized as a Level 3 liability related to the Scibids acquisition, valued using a Black-Scholes option pricing model[47][50] 9. Long-term Debt This note describes the company's long-term debt facilities, including the revolving credit facility and associated covenants - The company maintains a $150.0 million New Revolving Credit Facility, which was amended on March 29, 2023, to replace LIBOR with SOFR as the interest rate benchmark. As of September 30, 2023, there was no outstanding debt under this facility[51][52][55] - The facility includes significant negative covenants and requires compliance with a maximum total net leverage ratio (3.5x) and a minimum fixed charge coverage ratio (1.25x), which the company was in compliance with as of September 30, 2023[53][54][55] 10. Income Tax This note details the company's income tax expense and effective tax rates for the reported periods Income Tax Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax expense | $6,234 | $3,609 | $15,775 | $4,121 | | Effective tax rate | 31.8% | 25.9% | 29.1% | 14.1% | - Income tax expense increased significantly for both periods, primarily due to higher pre-tax book income and permanent book-to-tax adjustments. The effective tax rate also increased[58] 11. Earnings Per Share This note presents basic and diluted earnings per share calculations and related weighted-average shares outstanding Earnings Per Share Summary | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic earnings per share | $0.08 | $0.06 | $0.23 | $0.15 | | Diluted earnings per share | $0.08 | $0.06 | $0.22 | $0.15 | | Weighted-average common shares outstanding (Basic) | 168,606 | 164,297 | 166,937 | 163,512 | | Weighted-average dilutive shares outstanding (Diluted) | 173,980 | 170,876 | 172,812 | 170,558 | - Basic and diluted EPS increased for both the three and nine months ended September 30, 2023, reflecting higher net income. Approximately 7.7 million and 7.8 million weighted average shares issuable under stock-based awards were antidilutive and excluded from diluted EPS calculations for the three and nine months ended September 30, 2023, respectively[63] 12. Stock-Based Compensation This note provides details on stock-based compensation expense, unrecognized expense, and the employee stock purchase plan Stock-Based Compensation Summary | Stock-Based Compensation (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total stock-based compensation expense | $15,791 | $10,971 | $42,771 | $31,224 | - Total stock-based compensation expense increased by 44% for the three months and 37% for the nine months ended September 30, 2023, compared to the prior year. Unrecognized stock-based compensation expense as of September 30, 2023, was $134.9 million, expected to be recognized over a weighted-average period of 1.4 years[71] - The company operates a 2021 Employee Stock Purchase Plan (ESPP) allowing eligible employees to purchase common stock at a discount, with the current offering period ending November 30, 2023[72][73] 13. Supplemental Financial Statement Information This note offers additional financial details, including accrued expenses and other income/expense, net Accrued Expenses Summary | Accrued Expenses (in thousands) | As of Sep 30, 2023 | As of Dec 31, 2022 | | :------------------------------ | :----------------- | :----------------- | | Total accrued expenses | $41,751 | $33,085 | - Accrued expenses increased by $8.67 million, primarily due to increases in employee commissions and bonuses, and payroll and other employee-related expenses[75] - Other (income) expense, net, shifted from an expense of $0.2 million in Q3 2022 to income of $1.6 million in Q3 2023, and from an expense of $0.4 million to income of $6.8 million for the nine months, mainly due to increased interest income offset by foreign currency transaction losses[76] 14. Commitments and Contingencies This note discusses the company's legal proceedings and other commitments and contingencies - The company is subject to various legal proceedings and claims in the ordinary course of business but does not believe any will have a material adverse effect on its financial condition or results of operations[77] 15. Segment Information This note clarifies that DoubleVerify operates as a single operating and reportable segment - DoubleVerify operates as a single operating and reportable segment, with the chief operating decision maker reviewing financial information on a consolidated basis[78] 16. Subsequent Events This note discloses significant events that occurred after the reporting period, such as stock option grants - On October 24, 2023, the company granted 57 stock options and 201 restricted stock units to employees under the 2021 Equity Plan[79] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on DoubleVerify's financial condition and results of operations for the three and nine months ended September 30, 2023, compared to the same periods in 2022. It covers revenue drivers, operating expenses, profitability metrics (including non-GAAP Adjusted EBITDA), liquidity, and cash flow analysis, highlighting key trends and factors influencing performance Company Overview This section provides an overview of DoubleVerify's business, mission, and market position in digital media measurement - DoubleVerify is a leading software platform for digital media measurement and analytics, focused on ensuring stronger, safer, and more secure digital transactions for global advertisers[82] - The company serves large global advertisers and digital ad platforms, providing unified data analytics and a consistent, cross-platform measurement standard across nearly 100 countries and all key digital media channels[83] Components of Our Results of Operations This section explains the key drivers of revenue and the various categories of operating expenses impacting financial results - Revenue is primarily derived from advertiser customers based on the volume of Media Transactions Measured (Measurement and Activation services) and from supply-side customers through contracts with minimum guarantees[84][85][87] - For the three and nine months ended September 30, 2023, 92% of revenue came from advertiser customers, with a gross revenue retention rate over 95%[88] - Operating expenses include cost of revenue (hosting, personnel, revenue-sharing), product development (personnel, third-party software), sales, marketing, and customer support (personnel, promotional activities), general and administrative (executive, finance, legal, professional fees, acquisition costs), depreciation and amortization, interest expense, and other (income) expense[92][93][94][96][97] Results of Operations This section analyzes the company's financial performance, including revenue and expense trends, for the reported periods Results of Operations Summary (3 Months) | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Change ($) | Change (%) | | :------------------------------------------ | :-------------------------- | :-------------------------- | :--------- | :--------- | | Revenue | $143,974 | $112,254 | $31,720 | 28% | | Cost of revenue | $26,466 | $19,323 | $7,143 | 37% | | Product development | $32,315 | $23,932 | $8,383 | 35% | | Sales, marketing and customer support | $32,971 | $27,118 | $5,853 | 22% | | General and administrative | $23,280 | $19,395 | $3,885 | 20% | | Depreciation and amortization | $10,706 | $8,089 | $2,617 | 32% | | Income from operations | $18,236 | $14,397 | $3,839 | 27% | | Net income | $13,347 | $10,331 | $3,016 | 29% | Results of Operations Summary (9 Months) | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change ($) | Change (%) | | :------------------------------------------ | :-------------------------- | :-------------------------- | :--------- | :--------- | | Revenue | $400,312 | $318,782 | $81,530 | 26% | | Cost of revenue | $76,609 | $55,036 | $21,573 | 39% | | Product development | $92,811 | $68,742 | $24,069 | 35% | | Sales, marketing and customer support | $90,220 | $78,535 | $11,685 | 15% | | General and administrative | $63,223 | $60,599 | $2,624 | 4% | | Depreciation and amortization | $29,365 | $25,446 | $3,919 | 15% | | Income from operations | $48,084 | $30,424 | $17,660 | 58% | | Net income | $38,361 | $25,200 | $13,161 | 52% | - Total Advertiser revenue increased by 32% (three months) and 28% (nine months), driven by a 27% and 25% increase in Media Transactions Measured, respectively, and a 2% increase in Measured Transaction Fees. Activation revenue growth was fueled by greater adoption of Authentic Brand Suitability (ABS) and core programmatic solutions, while Measurement revenue grew from increased adoption of social measurement solutions by existing and new customers[102][103][104] - Cost of revenue increased due to growth in Activation revenue, leading to higher partner costs from revenue-sharing arrangements and accelerated investments in cloud services. Product development, sales & marketing, and general & administrative expenses all increased, primarily due to higher personnel costs (including stock-based compensation) and, for G&A, professional services related to the Scibids acquisition and increased bad debt expense[106][107][108][109][110] Adjusted EBITDA This section presents Adjusted EBITDA, a non-GAAP measure, and its reconciliation to net income, highlighting operational profitability Adjusted EBITDA Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $13,347 | $10,331 | $38,361 | $25,200 | | Adjusted EBITDA | $45,673 | $33,994 | $121,636 | $92,698 | | Adjusted EBITDA margin | 32% | 30% | 30% | 29% | - Adjusted EBITDA increased by 34% for the three months and 31% for the nine months ended September 30, 2023, demonstrating improved operational efficiency. Adjusted EBITDA margin also increased for both periods[116] - Adjusted EBITDA is a non-GAAP measure used to evaluate core business operations, excluding items like depreciation, amortization, stock-based compensation, interest expense, income tax, M&A/restructuring costs, offering costs, and other non-recurring items[117][118] Liquidity and Capital Resources This section discusses the company's cash position, working capital, and ability to meet its short-term and long-term financial obligations - As of September 30, 2023, the company had $259.2 million in cash and $135.4 million in net working capital. Management believes existing cash, cash from operations, and the $150.0 million undrawn revolving credit facility are sufficient to meet capital requirements for at least the next 12 months[121][122] Cash Flow Summary | Cash Flow (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | | Operating activities | $67,686 | $58,361 | | Investing activities | $(79,549) | $(27,719) | | Financing activities | $3,645 | $(8,547) | - Cash provided by operating activities increased due to higher net income and non-cash charges, offset by changes in working capital. Cash used in investing activities significantly increased due to the Scibids acquisition and capital expenditures. Financing activities provided cash, primarily from stock option exercises, offsetting share repurchases for tax withholdings[127][129][130] Critical Accounting Policies and Estimates This section highlights accounting policies and estimates that require significant management judgment and could materially affect financial results - The preparation of financial statements requires management to make estimates and assumptions. No material changes to critical accounting policies and estimates have occurred since the Annual Report on Form 10-K for the year ended December 31, 2022[131][132] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section states that there have been no material changes to the company's market risks as of September 30, 2023, compared to those discussed in the Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to market risks were identified as of September 30, 2023, compared to the previous Annual Report on Form 10-K[134] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of September 30, 2023, concluding they were effective. No material changes in internal control over financial reporting occurred during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2023[134] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2023[135] - Management acknowledges the inherent limitations of any control system, providing only reasonable, not absolute, assurance[136] PART II. OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and equity sales Item 1. Legal Proceedings The company is not currently a party to any legal proceedings that would have a material adverse effect on its business, financial condition, or cash flows, though it may be involved in ordinary course legal proceedings from time to time - No current legal proceedings are expected to have a material adverse effect on the company's business, financial condition, or cash flows[138] Item 1A. Risk Factors There have been no material changes to the risk factors previously described in the Annual Report on Form 10-K for the year ended December 31, 2022, and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 - No material changes to risk factors have occurred since previous filings[139] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the issuance of 1,642 thousand shares of common stock on August 14, 2023, to the former owners of Scibids as partial consideration for the acquisition, exempt from registration. It also outlines the use of net proceeds from the April 2021 IPO and concurrent private placement, including payments for the revolving credit facility and acquisitions of Meetrics, OpenSlate, and Scibids - On August 14, 2023, 1,642 thousand shares of common stock were issued to Scibids' former owners as partial acquisition consideration, exempt from registration under Section 4(a)(2) of the Securities Act[140] - Net proceeds from the April 2021 IPO ($253.2 million) and concurrent private placement ($29.0 million) were used to pay down the revolving credit facility ($22.0 million) and fund acquisitions of Meetrics ($24.3 million), OpenSlate ($147.4 million), and Scibids ($121.4 million)[141][143][144][145][146] - There has been no material change in the planned use of IPO net proceeds[147] Item 3. Defaults Upon Senior Securities This item states that there are no defaults upon senior securities to report - Not applicable; no defaults upon senior securities[149] Item 4. Mine Safety Disclosures This item states that there are no mine safety disclosures to report - Not applicable; no mine safety disclosures[150] Item 5. Other Information This section discloses that Julie Eddleman, Executive Vice President and Global Chief Commercial Officer, adopted a Rule 10b5-1 trading arrangement on August 17, 2023, for the sale of up to twelve thousand shares of common stock - Julie Eddleman, EVP and Global Chief Commercial Officer, adopted a Rule 10b5-1 trading arrangement on August 17, 2023, to sell up to twelve thousand shares of common stock by July 3, 2024[151][152] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications from the CEO and CFO, and XBRL-related documents - The report includes certifications from the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2) and various XBRL taxonomy extension documents (Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[153] SIGNATURES This section contains the official signatures of the company's executive officers, certifying the report's accuracy - The report is signed by Mark Zagorski, Chief Executive Officer and Director, and Nicola Allais, Chief Financial Officer, on November 9, 2023[156][157]