PUBM Q3 Deep Dive: AI-Driven Diversification Offsets Legacy DSP Headwinds

Digital advertising technology company PubMatic (NASDAQ:PUBM) beat Wall Street’s revenue expectations in Q3 CY2025, but sales fell by 5.3% year on year to $67.96 million. The company expects next quarter’s revenue to be around $75 million, close to analysts’ estimates. Its non-GAAP profit of $0.03 per share was significantly above analysts’ consensus estimates.

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StockStory’s Take

PubMatic’s third quarter results were met favorably by the market, as management attributed outperformance to rapid expansion in connected TV (CTV), the adoption of advanced artificial intelligence (AI) solutions, and the ongoing shift toward high-growth, diversified revenue streams. CEO Rajeev Goel highlighted that CTV revenue, excluding political advertising, grew over 50% year over year, driven by premium supply growth, new agency marketplaces, and increased participation from small and mid-market advertisers. The company’s efforts to leverage AI for yield optimization and operational efficiency were credited with supporting both top-line resilience and margin stabilization, despite broader declines in display advertising and pressure from a major demand-side platform (DSP).

Looking ahead, PubMatic’s guidance is shaped by management’s focus on scaling AI-driven offerings, further diversifying its DSP relationships, and expanding premium CTV and emerging revenue streams. Goel emphasized the company’s three-layer AI strategy—spanning infrastructure, applications, and transactions—as a core driver for future growth and differentiation. CFO Steven Pantelick noted that continued investments in AI and operational discipline should yield incremental margin improvement and free cash flow generation, even as PubMatic navigates muted seasonal trends and ongoing DSP transitions. Management remains confident that the business is positioned to benefit from industry shifts, including potential regulatory changes affecting Google’s ad tech ecosystem.

Key Insights from Management’s Remarks

Management credited the quarter’s performance to strong CTV growth, accelerated AI adoption, and ongoing business diversification, while addressing volatility from legacy DSP partners.

• CTV expansion accelerates growth: CTV revenue, excluding political ads, rose over 50% year over year, fueled by new partnerships with major streaming platforms and growth in live sports marketplaces. Management highlighted onboarding of streamers such as Tubi and Future Today, as well as increased demand from small and mid-sized advertisers, as key contributors.
• AI innovation drives operational gains: PubMatic’s proprietary AI solutions—developed through a multi-year partnership with NVIDIA—delivered a 5x increase in bid response speed and an 85% reduction in auction timeouts. These advancements enabled higher publisher yields and improved advertiser performance, supporting incremental revenue opportunities and competitive differentiation.
• Emerging revenues scale quickly: The company’s emerging revenue streams, including commerce media and sell-side targeting, grew over 80% year over year. PubMatic’s AI-powered yield optimization tool, launched recently, accounted for tens of millions in new publisher revenue and has become a significant source of high-margin growth.
• DSP mix shifts mitigate legacy declines: While spend from a large DSP partner stabilized at a lower level after optimization, ad spend from mid-tier DSPs increased by more than 25% year over year. Management has prioritized diversifying its DSP base to reduce exposure to any single partner, citing strong adoption among mid-market-focused platforms.
• Disciplined expense management supports margins: Despite top-line pressure in display, PubMatic kept operating expenses flat, reallocating resources to growth areas such as CTV and AI, while maintaining overall headcount. This approach allowed for continued investment in sales and product without eroding profitability.

Drivers of Future Performance

PubMatic expects future performance to be driven by expanded AI integration, CTV growth, and DSP diversification, while managing risks in display and evolving market dynamics.

• AI integration expands monetization: Management believes that further embedding AI in its product suite will increase platform usage, automate workflows, and unlock new high-margin revenue streams for both publishers and PubMatic. The company sees the transition to agentic AI (autonomous agents transacting directly) as a long-term catalyst.
• CTV and emerging channels as growth engines: Continued investment in CTV, especially in live sports and new ad formats, along with scaling commerce and curation revenues, is expected to drive double-digit growth in these secular areas. Management also anticipates that the shift of advertising budgets from linear TV to digital streaming will offer a long runway for expansion.
• DSP diversification reduces concentration risk: By strengthening relationships with mid-market and specialized DSPs, PubMatic aims to offset declines from legacy partners and stabilize revenue. The company notes that its expanding buyer ecosystem, supported by direct-to-supply buying platforms like Activate, will be critical to driving future volume and resilience.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will watch for (1) adoption rates of AI-powered products and agentic AI solutions, (2) sustained CTV and live sports marketplace momentum, and (3) further diversification of DSP relationships and revenue streams. Execution on emerging revenue categories and the impact of industry regulatory developments, particularly around Google’s ad tech ecosystem, will also be closely followed as potential inflection points for PubMatic.

PubMatic currently trades at $8.82, up from $7.64 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free for active Edge members).

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