Direct Digital Holdings (DRCT) Q2 2026 Earnings Call: Revenue Falls, AI Strategy Advances

Key Takeaways

• Q2 2026 revenue fell to $7.8 million from $10.1 million a year earlier, primarily due to a $2.5 million decrease in spending by demand-side platform customers.
• Gross profit was $2.7 million, with gross margin narrowing to 34% from 35% in Q2 2025.
• Net loss improved to $3.6 million from $4.2 million, while adjusted EBITDA loss widened to $2.3 million from $1.5 million.
• First-half revenue was $14.5 million. Excluding a $4.5 million decline in DSP customer sales, revenue increased by approximately $700,000, or 5%, year over year.
• Direct Digital Holdings launched AI search and generative engine optimization offerings during the quarter. Management reported strong demand from existing and prospective clients, while emphasizing that the strategic shift remains at an early stage.
• Quarter-end cash and cash equivalents were $500,000. The company was not compliant with certain financial covenants under its credit facility and requested a waiver from its lender.

Key Financial Data

For the first half of 2026, revenue totaled $14.5 million versus $18.3 million a year earlier. Management said revenue grew approximately 5% year over year after excluding the $4.5 million reduction in DSP customer sales.

Business and Operating Performance

Direct Digital Holdings continued the strategic shift announced in Q1 2026, consolidating operations into a more streamlined model. The company is seeking to diversify its pipeline, broaden customer relationships and expand product capabilities.

During Q2, the company introduced AI search and generative engine optimization offerings. It is also expanding AI support and web infrastructure technology services, which management said could access new technology budgets and help clients improve conversion performance and reduce customer acquisition costs.

Management described the company’s positioning as evolving from media support toward a broader digital growth partnership. However, the transition is still at an early stage, and reduced DSP customer activity continued to weigh on reported revenue.

Client retention was approximately 80% among customers representing roughly 80% of revenue for the six months ended June 30, 2026. Management also said the company retains flexibility to evaluate strategic partnerships and other opportunities that could complement its platform.

Risks and Key Watchpoints

• Lower demand-side platform customer spending reduced Q2 revenue by $2.5 million and first-half sales by $4.5 million.
• Cash and cash equivalents declined to $500,000 at quarter-end, while cash plus accounts receivable fell to $3.2 million.
• Direct Digital Holdings was not compliant with certain financial covenants under its current credit facility as of June 30, 2026.
• The company requested a waiver and said discussions with its lender were constructive, but the process remained ongoing.
• Management cautioned that its strategy centered on AI search, generative engine optimization and technology services is still in its early stages.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good day, everyone, and welcome to the Direct Digital Holdings Second Quarter 2026 Conference Call. As a reminder, this call is being recorded. At this time, I would like to hand things over to Walter Frank, Investor Relations. Please go ahead.

Walter Frank

Thank you. Good afternoon, everyone, and welcome to Direct Digital Holdings Second Quarter 2026 Earnings Conference Call. On today's call are Direct Digital Holdings Chairman and Chief Executive Officer, Mark Walker; and Chief Financial Officer, Diana Diaz. Information discussed today is qualified in its entirety with the Form 8-K and accompanying earnings release, which has been filed today by Direct Digital Holdings, which may be accessed at the SEC's website and the company's website. Today's call is also being webcast, and a replay will be posted to Direct Digital's Investor Relations website.

Immediately following the speaker's presentation, there will be question and answer session. Please note that the statements made during the call, including financial projections or other statements that are not historical in nature, may constitute forward-looking statements. These statements are made on the basis of Direct Digital's views and assumptions regarding future events and business performance at the time they are made, and we do not undertake any obligation to update these statements. Forward-looking statements are subject to risks, which could cause Direct Digital's actual results to differ from its historical results and forecasts, including those risks set forth in Direct Digital's filings with the SEC, and you should refer to those for more information.

This cautionary statement applies to all forward-looking statements made during this call. During the call, Direct Digital will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings release that Direct Digital filed in its Form 8-K today. I will now hand over the conference to Mark Walker, Chief Executive Officer. Please go ahead, Mark.

Mark Walker

Thanks, Walter, and thank you to everyone joining our call today. I'll start by reviewing some of the highlights of our operations and financial results during the second quarter and first half of 2026. Before turning the call over to our Chief Financial Officer, Diana Diaz, for a more detailed look at our financial results, we'll conclude by opening the call for a brief Q&A. We saw encouraging progress in our core business during the second quarter. To recap, during the first quarter of 2026, we announced a comprehensive shift in our strategy that saw us aggregate our operations to a streamlined model to sharpen our focus on the areas where we believe we can create the greatest value for both our clients and our shareholders. We believe that by diversifying our pipeline, broadening our customer relationships and enhancing our product capabilities, we're positioning ourselves to drive more consistent, scalable long-term growth.

We successfully unveiled AI search and GEO offerings this past quarter and are seeing strong demand from current clients and prospective new clients as well as our AI support and web infrastructure technology services, which will both expand our addressable market. These products unlock new technology budgets and the technical upgrades we provide clients service performance multipliers that improves conversion performance and lowers cost to acquire for our new clients. We're seeing our technical expertise position us with clients as a comprehensive digital growth partner rather than just supporting the media needs and leaning into helping companies facing conversion bottlenecks. Demand is strong, but it's important to remember that we're still in the early stages of this shift.

Total revenue was down in the quarter related to decreased activity from our demand-side platform customers, which is expected as we continue to shift our strategy. In fact, excluding the impact of reduced spending from DSP customers, total revenue increased approximately 5% year-to-date when compared with the first 6 months of 2025. While these numbers seem small compared to our historical results, they are trending in the right direction. Our value proposition is heightened by complete alignment across our digital supply platform. We're technology and media agnostic and our clients rely on us to provide the best opportunity their brands and businesses to achieve enhanced market reach through strategic digital advertising.

Strong relationships we have built are evidenced in our client retention rate of approximately 80% among clients that represent approximately 80% of our revenue for the 6 months ended June 30, 2026. We still have a tremendous amount of work to do, but we're operating from a much stronger foundation and driving measurable results. Additionally, we have the flexibility to evaluate strategic partnerships and opportunities that complement and enhance the strength of our platform with the goal of driving shareholder value. As always, I sincerely appreciate your support of Direct Digital Holdings. I will now hand the call over to Diana Diaz, our Chief Financial Officer, who will walk through some of the financial highlights in further detail.

Diana Diaz

Thank you, Mark, and good evening, everyone. I'll now provide a review of our second quarter results with some commentary on year-to-date results where relevant. Consolidated revenue in the second quarter of 2026 was $7.8 million compared to revenue of $10.1 million in the second quarter of last year. As Mark mentioned, revenue declined in the quarter related to a decrease in spending by demand-side platform customers of $2.5 million. On a year-to-date basis, revenue of $14.5 million decreased compared to $18.3 million in the first half of last year. Excluding the decrease in sales to DSP customers of $4.5 million for the first half of the year, revenue grew about $700,000 or 5% year-over-year.

Gross profit was $2.7 million for the second quarter of 2026 or 34% of revenue compared with $3.6 million or 35% of revenue in the second quarter of 2025. Operating expenses in the second quarter of 2026 decreased 7% to $5.6 million compared to $6 million in the second quarter of 2025. Total operating loss for the second quarter was $2.9 million compared with an operating loss of $2.4 million in the second quarter of 2025. Net loss in the second quarter was $3.6 million compared to a net loss of $4.2 million in the second quarter of last year. And the adjusted EBITDA loss for the second quarter was $2.3 million compared with adjusted EBITDA loss of $1.5 million in the second quarter of last year. Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $500,000 compared to $700,000 at the end of December 2025.

Total cash plus our accounts receivable balance as of June 30, 2026, was $3.2 million compared to $3.9 million at the end of 2025. Related to our current credit facility, we were not in compliance with certain financial covenants as of the end of the quarter. We are actively engaged with our lender and have requested a waiver. Discussions have been constructive. And while the process remains ongoing, our current focus is on improving operating performance and working toward a mutually acceptable resolution. We will provide further updates when appropriate. Our focus continues to be on driving operational efficiencies and managing the business with financial discipline, and we're strategically investing in the business to capitalize on opportunities and drive sustainable long-term growth. Now I'd like to turn it back over to Mark for some closing comments.

Mark Walker

Thank you, Diana, and thank you to everyone for joining. We appreciate your interest in Direct Digital Holdings and I would like to now open the call for questions. Operator, please open the line.

Operator

[Operator Instructions] Everyone, there are no questions. That does conclude our conference for today. We would like to thank you all for your participation. You may now disconnect.