Earnings call transcript: Direct Digital Holdings beats EPS expectations in Q1 2025

Direct Digital Holdings reported its Q1 2025 earnings, revealing an EPS of -$0.35, surpassing the forecasted -$0.41. However, revenue fell short, reaching $8.2 million against an anticipated $16.25 million. Despite the revenue miss, the stock surged 11.77% in aftermarket trading, closing at $0.98, as investors responded positively to strategic cost management and future guidance. According to InvestingPro data, the company’s market capitalization stands at $15.6 million, with analysts maintaining a consensus buy recommendation and an $8 price target.

Key Takeaways

• EPS beat expectations by $0.06, signaling effective cost management.
• Revenue fell short of forecasts by $8.05 million, highlighting challenges.
• Stock rose 11.77% in aftermarket trading, reflecting investor optimism.
• Gross margin improved to 29% from 22% year-over-year.
• Strategic initiatives focus on digital advertising and emerging technologies.

Company Performance

Direct Digital Holdings faced a mixed quarter, with a notable EPS beat but significant revenue shortfall. The company is navigating a challenging digital advertising landscape, focusing on cost reductions and strategic initiatives to drive future growth. InvestingPro analysis reveals concerning metrics, including a high debt-to-capital ratio of 0.98 and a current ratio of 0.64, indicating potential liquidity challenges. For deeper insights into the company’s financial health and 13 additional exclusive ProTips, consider exploring the comprehensive Pro Research Report available on InvestingPro.

Financial Highlights

• Revenue: $8.2 million, down from $22.3 million in Q1 2024.
• Earnings per share: -$0.35, better than the forecasted -$0.41.
• Gross margin: 29%, up from 22% in the previous year.
• Cash and cash equivalents: $1.8 million.

Earnings vs. Forecast

The company reported an EPS of -$0.35, beating the forecast of -$0.41 by $0.06. However, revenue missed the forecast by $8.05 million, indicating a significant shortfall.

Market Reaction

Following the earnings release, Direct Digital Holdings’ stock price increased by 11.77% in aftermarket trading, closing at $0.98. This positive movement suggests investor confidence in the company’s strategic direction and cost management efforts.

Outlook & Guidance

For the full year 2025, Direct Digital Holdings projects revenue between $90 and $110 million, with a focus on buy side and sell side growth. The company anticipates strong gains in the latter half of the year, contingent on stable economic conditions. With a beta of 6.6 and significant stock price volatility, investors should note that InvestingPro’s Fair Value analysis suggests the stock is currently overvalued, despite the positive revenue growth forecast of 49% for FY2025.

Executive Commentary

CEO Mark Walker emphasized, "We are well positioned with a revitalized model, prudent cost management strategies, and strong demand for our products and services." CFO Diana Diaz added, "We anticipate the second half of the year to deliver strong gains as new direct sell side partners come online."

Risks and Challenges

• Continued market disruption and digital advertising shifts.
• Revenue dependency on economic conditions and sell side recovery.
• Navigating cookie deprecation and alternative ID technologies.
• Competitive pressures and market saturation in digital advertising.

Q&A

During the earnings call, analysts focused on the recovery strategy for the sell side business and cost-cutting measures. Executives provided insights on integration timelines with DSP partners and addressed market dynamics related to cookie deprecation and ad tech separation.

Full transcript - Direct Digital Holdings Inc (DRCT) Q1 2025:

Tina, Conference Operator: Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Direct Digital Holdings First Quarter twenty twenty five Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session.

Thank you. I would now like

Jennifer Belladeau, Investor Relations, IMS Investor Relations: to turn the call over to

Tina, Conference Operator: Jennifer Belladeau, IMS Investor Relations. Please go ahead.

Jennifer Belladeau, Investor Relations, IMS Investor Relations: Good afternoon, everyone, and welcome to Direct Digital Holdings’ first quarter twenty twenty five earnings conference call. On today’s call are Direct Digital Holdings’ Chairman and Chief Executive Officer, Mark Walker and Chief Financial Officer, Diana Diaz. Information discussed today is qualified in its entirety with the Form eight ks and accompanying earnings release, which has been filed today by Direct Digital Holdings, which may be accessed at the SEC’s website and the company’s website. Today’s call is also being webcast, and a replay will be posted to DRCT’s Investor Relations website. Immediately following the speakers’ presentation, there will be a question and answer session.

Please note that the statements made during the call, including financial projections or other statements that are not historical in nature, may constitute forward looking statements. These statements are made on the basis of DRCT’s views and assumptions regarding future events and business performance at the time they are made, and we do not undertake any obligation to update these statements. Forward looking statements are subject to risks, which could cause DRCT’s actual results to differ from its historical results and forecasts, including those risks set forth in DRCT’s filings with the SEC, and you should refer to those for more information. This cautionary statement applies to all forward looking statements made during this call. During this call, DRCT will be referring to non GAAP financial measures.

These non GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. Reconciliation of the non GAAP financial measures to the most directly comparable GAAP measures is available in the earnings release that DRCT filed in its Form eight ks today. Now I’ll hand over the conference call to Mark Walker, Chief Executive Officer. Please go ahead, Mark.

Mark Walker, Chairman and Chief Executive Officer, Direct Digital Holdings: Thanks, Jen, and thank you to everyone joining our call this evening. I’ll start by reviewing some of the highlights of our operations and financial results during the first quarter before turning the call over to our Chief Financial Officer, Diana Diaz, for a more detailed look at our financial results. We’ll conclude by opening the call for a brief Q and A. As we begin to move through 2025, our focus is on scaling our buy side solution and rebuilding our sell side business to drive consolidated revenue growth throughout the fiscal year. In the first quarter, we recognized consolidated revenue of $8,200,000 including $6,100,000 in revenue from our buy side segment, a 6% increase compared to buy side revenue in the first quarter of twenty twenty four.

The increase included growth from customers in new verticals of 1,200,000. Sequentially, our first quarter sell side revenue of 2,000,000 was relatively consistent with fourth quarter sell side revenue of 2,700,000.0, demonstrating an encouraging trend given that our fourth quarter is typically the strongest driven by increased activity around the holidays and our fourth quarter twenty twenty four included $700,000 of political spend. So we are pleased with the performance of our sell side segment in Q1 and continue to focus our efforts on scaling this segment to drive consolidated revenue growth. In the first quarter of twenty twenty five, we continue to see the impact of the disruption of our sell side business during the previous year resulting from multiple short attacks. As many of you are already aware, a market discredited blog post against our supply side platform, Colossus SSP, in mid May of twenty twenty four caused an unexpected business disruption amongst our partners, advertisers, and clients.

As we continue to repair the business and reconstitute our relationships, volumes have not yet returned to prepause levels, and this caused a meaningful reduction in our 2024 revenues and also impacted the first quarter of twenty twenty five. We have been working diligently with our multinational HOCO agency partners, our Fortune 500 brand partners, and demand side partners to resume or increase activity once direct connections are fully integrated in the second half of twenty twenty five. And we’re pleased by their ongoing commitment to direct digital as we build our business back to previous levels. Our focus in 2025 is on driving growth and value for our shareholders. We’ve launched several initiatives to drive our progress, including revenue optimization efforts to diversify our revenue base and cost saving initiatives to drive reductions in operating expenses and enhance operational efficiencies.

In the first quarter of twenty twenty five, we reduced operating expenses by nearly $1,500,000 or approximately 19% when compared to the first quarter of twenty twenty four. We continue to evaluate the optimal personnel and cost structure for our business. At the business unit level, the unification of our two buy side platforms into Orange one forty two has allowed us to better service small to midsize clients who represent a significant growth opportunity for our business. Small and mid sized clients are increasingly shifting their advertising dollars to focus more on digital advertising. By intentionally focusing on this segment of the market, Direct Digital can provide the support these clients need to help navigate the complexities of digital advertising and optimize the return on ad spend and emerging technologies and high growth channels, including AI, connected TV, retail media, and more.

As we mentioned last quarter, we brought on several clients across some of these new verticals, which are expected to generate additional incremental revenue in the range of 5,000,000 to $10,000,000 in 2025. We expect to see the impact of these new clients continuing into second quarter twenty twenty five revenues. On the sell side, we launched Colossus Connection in the third quarter twenty twenty four to accelerate direct integration efforts with leading demand side platforms. We established this offering to optimize supply path efficiency for our advertising clients through direct connections with top demand side platforms, which ultimately provides advertisers with improved access to demand and cost savings. And we’re seeing some encouraging early results.

As we stated previously, we’ve already signed up two of the leading marketplace partners in this segment. We have also recently added several mid tier DSP partners who are near completion with integrations. We’re also pursuing alternative intermediaries and pathways to send buyer spend to our publishers. We expect to see the impact of these new partners on our revenues once integration has been completed in the second half of twenty twenty five. In addition to our revenue diversification strategy, we’ve implemented cost saving initiatives across our business with the goal of reducing some of our ongoing expenses and enhancing operational efficiencies.

In the first quarter of twenty twenty five, we reduced total operating expenses by 1919% compared to the prior year period. Diana will elaborate on this in her prepared remarks, but at a high level, we’ve taken a close look at our cost structure and expenses, and we’re strategically reallocating capital to invest in the long term growth of our business. From a liquidity perspective, we continue to selectively pursue strategic financing. We’re optimistic about our prospects for securing the necessary capital to support the growth of our business. We’re encouraged by our progress in the quarter and excited about what’s ahead for Direct Digital in 2025.

We face significant challenges in 2024, and there is still a great deal of work to be done as we continue to recalibrate and rebuild our business. That being said, we believe that we are well positioned with the revitalized model, prudent cost management strategies, and strong demand for our products and services. With our visibility today, we maintain our revenue guidance of $90,000,000 to $110,000,000 for full year 2025, supported by growth in both our buy side and sell side segments. And we look forward to driving enhanced value for our shareholders as we move through the balance of 2025. As we mentioned in our twenty twenty four year end earnings call, in particular, we expect the second half of twenty twenty five to deliver strong gains as we experience the full effect of new direct sell side partners coming online.

I will now hand things over to Diana Diaz, our Chief Financial Officer, who will walk you through some of the financial highlights in further detail.

Diana Diaz, Chief Financial Officer, Direct Digital Holdings: Thank you, Mark, and good evening, everyone. I will now provide a review of our first quarter twenty twenty five results. Consolidated revenue in the first quarter of twenty twenty five was $8,200,000 a decrease of $14,100,000 compared with revenue of $22,300,000 in the first quarter of twenty twenty four. Sell side revenue was $2,000,000 in the first quarter compared with $16,500,000 in the first quarter of twenty twenty four. The decrease in sell side advertising revenue was primarily related to a decrease in impression inventory when compared to the first quarter of twenty twenty four.

As market said, a market discredited blog post against our supply side platform, Colossus SSP, in mid May twenty twenty four caused an unexpected business disruption amongst our partners, advertisers and clients. As we continue to repair the business and reconstitute our relationships, volumes have not yet returned to prepost levels and this caused a meaningful reduction in our fiscal year twenty twenty four revenues and also impacted the first quarter of twenty twenty five. Buy side revenue of $6,100,000 increased approximately 6% compared with the first quarter of twenty twenty four, primarily driven by a $1,200,000 increase in spending from customers in new verticals. Gross profit dollars decreased to $2,400,000 in the first quarter compared with $5,000,000 in the prior year period. Due to the shift in revenue mix that includes a larger portion of higher margin buy side revenue, gross margin for the first quarter of twenty twenty five increased to 29% compared with 22% in the first quarter of twenty twenty four.

Moving now to operating expenses. Our first quarter twenty twenty five operating expenses were $6,300,000 a decrease of 19% or $1,500,000 compared with $7,800,000 in the same period of 2024. This reduction in operating expenses was primarily related to lower payroll costs and staff reductions made effective 07/01/2024, as part of our internal reorganization strategy and cost saving measures to reduce certain ongoing costs. Total operating loss for the first quarter was $3,900,000 compared to a loss of $2,800,000 in the same period of last year. Net loss in the first quarter was $5,900,000 or a loss per share of $0.35 compared to a net loss of $3,800,000 or a loss of $0.22 per share in the first quarter of twenty twenty four.

Adjusted EBITDA for the first quarter was a loss of $3,000,000 compared to an adjusted EBITDA loss of $1,700,000 in the same period of 2024. Turning to the balance sheet. We ended the year with cash and cash equivalents of $1,800,000 compared to $1,400,000 as of 12/31/2024. Total cash plus our accounts receivable balance as of the quarter end was $6,200,000 compared to $6,400,000 at year end 2024. We are actively advancing multiple funding and equity financing pathways with the goal that these efforts will restore NASDAQ compliance, strengthen the company’s financial position and support key growth initiatives.

Based on our current visibility, we are maintaining our full year revenue guidance of 90,000,000 to $110,000,000 based on the expectation of consolidated revenue growth driven by enhanced buy side activity and the ongoing recovery of our sell side segment. And as Mark said, we expect the second half of the year to deliver strong gains as we experience the full effect of new direct sell side partners coming online. Our guidance assumes that The U. S. Economy does not have any major economic conditions to deteriorate or otherwise significantly reduce advertiser demand.

We plan to offer annual guidance and update it throughout the year. I’d like to turn it back over to Mark for some closing comments.

Mark Walker, Chairman and Chief Executive Officer, Direct Digital Holdings: Thank you, Diana, and thank you to everyone for joining. As always, we appreciate your interest in Direct Digital Holdings and are looking forward to answering your questions. Operator, please open the line.

Tina, Conference Operator: And your first question comes from the line of Michael Opinski with Noble Capital Markets. Please go ahead.

Michael Opinski, Analyst, Noble Capital Markets: Thank you and thanks for taking my questions. I was wondering in terms of the sell side customer that you that cut back last year, I was just wondering if you can give us a sense of maybe in talking to that customer, what they might build back in terms of the business and maybe as a percent of 2024 spending levels, if you have any insight there? And then based on the revenue guide that you’re giving for the full year, can you kind of give us a sense of what percent of revenues will be derived from the buy side versus the sell side?

Mark Walker, Chairman and Chief Executive Officer, Direct Digital Holdings: Yes. Yes. No, appreciate the question, Michael. In regards to the customer from last year, what we are focusing on is all direct is to really go for a strategy of Direct Connection. So what we believe in the most cost efficient way for us to continue to grow the sell side of our business is through direct relationships with different DSP partners that we actually have in the marketplace.

And so what we’ve been working diligently on is making those direct connections with those partners. What we believe the overall impact of that direct connections will be and the strategy we have with Colossus Connections is really focusing on driving additional top line revenue dollars, increasing our margin profile as it relates to the SSP business because it’s direct instead of working through multiple intermediaries. And then we also think that our clients and customers, we could see an increase in demand in the future state as it relates to the second half of the year. So that’s why we maintain a bullish outlook for Q3 and Q4, as we believe some of those reclamation schools will be coming online. And then as it relates to your second question that you asked as it relates to the split between buy side, sell side, as you know, we’ve been working diligently on growing the buy side of our business.

We anticipate and what we have projected out is for that to be at the $40,000,000 range and then for the sell side of the business to be north of that number in order to close out the 90,000,000 to 110,000,000 range.

Michael Opinski, Analyst, Noble Capital Markets: And just as a quick follow-up, in terms of your cost cutting initiatives, you mentioned about the payroll cost. And I would assume that most of that would be variable. Do you anticipate that kind of give us a sense of maybe the extra efforts that I think you’re continuing to look at cost efficiencies and so forth. Is there a dollar amount that you plan to save this year? And are those mostly coming from variable cost reductions?

Or can you just kind of give us some color on those efficiencies? And when do you expect that you will continue to see those realized?

Mark Walker, Chairman and Chief Executive Officer, Direct Digital Holdings: Yes. I’m going to turn that over to Diane and answer that question.

Diana Diaz, Chief Financial Officer, Direct Digital Holdings: Sure. Michael, we actually saw those cost reductions in the current quarter. Our operating expenses were down 19%. And those costs are fixed costs. There are staff that’s on hand working every day, and we did cut our staff 20% back on July 1.

We saw savings in the second half of last year, and we continue to see those into the first quarter, and those will be ongoing.

Jennifer Belladeau, Investor Relations, IMS Investor Relations: So not variable.

Michael Opinski, Analyst, Noble Capital Markets: Gotcha. I appreciate that. That’s all I have. Thank you very much, and good luck to you guys.

Mark Walker, Chairman and Chief Executive Officer, Direct Digital Holdings: Thank you. Thank you, Michael.

Tina, Conference Operator: And our next question comes from the line of Daniel Kurnos with Benchmark. Please go ahead.

Daniel Kurnos, Analyst, Benchmark: Yeah. Great. Thanks. Just real quick, Mark. Just how quickly are these integrations gonna ramp with DSPs?

And do you have any thoughts on sort of the broader marketplace given kind of the garnish in the Google space?

Mark Walker, Chairman and Chief Executive Officer, Direct Digital Holdings: Thanks. Yeah. Absolutely. Yeah. I think, you know, I think, you know, with with the cookie deprecation on again, off again relationship, I think for the foreseeable future, I don’t think cookies are gonna go anywhere.

I do think alternative IDs are still going to have an impact in the marketplace, and I think we’re already seeing other partners actually leveraging some of those third party cookies that are actually out there. So I think those are going be a permanent part of the overall infrastructure. With regards to the breaking up of Google, if you will, between their ad tech business and all the rest of their businesses, I think it’s so we’re in a wait and see mode on that. I think there’s a lot of moving pieces as it relates to the judicial process that they’re going through. So, for us, we are, treating it as business as usual, and we will wait until we see definitive action from the judicial on how we’re going to respond and deal with that accordingly.

With regards to the ramp up of the integrations, each integration partner, is different. Some move faster than others. Some have, a little bit of legacy code that they’re working through. So those are going to be variable in time. And so what we’re anticipating is we’ll see the impact of that come Q3 and Q4 of this year.

Tina, Conference Operator: There are no further questions at this time. I will now turn the call back over to management for closing remarks.

Mark Walker, Chairman and Chief Executive Officer, Direct Digital Holdings: Yes. With that stated, we thank you for your continued support of Direct Digital Holdings. And that concludes our Q1 twenty twenty five call. So thank you very much, and we’ll look forward to to you next quarter.

Tina, Conference Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining and you may now disconnect.

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