Ad Tech Headcount Growth Slows, But Too Much Focus on Efficiency Could Cede Opportunity
Following on yesterday’s note about independent advertising agencies, ad tech companies are another grouping of companies in the advertising industry which I try to follow 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. As virtually everyone in the sector has a profile on Linkedin, there was a close relationship between profiles associated with individual companies and revenues.
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), it’s clear that there has been a meaningful deceleration in growth from close to 20% at the mid-point of last year to high single digits in the first quarter of this year and now only 4% growth in the second 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 for which they have already reported, but with much faster growth skewed upwards by The Trade Desk’s greater weight among the smaller group. Looking at the second quarter of 2023, for which none have reported as yet, each company previously provided investors with guidance which collectively amounts to 12% revenue growth at the mid-point of each company’s range. This would be a meaningful outperformance vs. the 4% growth in headcount I’ve noted above.
If the headcount and revenue growth figures referenced above map to what is ultimately reported, they would imply heightened focus on efficiency for the ad tech sector, which is an understandable approach considering the cautious environment across the industry in recent quarters. Of course, caution also has the consequence of ceding opportunity to those who have greater confidence about an eventual return to faster growth for advertising and marketing services overall.
I continue to expect that the second quarter of 2023 will undoubtedly be relatively soft for advertising, if still positive, primarily impacted by difficult comparables with the second quarter of last year. Within those trends, services (such as agencies) and software (such as ad tech) remain relatively well-positioned. As the year progresses, growth probably starts to look better if only because the comparables are easier and confidence about economic stability improves. A return to a normalized mid-single digit level of expansion continues to look likely on an ongoing basis, with growing opportunities for different participants, whether they sell media, services, data or software, to take share within the overall market.