PubMatic (PUBM 2.71%), a provider of an advertising technology (ad tech) platform for publishers to maximize the yield they get on their digital-advertising technology, reported first-quarter results that were much better than expected on Tuesday. This is especially good to hear during a period of heightened macroecnomic uncertainty. Revenue of $55.4 million and adjusted earnings per share of $0.02 beat analysts' average forecast for revenue of $50.9 million and an adjusted loss per share of $0.22, respectively.
"Our results reinforce the value of our platform with innovative solutions that drive increased stickiness and superior outcomes for publishers and buyers," said PubMatic co-founder and CEO Rajeev Goel in the company's first-quarter earnings release.
While PubMatic's financial results were notable, it's the "increased stickiness" the company is seeing with its publishers and buyers that may be the most notable takeaway from the update. Let's explore exactly what this "stickiness" looks like -- and where it's coming from.
Supply path optimization
One trend in the ad tech space that PubMatic arguably spearheaded earlier than its peers was to make supply path optimization (SPO) deals with buyers. SPO deals represent private negotiations between PubMatic and ad buyers, like marketers and ad agencies, to give them privileged access to its advertising inventory, whether that's through content, pricing, custom platform features, a greater level of customer service, or a combination of these factors.
The goal of SPO deals, therefore, is to get buyers to consolidate their ad spend on PubMatic's platform. While PubMatic makes its money directly from publisher fees and not buyer fees, it benefits indirectly from SPO deals by bringing more demand to its publishers, which ultimately leads to more transactions and more revenue from its publishers.
PubMatic said that 35% of the transactions on its platform in Q1 were from SPO deals. This is up from 30% of activity in 2022.
Even more, Goel said during the company's first-quarter earnings call that PubMatic saw more than an 80% increase in buyers interested in SPO for the first time. Indeed, he said the company now has "an active pipeline of several dozen buyers." He added, "Long term, we believe there are hundreds if not thousands of buyers that we could engage in SPO with globally."
The uncertain macroeconomic environment "has been an accelerant for SPO, as major advertisers and agencies seek to improve return on ad spend and streamline their operations," Goel explained during the call.
Activity from SPO deals is considered stickier than other activity on the company's platform, as the arrangements with marketers and ad agencies are longer term in nature and require more effort from both parties to create the relationship.
An inflection point for publishers
The environment is similarly driving greater demand from publishers to adopt PubMatic's omnichannel sell-side platform. Indeed, Goel said in the ad tech company's earnings call that he believes "the industry is at an inflection point." He explained, "It's becoming increasingly difficult for publishers and buyers to stay ahead of the curve, requiring significant investment and expertise."
More specifically, Goel said that there's been "a surge in adoption" of PubMatic's OpenWrap solution, which is a yield-management technology for publishers. "Overall, signed OpenWrap agreements grew 27% YoY [year over year] for Q1 as more publishers opt for the performance benefits and customer service PubMatic provides."
PubMatic certainly seems to be doing well. These two trends -- SPO deals and a surge in OpenWrap agreements -- suggest that the company may be hitting a tipping point with ad buyers and ad sellers simultaneously.
