Digital media measurement and analytics provider DoubleVerify (NYSE:DV) announced better-than-expected results in the Q3 FY2022 quarter, with revenue up 35% year on year to $112.2 million. The company expects that next quarter's revenue would be around $133 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. DoubleVerify made a GAAP profit of $10.3 million, improving on its profit of $7.92 million, in the same quarter last year.
DoubleVerify (DV) Q3 FY2022 Highlights:
- Revenue: $112.2 million vs analyst estimates of $109.2 million (2.73% beat)
- EPS: $0.06 vs analyst estimates of $0.05 (14.8% beat)
- Revenue guidance for Q4 2022 is $133 million at the midpoint, roughly in line with what analysts were expecting
- Free cash flow of $17.6 million, down 11.2% from previous quarter
- Gross Margin (GAAP): 82.7%, down from 83.8% same quarter last year
When Oren Netzer saw a digital ad for US-based Target while sitting in his Tel Aviv apartment, he knew there was an unsolved problem, so he started DoubleVerify (NYSE: DV), a provider of advertising solutions to businesses that helps with ad verification, fraud prevention, and brand safety.
The advertising industry continues to shift from traditional mediums to an expanding array of digital channels and platforms. Digital advertisers have historically relied on inconsistent, self-reported data from a large number of publishers, social media platforms and programmatic ad servers to understand how and where their ad budgets are being spent. The need to understand where ads are being served has accelerated in recent years as more and more objectionable content and ad fraud have found their way into the online advertising ecosystem.
DoubleVerify’s solution is an independent third party measurement provider which big brands can use to track and optimize the performance of their digital advertising dollars. The company’s DV Authentic Ad metric measures whether a digital ad is displayed in a fraud-free, brand-safe environment and is fully viewable in the intended geography. DoubleVerify’s customers can use this metric in real time, allowing advertisers to use the data to improve the efficiency of their advertising campaigns. Central to DoubleVerify’s competitive advantage is its integration across all the major platforms across the entire digital advertising ecosystem, and platforms from social, video, mobile in-app and connected TVs.
The digital advertising market is large, growing and becoming more diverse, both in terms of audiences and media. This as a result drives a growing need for a software that enables advertisers to use data to automate and optimize ad placements.
DoubleVerify’s competitors include large vendors such as Adobe (NASDAQ:ADBE), and Salesforce.com (NYSE:CRM), along with Oracle’s Moat and Grapeshot (NYSE:ORCL), and Integral Ad Science (NASDAQ:IAS). Smaller private companies that compete directly include White Ops and OpenSlate.
As you can see below, DoubleVerify's revenue growth has been very strong over the last two years, growing from quarterly revenue of $61 million in Q3 FY2020, to $112.2 million.
And unsurprisingly, this was another great quarter for DoubleVerify with revenue up 35% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $2.44 million in Q3, compared to $13 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates DoubleVerify is expecting revenue to grow 26% year on year to $133 million, slowing down from the 34.1% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 23.5% over the next twelve months.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. DoubleVerify's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 82.7% in Q3.
That means that for every $1 in revenue the company had $0.82 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a great gross margin, that allows companies like DoubleVerify to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that DoubleVerify is doing a good job controlling costs and is not under pressure from competition to lower prices.
Cash Is King
If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. DoubleVerify's free cash flow came in at $17.6 million in Q3, up 24.4% year on year.
DoubleVerify has generated $51 million in free cash flow over the last twelve months, a solid 12% of revenues. This strong FCF margin is a result of DoubleVerify asset lite business model and provides it plenty of cash to invest in the business.
Key Takeaways from DoubleVerify's Q3 Results
With a market capitalization of $3.89 billion DoubleVerify is among smaller companies, but its more than $242.6 million in cash and positive free cash flow over the last twelve months give us confidence that DoubleVerify has the resources it needs to pursue a high growth business strategy.
We enjoyed seeing DoubleVerify’s impressive revenue growth this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. Overall, this quarter's results seemed pretty positive. But investors might have been expecting more and the company is down 0.76% on the results and currently trades at $23.28 per share.
Is Now The Time?
When considering DoubleVerify, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are a number of reasons why we think DoubleVerify is a great business. While we would expect growth rates to moderate from here, its revenue growth has been strong, over the last two years. On top of that, its impressive gross margins are indicative of excellent business economics, and its very efficient customer acquisition hints at the potential for strong profitability.
The market is certainly expecting long term growth from DoubleVerify given its price to sales ratio based on the next twelve months is 7.6x. But looking at the tech landscape today, DoubleVerify's qualities stand out and we still like it at this price.The Wall St analysts covering the company had a one year price target of $31.6 per share right before these results, implying that they saw upside in buying DoubleVerify even in the short term.
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