DoubleVerify: Counter-Points and More Points
Several industry contacts asked my opinion about a report on DoubleVerify today, which was published this week by a short-selling investment fund, Spruce Point Capital. The claims made in the report included “grave concerns about the accuracy of its financial reporting to investors, efficacy of its product suite, and the sustainability of its growth story.”
Whether or not they are right or wrong about valuation, product quality and growth trends are beyond the scope of my focus here. However, many of the personal, company and industry-level arguments made with apparent certainty appeared to me as either selective, suggestive or in some cases impossible to prove at least without more qualification or more tangible evidence, and thus warranted a critique of at least part of the report. My comments below should also have applicability in others’ efforts to analyze ad tech (or advertising or business in general) in the future.
To clarify, I don’t have any commercial or financial relationship with either company although I do know many individuals within the industry who engage with them or who work at the company and who are referenced in the report.
“CEO Mark Zagorski was “an architect” of the merger between Rubicon and Telaria, which became Magnite, that “created no value””
To attribute creation or destruction of value by a CEO at any given company is hard, especially if one accounts for a) the time horizon involved b) an acquiror’s subsequent strategic or financial choices c) relative valuation at referenced point in time. Essentially, one needs to identify how much value would have been lost had the merger not occurred to claim no value was created through the transaction. For example, the creation of AOL Time Warner is often described as a transaction that destroyed value – but it was arguably a good outcome for AOL shareholders relative to scenarios where such a transaction never occurred. Similarly, Microsoft’s acquisition of Aquantive is often described in negative terms because Microsoft was generally deemed to have overpaid. On the contrary, it was a fantastic transaction for Aquantive and its shareholders.
“DV’s CEO Mark Zagorski failed miserably at his prior Company in expanding Telaria’s international sales.”
Few US-based ad tech businesses built meaningful international businesses in the 2010s, so consequently it’s difficult to be too critical of a failure to build an international presence, especially when the US opportunity was much bigger and developing products that would be compliant with GDPR would have added additional challenges or shifts of resources.
“DV’s…past CEO leadership is highly troubling.”
Criticizing a company by focusing on a salacious episode involving a former CEO outside of the office – from more than three years ago – won’t necessarily convey anything about a company’s current state, unless there is evidence that somehow that episode was reflecting of a problematic culture or other challenges.
“DV’s CMO Formerly Marketed Blinkx, A Product Suite Alleged To Be Deceptive”
Similarly, while there are many executives at many companies who have been involved with problematic companies in the past – or even had what appear to be senior roles in those companies - association does not necessarily mean causation or even awareness necessarily. I would argue that generally it isn’t meaningful unless there’s specific (or even anecdotal) evidence presented of bad behavior on the part of the individual in question in that prior role.
“We believe insiders have orchestrated a brazen scheme to artificially inflate DV’s share price by selling and obscuring an international growth narrative that is failing while they rapidly unload stock. Sponsor Providence Equity has sold an estimated $1.1 billion of stock while four DV executives currently utilize stock sale programs”
Private equity firms need to reduce their shareholdings of companies they bring public, which they do so in order to get liquid. No investor would ever expect a sponsor to hold onto their shareholdings, and in fact, many will view continued shareholdings negatively as those shareholdings can make stocks less liquid than they need to be.
“Spruce Point often finds that when a Company updates the summary of its risk factors under “Forward-Looking Statements” it marks a shift in the business that is being signaled by management.”
In an evolving sector involving companies who are newly public, appropriate risk factors should and will change. They may or may not be meaningful from an analyst’s perspective.
“Evidence clearly shows that DV’s spending from its top 50 customers was slowing pre-IPO, so it shifted the goal post to the top 100 customers. The growth rate of the top 100 has also started to slow.”
Changes in targets from a pre-IPO draft prospectus to a final one or subsequent changes in disclosures aren’t necessarily meaningful
“DV modified its discussion about payment-related risks and now discloses disputes with clients.”
Reconciliations in digital media are challenging in almost all spheres of the industry. What gets served and what gets received are often not the same, or may vary depending on the tools used to track transactions. Challenges with reconciliations could always worsen without it being the fault of any one company.
“Legacy verification vendors gave pre-IPO shares to executives of multiple media agencies before IPO”…”legacy verification vendors used kickback schemes (cash-back) with media agencies to push-their fraud verification services.”
Specific evidence of or details related to “kick-backs” should be explored when such allegations are made and many additional questions need to be addressed in that context. For examples, what was the actual transaction that is being referenced, and who was involved? Was there a quid pro quo with resources that didn’t belong to the individuals involved? Presuming it occurred, was the kick-back actually a form of consideration to the agency (rather than to individuals), which engaged in a transaction in a manner that was consistent with contracts it holds with clients, subject to the norms of the market/country in which it occurred? Is the transaction transparent to all stakeholders about the commercial relationship?
“DV references its partners in relation to collection of payments. Among them are AppNexus, Xandr, MediaMath, and MediaOcean. While each are private companies (ex: Xandr which is a part of Microsoft), we can infer their business conditions from hiring growth on LinkedIn. It appears that all are reducing headcount”
When looking at headcount changes in Linkedin it’s important to note that the data will be highly inaccurate for businesses which are part of larger ones or those which were recently acquired, going through significant management upheavals, or which were founded in the 1960s (as many employees still working at the company will not have a Linkedin presence). It’s equally important to not be selective when looking at this data. There are companies associated with ad tech – such as The Trade Desk and TikTok - which are growing rapidly.
“Recent commentary from key players driving digital advertising indicates overall weakness of digital advertising, but strength in foreign markets were DV is poorly positioned.”
It’s difficult to make strong arguments about the relative health of advertising outside of the US vs. inside the US solely based on reports from US companies – especially as many of the biggest international ones haven’t reported quarterly results yet. Moreover, assessing international vs. domestic trends in advertising requires in-depth analysis of Google and Amazon, who do not provide regional advertising disclosures.
“More Evidence of International Struggles…Spruce Point has analyzed DV’s global locations listed on its website. We find that it frequently changes addresses and has closed more physical locations than opened. Notably, it no longer has a listed address in the technology hub of San Francisco and shuttered offices in Latin America.”
Many companies around the world with small satellite offices closed those offices between 2020 and 2023 to either get out of leases and find cheaper space, or allow employees to work from home. Similarly, it would be unsurprising if companies with small physical footprints changed office locations regularly.