The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim Condensed Consolidated Financial Statements and related notes appearing elsewhere in this Quarterly Report and our Prospectus. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in our Prospectus and elsewhere in this Quarterly Report.
Company Overview
DoubleVerify is a leading software platform for digital media measurement and analytics. Our mission is to increase the effectiveness and transparency of the digital advertising ecosystem. Through our software platform and the metrics it provides, we help preserve the fair value exchange in the digital advertising marketplace. Our customers include many of the largest global advertisers and digital ad platforms and publishers. We deliver our suite of measurement solutions through a robust and scalable software platform that provides our customers with unified data analytics. We provide a consistent, cross-platform measurement standard across all major forms of digital media, making it easier for advertiser and supply-side customers to benchmark performance across all of their digital ads and to optimize their digital strategies in real time. Our coverage spans over 40 key geographies where our customers are located and covers all major purchasing channels, media formats and devices. For the three months endedJune 30, 2021 , we generated 91% of our revenue from advertiser customers and for the three months endedJune 30, 2020 , we generated 90% of our revenue from advertiser customers. For the six months endedJune 30, 2021 , we generated 91% of our revenue from advertiser customers and for the six months endedJune 30, 2020 , we generated 90% of our revenue from advertiser customers. We derive revenue from our advertiser customers based on the volume of media transactions, or ads, that our software platform measures ("Media Transactions Measured"). Advertisers utilize the DV Authentic Ad, our definitive metric of digital media quality, to evaluate the existence of fraud, brand safety, viewability and geography for each digital ad. Advertisers pay us an analysis fee ("Measured Transaction Fee") per thousand impressions based on the volume of Media Transactions Measured on their behalf. We maintain an expansive set of direct integrations across the entire digital advertising ecosystem, including with leading programmatic, CTV, and social platforms, which enables us to deliver our metrics to the platforms where our customers buy ads. Further, our services are not reliant on any single source of impressions and we can service our customers as their digital advertising needs change. For the three months endedJune 30, 2021 andJune 30, 2020 , 9% and 10% of our revenue, respectively, were generated from our supply-side customers to validate the quality of their ad inventory. For the six months endedJune 30, 2021 andJune 30, 2020 , 9% and 10% of our revenue, respectively, were generated from our supply-side customers to validate the quality of their ad inventory. We generate revenue from supply-side customers based on monthly or annual contracts with minimum guarantees and tiered pricing when guarantees are met.
COVID-19
SinceJanuary 2020 , an outbreak of the 2019 novel coronavirus ("COVID-19") has evolved into a worldwide pandemic. We modified operations in line with our business continuity plans. While certain of our facilities generally remain open, we are making extensive use of the work-from-home model at the moment. While COVID-19 has not had a significant impact on our results from operations to date, to the extent that demand for digital advertising declines, our results and financial condition may be materially and adversely impacted. On a daily basis, management is reviewing operations and there have been to date minimal interruptions in our customer facing operations. 21 Table of Contents Throughout the pandemic, the underlying demand for our products has remained relatively unchanged, with limited disruption to our new customer sales. For the three months endedJune 30, 2021 , we generated growth of 44% in total revenue as compared to the three months endedJune 30, 2020 . For the six months endedJune 30, 2021 , we generated growth of 38% in total revenue as compared to the six months endedJune 30, 2020 . Our existing customer base has remained largely stable, and we have been able to maintain gross revenue retention rates of over 95% for the three months endedJune 30, 2021 . We define our gross revenue retention rate as the total prior period revenue earned from advertiser customers, less the portion of prior period revenue attributable to lost advertiser customers, divided by the total prior period revenue from advertiser customers, excluding a portion of our revenues that cannot be allocated to specific advertiser customers. While the impact on our business has been limited to date, the pandemic has resulted in market disruptions and a global economic slowdown, the duration of which is highly uncertain and cannot be predicted, that may materially impact our results of operations and financial condition. See "Risk Factors-Risks Relating to Our Business-Economic downturns and unstable market conditions, including as a result of the COVID-19 pandemic, could adversely affect our business, financial condition and results of operations" in our Prospectus.
Components of Our Results of Operations
We manage our business operations and report our financial results in a single segment.
Revenue Our customers use our solutions to measure their digital advertisements. We generate revenue from our advertising customers based on the volume of Media Transactions Measured on our software platform, and for supply-side customers, based on contracts with minimum guarantees or contracts that have tiered pricing after minimum guarantees are achieved. For the three months endedJune 30, 2021 and 2020, we generated 91% and 90%, respectively, of our revenue from advertiser customers. For the six months endedJune 30, 2021 and 2020, we generated 91% and 90%, respectively, of our revenue from advertiser customers. Advertisers can purchase our services to measure the quality and performance of ads purchased directly from digital properties, including publishers and social media platforms, which we track as Advertiser Direct revenue. Advertisers can also purchase our services through programmatic platforms to evaluate the quality of ad inventories before they are purchased, which we track as Advertiser Programmatic revenue. We generate revenue from advertisers by charging a Measured Transaction Fee based on the volume of Media Transactions Measured on behalf of our customers. We recognize revenue from advertisers in the period in which we provide our measurement solutions. For the three months endedJune 30, 2021 and 2020, we generated 9% and 10%, respectively, of our revenue from supply-side customers who use our data analytics to validate the quality of their ad inventory and provide data to their customers to facilitate targeting and purchasing of digital ads, which we refer to as Supply-Side revenue. For the six months endedJune 30, 2021 and 2020, Supply-Side revenue comprised 9% and 10% of revenue, respectively. We generate revenue from supply-side customers based on monthly or annual contracts with minimum guarantees and certain customers having tiered pricing when guarantees are met. We recognize revenue ratably over the contract term beginning on the date our product is made available to them, which typically begins on the commencement date of each contract.
The following table disaggregates revenue between advertiser customers (on both a direct and programmatic basis) and supply-side customers.
22 Table of Contents Three Months Ended June 30, Change Change Six Months Ended June 30, Change Change 2021 2020 $ % 2021 2020 $ % (In Thousands) (In Thousands)
Revenue by customer type: Advertiser - direct$ 31,662 $ 23,707 $ 7,955 34 %$ 59,203 $ 45,894 $ 13,309 29 % Advertiser - programmatic 37,880 24,128 13,752 57 71,792 47,979 23,813 50 Supply-side customer 6,982 5,185 1,797 35 13,115 10,366 2,749 27 Total revenue$ 76,524 $ 53,020 $ 23,504 44 %$ 144,110 $ 104,239 $ 39,871 38 % Operating Expenses
Our operating expenses consist of the following categories:
Cost of revenue. Cost of revenue primarily consists of platform hosting fees, data center costs, software and other technology expenses, and other costs directly associated with data infrastructure; personnel costs, including salaries, bonuses, stock-based compensation and benefits, directly associated with the support and delivery of our software platform and data solutions; and costs from revenue-sharing arrangements with our partners. Product development. Product development expenses primarily consist of personnel costs, including salaries, bonuses, stock-based compensation and benefits, third party vendors and outsourced engineering services, and allocated overhead. We allocate overhead such as information technology infrastructure, rent and occupancy charges based on headcount. Product development expenses are expensed as incurred, except to the extent that such costs are associated with software development that qualifies for capitalization, which are then recorded as capitalized software development costs included in Property, Plant and Equipment, Net on our Condensed Consolidated Balance Sheets. We amortize capitalized software development costs to depreciation and amortization. Sales, marketing, and customer support. Sales, marketing, and customer support expenses primarily consist of personnel costs directly associated with our sales, marketing, and customer support departments, including salaries, bonuses, stock-based compensation and benefits, and allocated overhead. We allocate overhead such as information technology infrastructure, rent and occupancy charges based on headcount. Sales and marketing expense also includes costs for promotional marketing activities, advertising costs, attendance at events and trade shows, and allocated overhead. Sales commissions are expensed as incurred. General and administrative. General and administrative expenses primarily consist of personnel expenses associated with our executive, finance, legal, human resources and other administrative employees. Our general and administrative expenses also include professional fees for external accounting, legal and other consulting services, and other overhead, as well as third-party costs related to acquisitions. We continue to incur certain non-recurring professional fees and other expenses as part of our transition to becoming a public company. Following the effective date of the Prospectus, we expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with rules and regulations applicable to companies listed on aU.S. securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of theSEC , investor relations and professional services. Interest expense. Interest expense for the six months endedJune 30, 2021 andJune 30, 2020 consists primarily of interest on our outstanding balances under the Prior Credit Facilities and the New Revolving Credit Facility, and also includes debt issuance costs. OnOctober 1, 2020 , we entered into the New Revolving Credit Facility and repaid all amounts outstanding under the Prior Credit Facilities. The New Revolving Credit Facility bears interest at LIBOR plus an applicable margin per annum. See "Debt Obligations." Other (income) expense. Other (income) expense consists primarily of interest earned on our cash equivalents and short-term investments, gains and losses on foreign currency transactions, and change in fair value associated with contingent considerations related to our acquisitions. 23 Table of Contents Results of Operations
Comparison of the Three and Six Months Ended
The following table shows our condensed Consolidated Results of Operations:
Three Months Ended June 30, Change Change Six Months Ended June 30, Change Change 2021 2020 $ % 2021 2020 $ % (In Thousands) (In Thousands) Revenue $ 76,524$ 53,020 $ 23,504 44 %$ 144,110 $ 104,239 $ 39,871 38 % Cost of revenue (exclusive of depreciation and amortization shown separately below) 12,291 7,655 4,636 61 22,494 14,965 7,529 50 Product development 15,120 10,906 4,214 39 29,299 21,237 8,062 38 Sales, marketing and customer support 19,580 12,833 6,747 53 35,114 25,152 9,962 40 General and administrative 32,017 8,262 23,755 288 43,852 18,958 24,894 131 Depreciation and amortization 7,440 6,146 1,294 21 14,497 12,080 2,417 20 (Loss) income from operations (9,924) 7,218 (17,142) (237) (1,146) 11,847 (12,993) (110) Interest expense 297 936 (639) (68) 687 2,100 (1,413) (67) Other expense (income), net 49 198 (149) (75) - (122) 122 (100) (Loss) income before income taxes (10,270) 6,084 (16,354) (269) (1,833) 9,869 (11,702) (119) Income tax expense 2,298 2,006 292 15 5,091 3,351 1,740 52 Net (loss) income$ (12,568) $ 4,078 $ (16,646) (408) %$ (6,924) $ 6,518 $ (13,442) (206) %
The following table sets forth our Condensed Consolidated Results of Operations for the specified periods as a percentage of our revenue for those periods presented:
Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020
Revenue 100 % 100 % 100 % 100 % Cost of revenue (exclusive of depreciation and amortization shown separately below) 16 14 16 14 Product development 20 21 20 20 Sales, marketing and customer support 26 24 24 24 General and administrative 42 16 30 18 Depreciation and amortization 10 12 10 12 (Loss) income from operations (13) 14 (1) 11 Interest expense - 2 - 2 Other expense (income), net - - - - (Loss) income before income taxes (13) 11
(1) 9 Income tax expense 3 4 4 3 Net (loss) income (16) % 8 % (5) % 6 % Revenue
Total revenue increased by$23.5 million , or 44%, from$53.0 million in the three months endedJune 30, 2020 to$76.5 million in the three months endedJune 30, 2021 . Total revenue increased by$39.9 million , or 38%, from$104.2 million in the six months endedJune 30, 2020 to$144.1 million in the six months endedJune 30, 2021 . 24 Table of Contents Advertiser Direct revenue grew$8.0 million , or 34%, in the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 , driven primarily by growth of 89% in Media Transactions Measured for CTV and 100% in Media Transactions Measured for social channels. Advertiser Direct revenue grew$13.3 million , or 29%, in the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 , driven primarily by growth of 82% in Media Transactions Measured for CTV and 87% in Media Transactions Measured for social channels. Advertiser Programmatic revenue grew$13.8 million , or 57%, in the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 , driven primarily by continued adoption of our premium-priced Authentic Brand Safety solution. Advertiser Programmatic revenue grew$23.8 million , or 50%, in the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 , driven primarily by continued adoption of our premium-priced Authentic Brand Safety solution. Supply-Side revenue grew$1.8 million , or 35%, in the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 , primarily driven by increased uptake of our solutions from our platform and publisher customers. Supply-Side revenue grew$2.7 million , or 27%, in the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 , primarily driven by increased uptake of our solutions from our platform and publisher customers.
Cost of Revenue (exclusive of depreciation and amortization shown below)
Cost of revenue increased by$4.6 million , or 61%, from$7.7 million in the three months endedJune 30, 2020 to$12.3 million in the three months endedJune 30, 2021 . The increase was primarily due to higher partner costs from revenue-sharing arrangements with our Advertiser Programmatic partners, as well as higher software and other technology costs to support our increased volumes. Cost of revenue increased by$7.5 million , or 50%, from$15.0 million in the six months endedJune 30, 2020 to$22.5 million in the six months endedJune 30, 2021 . The increase was primarily due to higher partner costs from revenue-sharing arrangements with our Advertiser Programmatic partners, as well as higher software and other technology costs to support our increased volumes.
Product Development Expenses
Product development expenses increased by$4.2 million , or 39%, from$10.9 million in the three months endedJune 30, 2020 to$15.1 million in the three months endedJune 30, 2021 . The increase was primarily due to an increase in personnel costs of$3.4 million , which reflects our continued hiring of resources to support our product-development efforts. Product development expenses increased by$8.1 million , or 38%, from$21.2 million in the six months endedJune 30, 2020 to$29.3 million in the six months endedJune 30, 2021 . The increase was primarily due to an increase in personnel costs of$6.9 million , which reflects our continued hiring of resources to support our product-development efforts, in addition to$0.4 million of higher professional fees and$0.4 million of higher software expenses.
Sales, Marketing and Customer Support Expenses
Sales, marketing and customer support expenses increased by$6.8 million , or 53%, from$12.8 million in the three months endedJune 30, 2020 to$19.6 million in the three months endedJune 30, 2021 . The increase was primarily due to an increase in personnel costs of$5.2 million to support our sales efforts, grow market presence in international markets, drive continued expansion with our existing customers, and support existing and new customers in addition to$1.5 million of higher stock-based compensation expense. Stock-based compensation expense increased due to certain awards that accelerated upon the completion of the IPO, an increase in the number of employees who were eligible and received equity awards and an increase in the value of our common stock. Sales, marketing and customer support expenses increased by$9.9 million , or 40%, from$25.2 million in the six months endedJune 30, 2020 to$35.1 million in the six months endedJune 30, 2021 . The increase was primarily due to an increase in personnel costs of$9.7 million to support our sales efforts, grow market presence in international markets, drive continued expansion with our existing customers, and support existing and new customers. 25 Table of Contents
General and Administrative Expenses
General and administrative expenses increased by$23.8 million , or 288%, from$8.3 million in the three months endedJune 30, 2020 to$32.0 million in the three months endedJune 30, 2021 . The increase was primarily due to$18.3 million of higher transaction costs associated with the preparation and completion of the Company's IPO, as well as an increase in compensation expenses of$2.5 million and an increase in stock-based compensation expenses of$2.0 million . Stock-based compensation expense increased due to certain awards that accelerated upon the completion of the IPO, an increase in the number of employees who were eligible and received equity awards and an increase in the value of our common stock. General and administrative expenses increased by$24.9 million , or 131%, from$19.0 million in the six months endedJune 30, 2020 to$43.9 million in the six months endedJune 30, 2021 . The increase was primarily due to$19.9 million of higher transaction costs associated with the preparation and completion of the Company's IPO, as well as an increase in compensation expenses of$5.6 million and an increase in stock-based compensation expenses of$3.1 million partially offset by lower professional fees, travel & entertainment, and one-time costs. Stock-based compensation expense increased due to certain awards that accelerated upon the completion of the IPO, an increase in the number of employees who were eligible and received equity awards and an increase in the value of our common stock.
Depreciation and Amortization
Depreciation and amortization increased by$1.3 million , or 21%, from$6.1 million in the three months endedJune 30, 2020 to$7.4 million in the three months endedJune 30, 2021 . The increase was primarily due to an increase in depreciation related to capital expenditures. Depreciation and amortization increased by$2.4 million , or 20%, from$12.1 million in the six months endedJune 30, 2020 to$14.5 million in the six months endedJune 30, 2021 . The increase was primarily due to an increase in depreciation related to capital expenditures. Interest Expense Interest expense is mainly related to our Prior Credit Facilities and New Revolving Credit Facility, which carry a variable interest rate. Interest expense decreased by$0.6 million , from$0.9 million in the three months endedJune 30, 2020 to$0.3 million in the three months endedJune 30, 2021 . The decrease was attributable to a reduction in outstanding debt. Interest expense decreased by$1.4 million , from$2.1 million in the six months endedJune 30, 2020 to$0.7 million in the six months endedJune 30, 2021 . The decrease was attributable to a reduction in outstanding debt.
Other (Income) Expense, Net
Other expense decreased by$0.1 million , from loss of$0.2 million in the three months endedJune 30, 2020 to a loss of$0.1 million in the three months endedJune 30, 2021 , primarily due to a decrease in unrealized losses related to changes in exchange rates. Other income decreased by$0.1 million , from income of$0.1 million in the six months endedJune 30, 2020 to income of less than$0.1 million in the six months endedJune 30, 2021 , primarily due to a decrease in realized gains for changes in fair value related to contingent payments from our acquisition ofZentrick NV inFebruary 2019 , partially offset by a decrease in unrealized losses related to changes in exchange rates.
Income Tax Expense (Benefit)
Income tax expense grew by$0.3 million from$2.0 million in the three months endedJune 30, 2020 to$2.3 million in the three months endedJune 30, 2021 . The increase was primarily due to an increase in pre-tax income, after taking into account permanent book to tax income adjustments. Income tax expense grew by$1.7 million from$3.4 million in the six months endedJune 30, 2020 to$5.1 million in the six months endedJune 30, 2021 . The increase was primarily due to an increase in pre-tax income, after taking into account permanent book to
tax income adjustments. 26 Table of Contents Adjusted EBITDA In addition to our results determined in accordance with GAAP, we believe that certain non-GAAP financial measures, including Adjusted EBITDA and Adjusted EBITDA Margin, are useful in evaluating our business. A metric similar to Adjusted EBITDA is used in certain calculations under our New Revolving Credit Facility. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by total revenue. The following table presents a reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to the most directly comparable financial measure prepared in accordance with GAAP. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (In Thousands) (In Thousands)
Net (loss) income$ (12,568) $ 4,078 $ (6,924) $ 6,518 Net (loss) income margin (16)% 8% (5)% 6% Depreciation and amortization 7,440 6,146 14,497 12,080 Stock-based compensation 4,714 1,140 7,252 1,942 Interest expense 297 936 687 2,100 Income tax expense 2,298 2,006 5,091 3,351 M&A costs (a) 67 8 49 223
Offering costs and IPO readiness costs (b) 18,886
585 22,147 2,227 Other costs (c) - 561 109 2,724 Other expense (income) (d) 49 198 - (122) Adjusted EBITDA $ 21,183$ 15,658 $ 42,908 $ 31,043 Adjusted EBITDA margin 28% 30% 30% 30%
M&A costs for the three and six months ended
(a) reductions to deferred compensation liabilities related to acquisitions. M&A
costs for the three and six months ended
costs and deferred compensation costs related to acquisitions.
Offering costs and IPO readiness costs for the three and six months ended
(b)
and completion for our IPO. Other costs for the three and six months endedJune 30, 2021 consist of
reimbursements paid to Providence. For the three and six months ended June
(c) 30, 2020, other costs include reimbursements paid to Providence as well as
costs related to the departure of our former Chief Executive Officer, and
third-party costs incurred in response to investigating and remediating
certain IT/cybersecurity matters that occurred in
Other expense (income) consists of interest income, change in fair value
(d) associated with contingent considerations, and the impact of foreign currency
transaction gains and losses associated with monetary assets and liabilities.
We use Adjusted EBITDA and Adjusted EBITDA Margin as measures of operational efficiency to understand and evaluate our core business operations. We believe that these non-GAAP financial measures are useful to investors for period to period comparisons of our core business and for understanding and evaluating trends in our operating results on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. 27 Table of Contents
These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as substitutes for an analysis of our results as reported under GAAP. Some of the limitations of these measures are:
? they do not reflect changes in, or cash requirements for, our working capital
needs;
? Adjusted EBITDA does not reflect our capital expenditures or future
requirements for capital expenditures or contractual commitments;
? they do not reflect income tax expense or the cash requirements to pay income
taxes;
? they do not reflect our interest expense or the cash requirements necessary to
service interest or principal payments on our debt; and
although depreciation and amortization are non-cash charges related mainly to
? intangible assets, certain assets being depreciated and amortized will have to
be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.
In addition, other companies in our industry may calculate these non-GAAP financial measures differently than we do, limiting their usefulness as a comparative measure. You should compensate for these limitations by relying primarily on our GAAP results and using the non-GAAP financial measures only supplementally.
Liquidity and Capital Resources
Our operations are financed primarily through cash generated from operations. As ofJune 30, 2021 , we had cash of$330.3 million and net working capital, consisting of current assets (excluding cash) less current liabilities, of$63.6 million . The Company received aggregate net proceeds of$253.2 million from the IPO, after deducting underwriting discount fees of$16.2 million . The Company also received total aggregate net proceeds of$29.0 million from the concurrent private placement, after deducting fees of$1.0 million . We believe our existing cash and cash generated from operations, together with the proceeds from our recent IPO and concurrent private placement and the undrawn balance under the New Revolving Credit Facility, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Our total future capital requirements and the adequacy of available funds will depend on many factors, including those discussed above as well as the risks and uncertainties set forth under "Risk Factors" in the Prospectus.
Our liquidity has not been materially impacted by the COVID-19 pandemic as discussed above.
Debt Obligations
In
OnDecember 24, 2020 ,DoubleVerify Inc. prepaid$68.0 million of the outstanding principal amount under the New Revolving Credit Facility with a portion of the proceeds from a private placement effected onNovember 18, 2020 , in which certain investors purchased an aggregate of 61,006 thousand shares of our preferred stock from us and certain of our existing stockholders for an aggregate purchase price of approximately$350.0 million . As ofMarch 31, 2021 ,$22.0 million was outstanding under the New Revolving Credit Facility. OnApril 30, 2021 ,DoubleVerify Inc. paid the entire outstanding balance under the New Revolving Credit Facility of$22.0 million using proceeds from the IPO and the concurrent private placement. Following the payment and as ofJune 30, 2021 ,DoubleVerify Inc. has no outstanding variable rate indebtedness and has$150 million of availability under the New Revolving Credit Facility. 28 Table of Contents The New Revolving Credit Facility is secured by substantially all of our assets (subject to customary exceptions) and contains customary affirmative and restrictive covenants, including with respect to our ability to enter into fundamental transactions, incur additional indebtedness, grant liens, pay dividends or make distributions to our stockholders and engage in transactions with our affiliates.DoubleVerify Inc. is in compliance with all covenants under the New Revolving Credit Facility as ofJune 30, 2021 .
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