Large swaths of the ad tech space are fast descending into what looks like will be a long and significant economic contraction.
The warning signs are totting up: slower growth forecasts. Investor pressure. Cash flow preservation. Layoffs. In fact, layoffs may be the most enduring sign yet that the outlook for many of these companies is gloomy at best.
Earlier this month, for example, Business Insider reported that ad tech vendor Viant plans to lay off 13% of its staff.
It was the latest in a flurry of job cuts so far this year. Infosum let go of 12% of its workforce, Taboola lost 6%, Integral Ad Science cut 113% while Unity and AppLovin laid off 4% and 13% respectively.
That equates to around 780 people who have lost their jobs in recent months and all signs point to there being more to come.
Potentially more cuts
“We made cuts earlier this year,” said one exec of a privately owned ad tech company. “But I’m not sure that’s going to be the end of it. We have finance people scrutinizing our budget requests more than ever, and my bonus scheme has been revised. We definitely over-hired over the last two years, and I worry there’s going to be a reckoning.”
Hiring more people in a sustained period of growth is a common predicament in the tech space. The ad slowdown has shown how wide off the mark those hiring sprees were. Perhaps more so in ad tech, where so much of how companies make money is predicated on the amount of dollars they have flowing into their platforms they can subsequently take a cut from.
Sure, ad tech bosses could accept lower profits or increase the cut they make from those ad dollars to protect profitability. But the fact that these companies have opted to cut job costs may indicate that neither solution is either realistic (unless they want to get slammed by Wall Street and investors) or possible (because it would be shameless to try and hike up already high take rates).
“We’re seeing commitments from buyers to publishers not being delivered as in the upfront commitments that we had brokered are coming in well under 100% right now,” said a commercial director at a publicly listed ad tech vendor on condition of anonymity.
And this is from someone at a public ad tech company that hasn’t made any cuts — yet. Even the largest players are feeling the pinch.
“This is the sort of thing that happens during a downturn for a business like ours,” said the exec. “The publishers that sell impressions via our business are prioritizing those companies that give them better access to demand. They always do, of course, but there’s definitely more urgency now to lock ad dollars down.”
Stretching dollars
The money is just not showing up in the way it once did for ad tech companies. payment terms are stretching longer and late payments are becoming more prevalent.
One source, who requested anonymity, as they weren’t cleared to speak with press, noted how some are starting to do their best to preserve liquidity, and that this is introducing distress to the sector.
Here’s the rationale: when interest rates were “basically zero” there was little incentive to preserve cash, but now, as interest rates begin to rise from their historic lows, holding on to cash can return “basically a profit.”
The source, who has experience of working at one of the media industry’s largest payment solutions providers, further detailed how the operating model of the industry’s large holding groups means they are incentivized to hold on to cash as long as possible.
And in many cases, this results in extended payment cycles — or being “pushed out” — and the distress is then spread throughout the ecosystem, a tell-tale indicator that “the good times” are coming to an end.
“I can remember speaking to the FD [finance director] at one of the big holding groups one time, and he mentioned how his compensation was directly linked to how much interest they earn on the money they [the agency] has in their bank account,” added the source.
“If you look at one of the big holding groups, they can have as much as $10 billion in cash in their bank account at any one time,” the source said. “While most of that is payable to vendors if you can delay payment to vendors, then you’re earning an extra month’s worth of interest. If interest rates are as high as 2,3,4%, that could be a couple of hundred million.”
Now, this situation wouldn’t necessarily be a big concern if the growth prospects were healthy in ad tech. The issue is that the short term future isn’t looking too rosy. For months, the ad industry has been weighing whether it would slide into a real slowdown or if the current contraction of ad dollars was really just a reversion to the mean of spending.
These days, or rather after recent revisions to forecasts, the real question is how severe this slowdown will be. Until that’s clear, ad tech companies are reigning in their spending to ensure they get through this volatile period relatively unscathed.
“Coming off record-high M&A activity last year, many companies are now forced to start making tough decisions,” said Nick Carrabbia, executive vp at online ad revenue exchange Oarex. “As risk rises and credit tightens, now is the time to prepare for things to get worse before they get better.”
For instance, private equity investors, long a source of capital in ad tech, are suffering losses across different assets, which will only swell further if interest rates continue to rise. Since these investors often saddle their portfolio companies with debt, continued Carrabbia, they’re especially vulnerable to downsizing or restructuring during downturns. It’s a slippery slope many of these companies are on, as Carrabbia explained. “As monetary tightening continues, expect more contagion and the continuation of layoffs and bankruptcies.”
His perspective speaks to the breadth and depth of the quagmire ad tech vendors are mired in.
A slowdown in ad dollars is just the start. CTV and retail media can only soften the loss of those dollars rather than mitigate them entirely. Then there’s the fact that advertisers aren’t spending much money on alternative identifiers to third-party cookies, which is subsequently undermining the profitability of the marketplaces erected by some of the larger ad tech players. Other issues range from Apple’s ongoing efforts to starve parts of the ad tech supply chain of revenue to consolidation of the ad tech stack. To say nothing of the liquidity issues these companies are grappling with.
In short, things are going to get worse before they get better for many businesses.
“If I had to guesstimate, it’s probably coming in stages,” said Tom Triscari, an economist at consulting firm Lemonade Projects. “This is stage 1 to see how Q4 ad spending turns out and also getting a read on Q1. January is actually a bigger time for layoffs than December and December has not been good. I suspect ad tech is not done yet.”
A recent report by online revenue exchange Oarex has made that abundantly clear.
Before digging into the numbers, the main takeaway from the report is ominous for ad tech: data provided in previous reports showed a potential “catch up” or correction that aligned with pre-Covid trends rather than signaling a slowdown. However, with third quarter revenue results dropping below 2018 and 2019 growth levels, the data clearly shows that the industry is swept up in a true slowdown.
Now for those numbers: with a median growth of only 5%, the third quarter was the worst growth in the past four years save for the covid hit second quarter of 2020. More than six (63%) in ten of the companies surveyed had positive revenue growth, which is also much worse than ex-covid history. That said, there were a number of companies that still scored large increases. AC/Interactive, DoubleVerify, Zeta Global, The Trade Desk, Perion Network, Hubspot and Integral Ad Science all had over 25% growth rates year-on-year, according to Oarex. On the other end of the spectrum, MediaAlpha had a 42% drop in the same quarter a year ago.