Spruce Point Capital Management Announces Investment Opinion: Releases Report and Strong Sell Research Opinion on DoubleVerify Holdings, Inc. (NYSE: DV)
NOTE TO EDITORS: The Following is an Investment Opinion Issued by Spruce Point Capital Management
Warns Investors That DoubleVerify Will Have Difficulty Combating Slowing Customer Spending and Margin Pressures as it Faces a Pricing War and U.S. Market Saturation for its Services
Expresses Concerns That the Company Recently Expanded its Forward-Looking Risk Statements, Retracted its Total Addressable Market Claims, Ceased Material Revenue Disclosures and Failed to Provide a Bridge to its Organic Revenue Growth
Provides Evidence That the Company’s International Expansion is Struggling While Customers Shift Spending Abroad, That it Has Reported Anomalous Financial Results Internationally, and That Key International Leaders Have Departed After it Lost a Major Independent Accreditation
Highlights Concerns from a Recent Analysis by an Industry Expert Referencing “Legacy Fraud Verification Vendors” as “Useless” and Alleged They Failed to Detect the Most Basic Forms of Invalid Traffic While Overbilling Clients for Years. DoubleVerify Recently Added A 10-K Disclosure About Client Billing Disputes
Warns That DoubleVerify’s Largest Owner Has Sold More Than $1 Billion of Stock at Average Prices 9% Below the Current Price, While Four Executives are Liquidating Shares Under Pre-Arranged Programs
Sees 35% to 45% Long-Term Downside Risk to DoubleVerify’s Share Price and Urges Investors to Visit www.SprucePointCap.com and Follow @SprucePointCap on Twitter for the Latest on $DV
May 02, 2023 09:00 AM Eastern Daylight Time
NEW YORK--(BUSINESS WIRE)--Spruce Point Capital Management, LLC (“Spruce Point” or “we” or “us”), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled “Triple Verifying DoubleVerify’s Financial And Business Claims” that outlines why we believe shares of DoubleVerify Holdings, Inc. (NYSE: DV) (“DoubleVerify” or "DV" or the "Company"), face up to 35% to 45% long-term downside risk, or $15.90 – $18.80 per share. The report also outlines why shares of DoubleVerify’s competitor, Integral Ad Science Holding Corp. (Nasdaq: IAS) (“IAS”) are undervalued with 20% to 30% upside potential, or $19.20 – $20.80 per share as the valuation discount to DoubleVerify narrows. Download or view the report by visiting www.SprucePointCap.com and follow us on Twitter @SprucePointCap for additional information and exclusive updates.
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Spruce Point Report Overview
Based in New York City, DoubleVerify is a software platform for digital media measurement and analytics. The Company claims to be a technology leader in advertising measurement, verification and fraud prevention that seeks to help corporate advertising clients protect their brand value. Its purported value proposition is that it increases transparency for its clients in the digital advertising ecosystem to ensure they receive the advertising impression value that they’re paying for. However, after conducting extensive research into the Company, we believe that its mission is hypocritical and that the Company falls dramatically short of its own transparency and ability to accurately measure and report its financial results to investors.
The concerns we outline in our report include:
- DoubleVerify is under pressure as it struggles to grow in a saturated and highly price competitive industry. The Company’s early success came from signing-up larger enterprise clients and using long-term contracts and volume discounts in pricing contracts that are typically $0.05 per 1,000 impressions. However, the Company’s market has since become extremely penetrated with competitors that are pursuing the same large clients – creating increased pressures on DoubleVerify and limiting its growth potential. As evidence, one former employee we interviewed described “a pricing war” as a problem for DoubleVerify since costs (such as labor) are rising and there is a “race to the bottom” in prices within its competitive industry. Another former employee we interviewed said it was an “absolute dogfight” with competitors. As evidence of the growing competition within the Company’s competitive set, prior to its 2021 IPO DoubleVerify said that it focused on its “top 50” customers but after its IPO in 2022 it shifted to targeting the “top 100” customers. Our research shows that average revenue from these top 100 customers has slowed markedly from 64% (2020) to 18% (2022). To further underscore the challenges the Company has faced in growing its customer base, by August 2022 DoubleVerify had expanded from large clients to also talking about spending for smaller accounts with more than $200,000 in annual revenue – despite its expansion into small clients, growth of customers spending more than $200,000 slowed from 38% (as of August 2022) to 29% (as of December 2022). We believe one reason why DoubleVerify may be struggling to grow as it expands to smaller accounts is because – according to one former employee we spoke with – there is typically a significant learning curve and major adoption issues with smaller accounts because the Company’s product suite was designed for large enterprises and has not since been adapted.
Even more concerning to us is the fact that the Company recently retracted its long-standing Total Addressable Market (TAM) and penetration claims and expanded its Forward-Looking statements, a clear signal to us of the growing risks to its business as competition increases and growth slows. DoubleVerify also failed to update a key investor presentation slide last shown in December 2021 that provides its revenue base by industry vertical. According to the last slide seen in 2021, its five largest exposures are consumer packaged goods (20%), technology (18%), telecom (14%), financial services (14%), and retail (12%). However, recent commentary from advertising market participants such as Roku and Interpublic Group indicates a slowdown in spending across four of these top five industries.
- International markets, a key aspect of DoubleVerify’s growth story, appear to be struggling. We believe DoubleVerify’s CEO Mark Zagorski has a history of promoting and failing to achieve international growth claims, as evidenced by his track record while CEO of Telaria. With the U.S. market already highly penetrated, we believe the Company is dependent on international expansion to grow. However, despite having a global growth plan, an international management structure and customers that activate its services in foreign countries, DoubleVerify has failed to disclose adequate financial information about its international results in its SEC filings. After analyzing DoubleVerify’s global locations listed on its website, we found that the Company not only frequently changes addresses, but it has actually closed more physical locations than it has opened. When it comes to international revenue, we have identified extreme volatility in the Company’s Q4 implied international revenue reporting that is provided solely on its conference calls. Based on our analysis, DoubleVerify’s Q4 2022 international results surged to a record $14.3 million (248% Year-over-Year growth and 64% Quarter-over-Quarter growth) but did so without any explanation. Management went so far as to describe the challenges the Company faced in EMEA and APAC without even disclosing the growth rates. Furthermore, DoubleVerify continues to have substantial turnover on its international leadership team, including the recent March 2023 resignation of its head of APAC and the December 2021 departure of its head of EMEA. The challenges DoubleVerify faces on a global scale are further underscored by the fact that it recently lost its accreditation from the UK-based Audit Bureau of Circulations (ABC) despite having been the first verification company to receive the ABC certification for Ad-fraud back in 2018. The loss of this accreditation is yet another sign that DoubleVerify remains poorly positioned on a global scale when compared to its main competitor IAS, especially as recent commentary from Meta Platforms, Snap, Pinterest and other key digital advertising players has made clear that advertising impression and revenue growth has come mainly from ex-U.S. growth.
- DoubleVerify’s acquisitions and product development are riddled with issues. Over the last few years, DoubleVerify has made a number of investments in acquisitions and product development, yet we have identified signs of clear challenges in nearly all of them. In its first acquisition post-IPO, DoubleVerify acquired Meetrics GmbH (“Meetrics”), a Berlin-based European ad verification company, in an all-cash deal valued at $24.3 million. Meetrics was founded in 2008 and, according to its German regulatory filings, was shrinking its workforce and only marginally profitable prior to DoubleVerify’s acquisition in 2021. Upon acquiring Meetrics, DoubleVerify touted that it picked up 80 customers, but we believe these were not profitable clients. In a recent interview, a former DoubleVerify executive went so far as to tell us that Meetrics’ clients had in fact been lost to IAS following the acquisition. Furthermore, DoubleVerify itself previously said that Meetrics’ product solutions were not as robust as others. So, what exactly did the Company accomplish with this transaction?
DoubleVerify’s largest deal to acquire OpenSlate in November 2021 for $150 million also appears to be problematic and a company whose growth already peaked. In an interview in 2018 prior to the acquisition, OpenSlate’s CEO said it scanned 400 million YouTube videos a day and expected $2 billion of ads would be filtered through its software for the year. Now, more than four years later, DoubleVerify has powered a cumulative total of just $3 billion in media spend and 1 million YouTube ads. DoubleVerify also acquired Zentrick in 2019 but has already terminated earnout payments and its Belgium subsidiary filings show a degradation in margins. We believe DoubleVerify should explain why over $51 million and $155 million of cumulatively amassed goodwill and intangible assets from acquisitions is not at least partially impaired. We also find it concerning that DoubleVerify hasn’t provided investors adequate disclosures to access organic revenue growth, excluding acquisitions, but instead has highlighted that its consolidated revenue growth held steady at 36% for the past two years. We estimate that organic growth in 2022 was between 31.8% and 32.6%, indicating organic growth deceleration. On the product development side, DoubleVerify has touted its Authentic Attention product, which has taken multiple years to develop and does not appear to have much traction. As further evidence, a former DoubleVerify executive that was interviewed and who worked directly on the product development was not a believer that it would drive performance – an opinion that certainly has merit in our view.
- A notable industry expert questions legacy fraud verification vendors’ product performance and billing practices. Dr. Augustine Fou is an expert in advertising fraud and an outspoken critic of “legacy” ad fraud verification vendors. DoubleVerify was founded in 2008 and introduced its first brand safety solution in 2010, and its first fraud solution in 2014, almost a decade ago. In a blog Dr. Fou published on March 24, 2023, he alleged these “legacy” vendors failed to detect the most basic forms of invalid traffic, and that their brand safety tools are useless. Even worse, he alleged that many of these vendors have overbilled clients for years. This allegation of client billing disputes is particularly alarming because DoubleVerify recently modified risk factor language in its annual report filed March 1, 2023 that disclosed client billing disputes. Furthermore, DoubleVerify reports its Days Sales Outstanding (“DSO”) and Days Payable Outstanding (“DPO) metrics in a non-standard way. Rather than use annual data, DoubleVerify instead calculates DSOs over a trailing three-month period and does not even disclose its DPO calculation period. Based on standardized methods using annual data, we find that DoubleVerify’s DSOs are much longer (and DPOs much shorter) than it claims. As such, we believe its cash collection cycle is at least a month longer than depicted.
- DoubleVerify’s largest financial sponsor and four additional insiders are actively selling stock, and the Company has recently made a questionable appointment to its Board. We warn of 35%–45% downside risk. In October 2021, DoubleVerify announced that it had appointed Rosie Perez to join its Board and serve on the Audit Committee. The Company cited her extensive financial experience and track record of leading growth companies, including as Vice President and Chief Financial Officer of American Express’ Global Commercial Services (“GCS”) segment, which admitted to financial misconduct in its GCS segment just one month after Ms. Perez’s departure. In light of all our evidence and suspicions about DoubleVerify’s practices, we question the Board’s appointment. We also find it concerning that DoubleVerify’s largest financial sponsor, Providence Equity, has been regularly selling shares and has intensified its selling since November 2022, which coincides with the timeline of growing pressures with its international growth plans that we identified. In total, we estimate Providence Equity has liquidated more than $1 billion of DoubleVerify’s stock at an average price of $26.48 per share. DoubleVerify is currently trading at a 9% premium to their average selling price, which supports our case that the stock is materially overvalued. We are short DoubleVerify and value it at a discount to its rich 8.7x 2023E revenue multiple with the belief that estimates are too high and that the best growth is behind it. At a multiple closer to peers at 5.0x – 6.0x, we forecast 35% – 45% downside risk ($15.90 – $18.80 per share). We are long for IAS as a result of its more attractive exposure to international markets, greater financial reporting transparency and better patent protection. We see 20% – 30% upside potential as the valuation discount to DoubleVerify narrows ($19.20 – $20.80 per share).
The research note can be found at www.sprucepointcap.com and updates will be posted on twitter @sprucepointcap.
