AdTheorent Holding Company, Inc. (ADTH) on Q3 2023 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by, and welcome to AdTheorent's Third Quarter 2023 Earnings Call. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to turn the conference over to your first speaker, David DeStefano, Investor Relations. David, please go ahead.
David DeStefano: Good afternoon, and welcome to AdTheorent's third quarter 2023 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me today are AdTheorent's Chief Executive Officer, Jim Lawson; and Chief Financial Officer, Patrick Elliott. Before we begin today, I'd like to remind you that today's conference call will include forward-looking statements based on the company's current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release and our other reports and filings with the Securities and Exchange Commission. All of today's statements are made based upon information available to us today, and we assume no obligation to update any such statements except as required by law. We will also refer to both GAAP and non-GAAP financial measures during the call. You can find the reconciliation of our GAAP to non-GAAP measures included in our press release posted to the Investor Relations section of our website at www.adtheorent.com. All of our non-revenue financial measures we discuss today are non-GAAP unless we state otherwise. With that, let me turn the call over to Jim.
Jim Lawson: Thank you, David, and good afternoon, everyone. Thank you for joining our third quarter 2023 earnings call. During today's call, I will discuss our high-level results for the third quarter, provide a progress update on our ongoing investment initiatives, highlight recent and upcoming product innovation and briefly comment on the macroeconomic and industry backdrop. I will then turn the call over to Patrick, who will provide a more detailed look at results and provide guidance for the fourth quarter and full year 2023. I am pleased to report that AdTheorent's third quarter performance met or exceeded our financial objectives. Our unique machine learning offerings continue to attract elevated interest and uptake, driving an increase in demos, evaluations, new contracts and ultimately more spend on the platform. Third quarter revenue of $40.9 million was above the midpoint of our guidance range and a return to year-over-year growth, up 9% versus Q3 2022. Thanks to the hard work and strong execution of the AdTheorent team, we remain on pace to deliver revenue growth for the full year of 2023. We also drove operating leverage during the quarter, delivering $4.7 million of adjusted EBITDA, an 11.6% margin, above the high end of our guidance range and up 32% year-over-year, driven by higher adjusted gross profit margins and continued cost discipline. Results were especially robust in areas of investment, including self-service, AdTheorent Health and our algorithm-based predictive audience solutions, all of which saw exceptional growth during the quarter as customers responded enthusiastically to our differentiated offerings. I'll discuss each area of investment in more detail. Beginning with self-service, we believe we have the best performance-oriented DSP in the market, and we are confident that continued self-service adoption will drive long-term growth. We saw record activity again in the third quarter, driven by a strong mix of new logo wins and increased wallet share as advertisers gravitated to our cost-efficient and transparent self-service platform for both media buying and audience creation. Compared to Q2, self-service revenue increased 28%, impressions purchased through the platform increased 36%, and advertiser count increased 57%. We also saw very high retention rates, an expanding pipeline of established agencies and brands and outstanding customer satisfaction. This gives us confidence that self-service momentum will continue. In addition, in the coming days, we will announce a strategic partnership with Hero Media that establishes the first Black-owned DSP and programmatic advertising, Hero One. This audience-focused programmatic offering will combine AdTheorent's award-winning platform and technology with Hero Media's media network, exclusive properties and unique data and insights, allowing us to reach diverse audiences at scale. Our work through Hero One will elevate multicultural programmatic advertising beyond assumptions-based retargeting. This exciting opportunity will accelerate adoption of our platform within multicultural segment targeting, a $12 billion market in 2022. The Media Trade Organization Portada estimates will reach over $16 billion by 2027. This market is also perfect for our algorithm-based audience creation tools. Using aggregated self-declared race entity data, we can target multicultural users with a level of thoughtfulness and insight into multicultural families and culture not seen with any other product in the industry. This horizontal opportunity, available for both managed and self-service customers, will add multicultural depth to each of our verticals. Moving to AdTheorent Health. Our uniquely tailored solution and privacy-forward architecture have proven highly effective and are driving tremendous success in the complex healthcare sector, where privacy regulations are especially strict. In our view, AdTheorent's specialized techniques and safeguards, most notably leveraging machine learning algorithms instead of relying on targetable user IDs, give us a sustainable advantage relative to large generalist DSPs. These embedded advantages and our track record of delivering superior campaign outcomes drove 28% year-over-year revenue growth and a 51% year-over-year increase in advertiser count during the quarter. Looking ahead, we expect even greater revenue growth from AdTheorent Health in the fourth quarter. The number of active campaigns running out there in health audiences also increased meaningfully in Q3, up 89% to 36 versus 19 in Q2. I will briefly talk about two of these campaigns. First, for a pharma client looking to target patients with a rare medical condition, AdTheorent Health audiences outperformed all campaign benchmarks as measured by an independent third party, including 60% outperformance on the cost benchmark and 40% outperformance on audience quality. Second, for another pharma client looking to target condition sufferers with unfilled prescriptions, AdTheorent Health audiences drove a 34% more efficient conversion rate than benchmark as measured by an independent third party. We are also making great progress bringing HABi, our health audience creation tool, to self-service users. Through HABi, self-service users can explore key identified health records in real-time based on diagnosis, procedures, prescribed medication, healthcare specialty and many other attributes. Based on the attributes selected, users can see a variety of health insights such as top diagnosis, top prescribed medication, top procedures performed, age, gender and geographical breakdown. This allows advertisers to create and activate custom health audiences on the platform that are tailored to their unique objectives. We couldn't be more pleased with the customer interest generated in such a short period of time. In Q3, we conducted 26 product demos. And one month into the fourth quarter, we have another 15 already completed or committed. The AdTheorent Health DSP combines three of our largest market opportunities, health, self-service and algorithmic audience creation. We are extremely excited about this opportunity and look forward to providing more updates. Finally, in Q3, we received valuable third-party validation for our health audiences with Neutronian's NQI data quality certification based on our superior capabilities in areas including consent and compliance, data quality and sourcing transparency, privacy and performance. This follows our receipt last quarter of a Neutronian certification for our non-health predictive audience solutions. The NQI Health Certification involved an extremely comprehensive review of the underlying health data feeding AdTheorent's proprietary machine learning modeling processes, validating AdTheorent's position as a leader in privacy-forward and industry compliant healthcare solutions, and it distinguishes us as a high-quality provider in the healthcare industry. Switching gears to AdTheorent predictive audiences. Across verticals, customers are leveraging our proprietary ID-independent methodology for audience creation that delivers superior engagement rates while eliminating the expense of third-party audiences. During the quarter, there were 66 active campaigns running at AdTheorent predictive audiences, a 32% increase relative to the 50 active in Q2, driven by our ability to repeatedly demonstrate uplift in campaign performance versus third-party audiences. In Q3, as part of a controlled test with a holding company partner, AdTheorent predictive audiences went head-to-head with a major DSP competitor, utilizing third-party audience targeting in the CPG industry. The results validated the performance we see regularly across our customer campaigns. This particular test concluded with AdTheorent outperforming the competitor across all metrics, delivering a 43% higher click-through rate at a cost per click that was 51% more efficient than the competitor. AdTheorent predictive audiences are an important part of our strategy. This product suite invites deep collaboration and data sharing with customers and showcases our market superiority in the area of machine learning and algorithmic target. In the short time since we've introduced our audience products, they have become a focal point of our strategic sales efforts. Finally, we continue to expand our premium CTV offering. During the quarter, we added additional AVOD inventory with MAX, Discovery, Roku, Viacom, A&E and more, and we'll be adding Hulu in Q4. This builds upon our live sports and the live addressable TV offering that we rolled out last quarter, enabling buyers to target live premium inventory across a greater variety of online cable apps. In Q4, we will continue to expand our content metadata initiative to include network and channel information. As we have said before, much of the data in the CTV bidstream is not standardized or normalized. Having network and channel data differentiates AdTheorent CTV, making it performance-oriented and enabling clients to target, model and report out on more granular content signals. Our ML-based models for targeting, pricing and optimization facilitate smarter media buying, and the additional data further improves these models, generating measurable improvement in ROI. CTV performance was particularly strong within our self-service offering, where revenue increased sequentially 172% compared to the second quarter of 2023. As a result of this mixed shift, overall CTD revenues grew just 1% year-over-year. But self-service adoption continues to increase, and our new and innovative solutions are brought to market, we are confident CTD will return to robust growth. I would also like to make a few comments about the ongoing work of our world-class technology product and R&D teams whose ongoing contributions are expanding our competitive moat. Our mission is to make programmatic advertising more valuable and efficient for marketers by deploying advanced machine learning technology and data science solutions, leading the programmatic advertising industry into a privacy-forward future, not dependent on the ID-based user retarget. I'd like to briefly talk about two impactful innovations launched during the third quarter that advanced this mission. First, building on our natural language processing capabilities, we expanded keyboard targeting beyond URL analysis to the page level. A travel client looking to target keywords that contain airlines or flight deals can now do so based on both the page URL and in-page content across the open Internet. Our predictive models will also pick up these keywords during the campaign and will optimize towards those that are driving the strongest performance. Second, as we previewed last quarter, we rolled out our theme taxonomy, which organizes our inventory into themes based on common keyword vectors. So that same travel client can utilize our themes capability to target travel content as a whole in addition to using our robust keyword targeting capabilities. These NLP solutions are an important part of AdTheorent's product suite as they offer advertisers highly effective targeting methods that are machine learning-based, privacy forward, and not reliant on user IDs. We also continue to receive more industry recognition for our achievements. Notably, we won the Digiday Technology Award for Best Buy Side Programmatic Platform, and we remain a Crain's Best Places To Work for the 10th consecutive year. As we move into the fourth quarter and into 2024, we are pleased with our momentum and growth prospects. Even though advertiser outlook for ad spending remains mixed with ongoing concerns about the macro economy, we have strong momentum behind our core offerings, which we have enhanced materially in the past four quarters as we execute our strategy. Our budget and spending approach heading into 2024 will reflect the broader advertising caution, but we are positioning for a solid year of profitable growth in 2024. Across our primary growth sectors, we're witnessing increased engagement from brands and agencies, and our sales pipeline has never been more promising. We have never been more confident in our ability to capture a growing share of programmatic ad budgets by delivering consistently superior campaign performance, using cutting-edge machine learning and data products and verticalized solutions; and, in the process, leading the industry in data flexibility, ID independence and pricing transparency. We have made tangible progress during the quarter due to the patience and persistence of our world-class team, focused around a strategy which is successfully positioning AdTheorent for sustained market leadership. We expect this momentum to continue. We remain on track to meet or exceed our full-year projections for 2023, and we are looking ahead to 2024 with optimism. Thank you for your support and confidence in AdTheorent. Now I turn the call over to Patrick.
Patrick Elliott: Thanks, Jim, and good afternoon, everyone. We are pleased to deliver strong Q3 results as AdTheorent returned to solid year-over-year revenue growth. The quarter's revenue exceeded the midpoint of our outlook and adjusted EBITDA surpassed the high end of our previous outlook. In the third quarter, revenue was $40.9 million, an increase of $3.3 million, or 8.8% compared to the third quarter of the previous year, driven by continued momentum in our healthcare platform and from self-service advertisers. While we continue to see a challenging environment for ad budgets, particularly in verticals impacted by higher interest rates, this was more than offset by excellent execution and strength in our core areas of investments. In Q3, AdTheorent Health revenues grew 28% from Q3 2022 and the number of health brands advertising on the platform increased over 50% year-over-year. As Jim pointed out, there is a significant increase in the number of advertisers utilizing AdTheorent Health audiences. We also drove continued expansion in self-service revenue, which we've seen every quarter this year, with a sequential increase of 28% compared to Q2 2023. This growth can be attributed to a 57% sequential rise in a number of advertisers using self-service coupled with increased spending on the platform from existing advertisers. Turning now to expenses. In the third quarter, our adjusted gross profit calculated as GAAP revenue less traffic acquisition costs was $26.4 million, or 64.5% of revenue, up 50 basis points from Q2. The sequential increase in AGP margin is due to a higher mix of AdTheorent Health audiences, which are less reliant on expensive third-party data. On a year-over-year basis, the AGP margin declined from 65.8% of revenue due to competitive introductory pricing to encourage self-service adoption and a shift in mix to CTV offerings, partially offset by the increase in health audiences and other predictive audiences. Total GAAP operating expenses were $41 million in the third quarter, up $1.7 million, or 4.2% from Q3 2022. The increase in operating expenses was driven by higher traffic acquisition costs and hosting expense to support the higher revenue base, partially offset by reductions in technology and development and general and administrative expenses. Stock compensation expense in the third quarter was $2.6 million for a decrease of $0.2 million, or 7.2% compared to the $2.8 million recorded in Q3 2022. Adjusted EBITDA for the quarter was $4.7 million, up $1.1 million, or 32% compared to the third quarter of 2022, primarily due to the increases in year-over-year revenue and AGP offset by higher operating expenses. Consistent with our track record of cost discipline and commitment to prioritizing profitability, we once again exceeded the high end of our quarterly EBITDA outlook. Turning to our cash flow. We reported $1.2 million in free cash flow for the quarter versus $4.3 million in Q3 of last year, primarily due to the timing of working capital. Year-to-date, free cash flow was $1.8 million compared to $6.1 million for the first nine months of the year, mainly attributed to reduced revenue. It's worth noting that, similar to Q2, capitalized software costs increased to support our ongoing product and platform initiatives, with year-to-date capitalized software development costs up $2 million versus the prior year. It's also important to keep in mind that a significant portion of our annual cash flow is generated in the fourth quarter. We exited Q3 with a strong cash and liquidity position. At the end of the third quarter, we had $74.3 million in cash versus $72.6 million at the end of 2022. We have no debt on the balance sheet but continue to have access to $40 million on our revolving credit facility. Now turning to our outlook for Q4 and the full year. The positive revenue growth momentum we saw in Q3 will continue into Q4 driven by strong demand for our new products across various verticals. The progress in our key investment areas, including our self-service platform, AdTheorent Health and audience builder products and CTV offerings, is driving improved results on a year-over-year basis. Our forecast assumes no significant changes in the macroeconomic environment. For Q4, we expect revenue to be between $55 million and $57 million, representing 8% revenue growth at the midpoint compared to Q4 2022. The adjusted gross profit for Q4 is expected to be at least 64% of revenue, and we anticipate adjusted EBITDA to be between $10 million and $11.5 million for the fourth quarter, or a 30% adjusted EBITDA margin at the midpoint, reflecting our significant operating leverage. Regarding our outlook for the full year 2023, we've previously provided projections for revenue, AGP and adjusted EBITDA, which contemplated revenue growth, adjusted gross profit between 64% and 65% of revenue, and adjusted EBITDA within 16% and 19% of adjusted gross profit. Today, based on year-to-date actuals through Q3 and our Q4 outlook, we can be more specific about our full year expectations. For the full year, we expect revenue to grow approximately 1% at the midpoint of our range, AGP to be approximately $107 million, and adjusted EBITDA to be approximately $19 million, or an 18% margin. In summary, we are encouraged by our return to growth in Q3 and the many growth opportunities that lie ahead for AdTheorent. Across our key growth pillars, we see enthusiasm from brands and agencies, and the sales pipeline has never been better. The business continues to track toward our longer-term goals, and we expect to sustain this second half growth momentum into 2024. At this time, we would like to transition to the Q&A session moderated by the operator.
Operator: [Operator Instructions] Our first question comes from the line of Maria Ripps with Canaccord. Your line is now open.
Maria Ripps: Great. Good afternoon, and thanks for taking my questions. First, is there anything incremental you can share with us in terms of the state of the advertising market in Q4? And I guess how much conservatism is embedded in your guidance? And more broadly, what's the tone of your conversations with some of your key clients?
Jim Lawson: Yes, thank you, Maria. I appreciate the question. We are sensing a very improved dynamic with a lot of our customers. There's a lot of enthusiasm and optimism around the products that we've brought to market in the last few quarters. In terms of incremental, incremental has always been a big part of the fourth quarter in our business, and we've already received and enjoyed some incremental that has been a nice change from past quarters. And I think that our guidance, it should be noted that our guidance does not contemplate any unknown or kind of like unexpected incremental. Our guidance incremental would be additive to what we've guided the Street. So we feel good about where we are. We feel like the enthusiasm from our customers is a positive change from prior quarters. I think some of that's due to macro improvement. I think some of that's due to, frankly, the time in market with a number of our new products that we talked about in our prepared remarks, our health offerings, our self-service offerings, our algorithm-based audience offerings. So I think that the enthusiasm and adoption of those is driving a lot of the momentum that we're seeing, but we are also seeing improvements in the macro. Patrick, would you want to add anything to that?
Patrick Elliott: I mean, I can just give some more color that, on our Q4 guidance, the range really is dependent on slippage or our expectations around whether or not campaigns get moved to the future quarter or canceled, whereas any additional incremental would be upside to our guidance range for Q4.
Maria Ripps: Got it. That's very helpful. And then secondly, Jim, you sound pretty optimistic about next year, and you mentioned a strong pipeline. So given all the progress on the product side so far, how do you think about sort of your ability to grow and take share relative to the broader advertising space next year?
Jim Lawson: Yes, thank you for that question. So last year at this time, we were looking forward to a 2023 where we had less certainty around growth and commitments from a number of our customers because our self-service offering at that time was close to being out of beta. In 2023, looking into 2024, it is a completely different picture. We have a self-service offering that has not only gone through beta but has been incredible and driven incredible results for our early customers. And we have a lot of enthusiasm around customers seeking to deploy AdTheorent self-service as part of their media buying strategies. So I think, when we look into the '24 buying period, we have more commitments. We have more visibility into revenue, and we have just a much greater level of confidence as to the revenue foundation that we bring from '23 into '24 on top of which we will drive growth. So if in '22 going into '23 we had a customer that wanted to move into self-service, and we had a very early innings version of self-service, we didn't get that opportunity, and that impacted us, and that impacted our ability to drive meaningful growth at the beginning of the year, especially. It's a different picture going into '24. I believe we have a self-service platform that can compete with any self-service platform. And moreover, we have a highly differentiated, verticalized set of capabilities, especially in health, where we have a significant advantage, in our view, relative to other platforms, and we believe we'll capture a significant portion of that opportunity. So we couldn't feel better as we sit at the end of the year, looking into next year. So we're excited to keep you posted.
Maria Ripps: Great. Thank you so much and good luck with the rest of the quarter.
Jim Lawson: Thank you, Maria.
Operator: Our next question comes from the line of Laura Martin with Needham. Your line is now open.
Laura Martin: Hi, Jim, can you hear me okay?
Jim Lawson: Yes.
Laura Martin: Thank you. Great, So I wanted to drill down on Hero One first because, from reading the press release, I'd like to learn a little bit about that, because it sounds like, reading the press release, you're going to have sort of exclusive access to content in addition to data instances sites, which sounds like you've done a deal with the supply side and you've been a pure-play DSP today. So am I just reading that wrong about what Hero One is, please?
Jim Lawson: Thank you for that question. We're really excited about our partnership with Hero. In creating the first Black-owned DSP in partnership with Hero, we're very excited about tapping into our audience-building capabilities, our algorithm audience-building capabilities. Hero brings to the table a number of things. They're a multicultural agency. They have access to a number of data assets, supply-side assets that will be very valuable in creating multicultural offerings and fueling data and algorithms that we can use to provide thoughtful audience targeting in multicultural context rather than just the methods that are being used now; which, again, are largely assumptions-driven ID targeting based on one-off content consumption. So I think Hero brings a wealth of expertise about the communities in which they advertise and work and the clients and customers with whom they work, as well as a publisher network that they have, where we'll get unique access to inventory that we have not had in our network before. So we're not shifting to be on the supply side. We're clearly doubling down, tripling down on our demand-side capabilities and our ability to deliver value on the buy side, but we're partnering with a partner in Hero that will allow us to fuel our data assets, our models, our audiences with unique data and to give us unique destinations for multicultural advertisements.
Laura Martin: Super. Okay. So you're still a pure-play DSC.
Jim Lawson: Correct.
Laura Martin: Very helpful. My other question was on CTV, Jim. So you said that self-service CTV grew by 127%, but the total CTV grew by 1%. So is the implication of that that all we did is substitute managed service CTV for self-service and kill our take rate? Am I reading and interpreting that properly?
Jim Lawson: No. Laura, there's a shift mix in self-service sell. With regard to CTV, you're going to have a more self-service SKU, and I think that's good. I think we knew that self-service and CTV we're going to go very well together. So no, we're encouraged by that. I mean, I think we're going to see growth across both managed and self-service when it comes to CTV. But at this point in time, it's the law of small numbers. I mean, we're seeing that we've had much more growth in this particular quarter through self-service. I think there will be quarters where we'll have a lot of growth across managed. But at the end of the day, the longer-term view is that we have a fantastic data-driven, machine learning-driven self-service offering, and being able to provide that to both self-service buyers and managed buyers is going to be a key to growth. So I don't view it as a 1-quarter story. I view it as the beginning of laying a foundation for driving growth across CTV. And self-service is going to be obviously a very big part of that.
Laura Martin: Okay. And then my last question is, look like Google is actually going to finally deprecating cookies in the first half of next year. Does that act as a catalyst to push more campaigns towards you? What's your opinion on that?
Jim Lawson: Yes, 100%. We feel very good about where we sit relative to the post-cookie world. We've talked a lot in our prepared remarks and in our prior quarters about the audience, algorithmic audience capabilities that we've built. We talked about our contextual advancements in contextual advertising with keyword and natural language processing inputs to our data science models. And we're also working with additional partners to create more one-to-one insights so that we have one-to-one data, as well. But at the end of the day, the cookie deprecation is coming. I also believe that there are other IDs that are things that need to be thought about. And when you look forward, being in a machine learning world, where we can score impressions and we can understand data using statistics, and we can have more than just an ID-based approach, gives us a significant advantage. And there are a lot of platforms talking about their household graphs and those types of things. We have great household graphs. Many of them are tied back to IP addresses. We also are thinking beyond the IP address. We're thinking beyond other data signals. So it's not just about the cookie for us. We want to bring to the market a really future-proof solution for targeted advertising that leverages machine learning and goes beyond not just the cookie, but beyond a lot of these signals that are taken for granted right now. And I think we're going to be in a very exciting place to share some of that information, and I look forward to doing that.
Laura Martin: Thanks very much. Thank you.
Jim Lawson: Thanks, Laura.
Operator: Our next question comes from the line of Andrew Boone with JMP Securities. Your line is now open.
Unknown Analyst: Great. Thank you. This is [Brianna] on the line for Andrew Boone. Thanks so much for taking my question. Two questions for me. On CTV, what have you learned through this year? What's CTV trajectory looking like for 2024? And then, are there any impacts from the potential deprecation of IP addresses by Google? Thank you.
Jim Lawson: Yes. Thank you for your question. We feel good about the CTV growth. Again, we were we were talking about the fact that there's a bit of a mix shift to self-service with CTV, and we think that's a good thing. We think it's actually going to drive a lot of adoption of our self-service platform. We've increased our inventory reach, our AVOD inventory with MAX, Discovery, Roku, Viacom. We've recently added live sports, live addressable, and we're adding Hulu in the fourth quarter. We're also continuing to make investments in understanding the content object metadata in the CTV world so that our machine learning algorithms can use CTV signals in the bid request so that we can score those impressions and drive performance and make CTV more of a performance-oriented engine. So I think we feel really good about it. I think the growth rates are going to be there. Again, we're early innings relative to other more established platforms on self-service. So as we scale self-service, I think we're going to really see great numbers on CTV. It's a big part of our strategy, going forward, and we feel very optimistic about that. Regarding the deprecation of the cookie, as I just mentioned to Laura, we feel really good about where AdTheorent is positioned. We are not an ID-focused company. We do not emphasize the one-to-one nature of targeting. We have a lot of different capabilities. We focus on signals and bid requests, understanding those signals using machine learning algorithms to predict the outcome of serving an ad to an impression with given data on it rather than just retargeting IDs, whether that's a cookie ID or other IDs. So we have a number of strategies that we're excited to share as we get a little further along in the year. We will share our view on the way that the post-cookie world will exist and AdTheorent's role in that and why we believe that we have an opportunity to take full advantage of those changes that are happening. We're not waiting for Google to make those changes. We're actively working on building a future for AdTheorent that gives us the advantage of being a machine learning company in a world dominated by ID-based, one-to-one targeting. And I think it's a great, great opportunity for AdTheorent and a great time to be a stakeholder in AdTheorent for that reason.
Jim Lawson: Next question, please.
Operator: Thank you. And our next question comes from the line of Michael Kupinski from Noble Capital Markets. Your line is now open.
Michael Kupinski: Thanks for taking the question. I just have a couple of things. One that you had mentioned about all the new products and initiatives that you're bringing to the market and so forth. And in terms of your guide in the fourth quarter, I was just wondering if it was a way to quantify the new products and the take rate of those new products relative to your guide. I'm just trying to get a sense of the tone of the marketplace, the advertising marketplace versus some of the new initiatives that you have and just trying to kind of gauge what the key drivers are across the marketplace.
Patrick Elliott: Thanks for the question. Yes, we're very encouraged by our return to growth in Q3, and then we see persisting in Q4 and into the future. We do believe that this is primarily driven in this macro environment by our new product initiatives and our investments in our key strategic growth areas, including health and audiences, self-service, CTV. So it is difficult. We haven't provided a lot of detail on parsing between growth from new initiatives versus other. But I could say a majority of our growth is from our new initiatives. A rebound in the macro environment would be a bonus for us. In Q3, not only were our number of active customers higher, our average spend per customer was up 7% year-over-year. So that is indicating that what we're doing with our customers is resonating.
Jim Lawson: I would add to that that we also have a lot of confidence that our margins will continue to remain strong and potentially get even stronger as we go with these new offerings. With the ability to utilize algorithmic audiences, utilizing our tools and our platform, utilizing the data that we have rather than over-relying on purchasing third-party audience segments, it's incremental margin for us. We're excited about that. And I also think that the use of those and the adoption of those that we're seeing in self-service has been very, very positive. Seeing the adoption by a self-service user who can either choose or not choose to use an AdTheorent-based audience, I think it's quite impactful and an indication of the future margin improvements and sustainability that we see at this point, given our new offerings.
Michael Kupinski: Thanks for the color. And just one more further question. Just talking about, as you indicated, the rebound. We're still waiting for a rebound in the total ad market. There's been some reports out there that the advertising environment is being fueled by the largest advertisers in that there's still a large number of smaller advertisers that are still struggling and not really spending. Is that the sense that you have? Or in what regards were you referring to just a rebound? Just an overall volume increase or it's just the breadth of advertisers? I'm just trying to understand that what you're seeing.
Patrick Elliott: I mean, specific to us and as Jim mentioned earlier, as we go into Q4 and then into 2024, we do have higher level of confidence in the sustainability of our second half growth persisting in '24 because we're having better discussions. We're seeing incrementals come through already in Q4. And our spend commitments from our existing customers, the visibility into their spend for next year is at a higher level than it was last year at this time. So there is some incremental visibility and positivity there that we're seeing kind of across our customer base. But I would say that, as we pointed to, the areas of bigger growth, health, self-service is where we're seeing our areas of investment really materialize.
Jim Lawson: I would also add that, a lot of that, the answer to your question depends to some extent on the verticals that you're talking about. I mean, with health and pharma, we saw a lot of demand in government, CPG really strong, and we're really pleased with that. There was some weakness in banking, financial services and insurance. There are a number of, I think, offerings and products that were challenged or under pressure because of high interest rates and other macro considerations. But I think the bottom line is, we feel really good. We have a very diverse set of vertical clients. We have large clients. We have more large clients than we've ever had. We have a great middle market base, independent agencies and brand direct relationships that are really strong and growing nicely. And we're really trying to focus on those independents and middle market opportunities as well as we've made a lot of great strides with some of the largest media buyers in the world. And those arrangements don't happen overnight, and you don't get there overnight. But we're really happy with the progress we're making, getting our platform in front of those types of organizations, and I think it's going to be a really exciting 2024.
Michael Kupinski: Terrific. Thanks for answering the questions. Appreciate that.
Jim Lawson: Sure. Thank you.
Operator: There are no further questions at this time. I'll turn the call back over to Mr. Jim Lawson, CEO.
Jim Lawson: Thank you. In closing, I would just like to thank everybody for joining us today. I would also like to thank AdTheorent team members, our customers and clients and our shareholders, who have made it possible for us to deliver strong results, which we believe are only a beginning. We are very excited about the momentum in the business and the future of AdTheorent. We look forward to speaking with many of you on the road and to sharing the AdTheorent story and our future plans. To that end, we have posted an investor presentation to the IR section of our website, which we plan to update quarterly. Again, thank you, and have a great evening.
