3Q23 Ad Tech Trends: Modest Headcount Growth, Double Digit Revenue Expectations = Margin Improvements
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Following on yesterday’s post about independent agencies, ad tech companies are another grouping of companies in the advertising industry which historically I have tracked closely through trends related to headcount.
As an analyst covering stocks in the sector many years ago I found at the time that employee figures were an excellent proxy for revenue growth because, as with agencies, companies in this space tended to add to their headcount when they saw revenue coming in. Because virtually everyone in the sector has a profile on Linkedin, there was a close relationship between profiles associated with individual companies and revenues.
With the largest companies in the space generally maturing, the connection between these data points have become much looser, but can still provide useful insights nonetheless.
Looking at a composite of 20 of the largest independent companies in ad tech whose businesses are primarily centered around software and data (and not on managed services or the sale of media inventory) and probably covering $10 billion of annual revenue, it’s clear that there has been a meaningful deceleration in growth from close to 20% at the mid-point of last year to single digits in the first half of this year (9% in 1Q23 and 4% in 2Q23) followed by only 3% growth in the third quarter of 2023.
Within that group, the seven companies which are publicly listed (The Trade Desk, LiveRamp, Magnite, Pubmatic, DoubleVerify, IAS, Innovid and Viant) exhibited directionally similar trends in recent quarters, but with faster growth skewed upwards by The Trade Desk’s greater weight among a smaller group.
For the third quarter of 2023, which none have reported as yet, companies previously provided investors with guidance which collectively amounts to 13% revenue growth at the mid-point of each company’s range. Much as we saw in the second quarter, when revenue grew by 15% but headcount only grew by 6%, 13% revenue growth would be a meaningful outperformance vs. the 6% growth in headcount for this group that I’ve calculated for 3Q23.
As played out during the second quarter quarter, this outcome would suggest an ongoing focus on efficiency – i.e. margin improvement - for the ad tech sector, which is an understandable approach considering the cautious environment across the industry in recent quarters. During 2Q23 the group of seven companies collectively improved their EBITDA margins, collectively, from 27.5% to 30.0%.
Margin improvements can certainly be viewed positively. However, at the same time, in a sector with significant opportunity ahead and substantial market share to potentially gain from a large and growing industry, it’s also worth noting that a cautious investment approach may also have the consequence of ceding opportunity to others more focused on growth opportunities with longer-term benefits.