Taboola.com Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 9 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Taboola Quarter 1 2023 Earnings Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Rick Haas, Head of Investor Relations of Taboola. Please go ahead.

Speaker 1

Thank you, and good morning, everyone, and welcome to Tubular's Q1 2023 earnings conference call. I'm here with Adam Singolda, our Founder and CEO and Steve Walker, our CFO. We issued our earnings materials today before the market, periods are forward looking statements. They are not facts and are subject to material risks and uncertainties described in our SEC filings. These statements are based on currently available information, and we undertake no duty to update them, except as required by law.

Speaker 1

Today's discussion is also subject to the forward looking statement limitations in the earnings press release. Future events could differ materially and adversely from those anticipated. During this call, we will use terms defined in the earnings release and refer to non GAAP financial measures. For definitions and reconciliations to GAAP, Please refer to the non GAAP tables in the earnings release posted on our website. With that, I'll turn the call over to Adam.

Speaker 2

Thanks, Rick. Good morning, everyone, and thank you all for joining us for our Q1 call. We had a strong performance in Q1, beating the high end of our guidance across all metrics. We achieved $116,000,000 in ex tax gross profit, dollars 10,000,000 in adjusted EBITDA and $11,000,000 in free cash flow. We're also excited to raise the midpoint of our full year 2023 guidance.

Speaker 2

Now while we're not fully guiding for 2024, we do expect a step change in our financial performance with over $200,000,000 in adjusted EBITDA and over $100,000,000 in free cash flow. I've said it in the past that it's so rare for a company to have this level of clarity and confidence a full year in advance. We have such confidence in those numbers that today we announced a share buyback program of up to $40,000,000 in 2023 and also our intention to continue paying down debt up to $50,000,000 this year. Our strong performance in Q1 was driven by a few things. In our core business, we keep seeing meaningful publisher wins such as Conde Nast, Univision, The Blaze and Kiekre in Germany.

Speaker 2

I'm spending a lot of time with publishers existing and those who are yet to be working with us, and it's incredible for me To see the quality of the conversation around how Taboola can empower the editorial teams and how we can help publishers diversify their revenue and how we can help publishers drive New audiences through Tabula News. Additional drivers for our Q1 strong performance was e commerce, business and Tabula News, both of which performed better than expected in the Q1. While we don't plan on reporting this quarterly, when looking at 2022, you can see our revenue is diverse. About 15% of our ex tech is e commerce, about 10% is video and roughly 5% is tabula news. The rest, Call it 70% of our business is coordinated advertising.

Speaker 2

Taboola's vision is to be the recommendation engine for the open web. Think Amazon, Instagram, TikTok, they're all AI driven, huge recommendation engines making money from native advertising. These are ads that look and feel native to their platform. Tableau's mission is to bring the best of the world at Garden, things such as user experience, Data, AI and advertisers to a brand safe environment of the open web. Our business is predictable because 90% of our revenue is coming from advertisers working with us directly rather than through ad exchanges.

Speaker 2

Our partnerships with publishers are exclusive and long term and most publishers signed a 3 to 10 year partnerships with Taboola, and Yahoo! Recently signed a 30 year partnership. We have significant scale, reaching now about 600,000,000 active users a day. As a reminder, we measure our business on ex tech gross profit, Adjusted EBITDA and free cash flow. Over the last 3 years, our business has grown more than 20% year over year on an exit basis, Has generated about 30% adjusted EBITDA margin and has converted about 50% of adjusted EBITDA to free cash flow after adjusting for interest payment and prepayments to publishers, which we consider to be an investment.

Speaker 2

Over time, we expect these two payments to go to 0. Our core business is strong. We're a partner of choice for over 8,000 publishers who developed a unique technology optimizing for lifetime value, empowering publishers to diversify their revenue streams such as e commerce, subscription, native, head of eating and video. Publishers deploy our AI on their homepage, they use our editorial tools to make decisions, they build e commerce sections, dynamically match content and ads that are relevant and often Taboola is a top 3 revenue source to our publishers. Back in the day, people used to say nobody gets fired for buying IBM and the same can be said about Taboola these days.

Speaker 2

It's a safe bet to choose Taboola. More than 8,000 publishers grow revenue, engagement and audience and around 18,000 advertisers use Taboola to grow their business. Before updating you about our core business and our four priorities, I wanted to share a recent experience. I'm a strong believer in making things personal. We encourage everyone at Tabura to get closer to our clients and to each other.

Speaker 2

Zero distance is our theme this year. In that spirit, once a year, I fly to Israel and spend an entire month with our engineering team and product management teams. I get direct access to our teams. I join tech working sessions every day and they get to my and they get my global view of the business. Let me tell you it was incredible.

Speaker 2

The culture, the energy, the hard work and the focus on our top four priorities was never so high. We're in a rare position as a company where the future is in our hands. We do not need to enter new markets. We don't need to make any big move. We mainly need to execute and we have the best talented people in the world to do that.

Speaker 2

One of the things that came up again and again in that visit It's how engineering teams and product managers are no longer thinking about development just in terms of how good the code is, but mainly in terms of client adoption and impact. We have 600 people in Israel, and there is a growing obsession to know how things we build and deliver are affecting our clients. Switching gears, let's talk about our core business, which we've been operating for more than a decade. We have publishers working with us globally, exclusively and for 3 to 10 years as their native advertising partner using our lifetime value platform to help them reach their broad objectives. We generate revenues from advertisers working with us to drive sales by appearing on our publisher sites.

Speaker 2

You've all seen us before. If you visited sites you love like CNBC, time.com, the BBC, we've all discovered news, product and paid offerings by advertisers from the open web. This market is estimated to be about $70,000,000,000 and we think we have a meaningful competitive advantage in it. I started Tagoula 15 years ago, And though we were not first to this market, we became the partner of choice across the board. Our growth has been driven by our client obsession, execution A technological advantage.

Speaker 2

In our core, we monitor our momentum based on new and renewed publisher partnerships A new phase of our technology optimizing for lifetime value. This includes offerings such as Newsroom, which is now used by 3,500 editors and writers, Homepage personalization, which we call Homepage for you and more. We look at ex tech margin as a proxy for advantage over other advertising companies in the open web. Our publisher momentum remains uniquely strong. In the past quarter, we won publisher partnerships all around the world.

Speaker 2

Some key new wins include Some of the world's largest names are CUNY Vision, Conde Nast, Express, Kicker, Funky and DuMont, renewed relationships with well known publishers, including Sinclair, Advanced Local, 7 West Media and more. And now let's move into our key priorities as a company. We're laser focused on our 4 growth engines and key priorities each representing $1,000,000,000 opportunity for Taboola. I'm now going to spend some time discussing each one of them. Starting with performance advertising.

Speaker 2

As a reminder, the vast majority of Taboola's revenue is coming from advertisers who buy from Taboola directly using our own AI. About 10% of our revenue comes from programmatic partners such as Google, The Trade Desk, Amazon and others. Our to be successful when they try to build on and to get existing advertisers to stay with us and spend more measured by net dollar retention or NDR. The market is massive. Millions of advertisers are buying Google and Meta and hundreds of thousands of them are buying companies like Snap.

Speaker 2

Taboola has around 18,000 advertisers. So we have a lot of room to grow. Our main focus is on improving AI and workflows to make it easier for advertisers to work and be successful with Taboola. Earlier this year, we launched Target CPA for advertisers, and I'm excited about rolling out maximized conversions later this year. These are all part of our Smart Bit technology, giving our advertisers a variety of bidding strategies they can use to be successful with Tabura.

Speaker 2

It should be as easy to work with us and to find success as it is with Meta or Google. When advertisers succeed with us, Our yield on publishers get higher, which is not only improving our financial metrics, it also bolsters our moat as we become even more competitive as a company. About 2 quarters ago, we grew our engineering resources working on performance advertising from 50 to 200 engineers given the upside we think there is here for Taboola. Part of our investment here is also on the creative front. We're investing in generative AI, focusing on helping advertisers to easily get titles, thumbnails and landing pages that can work for them.

Speaker 2

Being bigger gives us an advantage Because we can use our historic data to produce exceptional results, hundreds of advertisers are adopting our Generive AI beta offering, which lives in Taboola Ads. We just completed a hackathon focused on Generiz AI and are working on more things we can offer advertisers, so stay tuned for more to come. Moving on to our 2nd gross engine, bidding. We estimate that about 8,000 publishers we work with In our core business, generate display revenue of roughly $20,000,000,000 a year. We think that we can access our publishers display inventory with our Head of Bidding solution and win about 5% to 10% of the option given our advantage in AI, first party data and direct advertisers relationship.

Speaker 2

This will make us even more valuable partners for our publishers, increasing our payments to them as well as our share of wallet while providing our advertisers with even more scale. We have 3 areas where we're already bidding. The first is Microsoft. This launched in April of last year. The second one, our publisher partners where we have first party advantage.

Speaker 2

And the third one is publishers not yet using our solutions. We believe that as Yahoo! Launches, we'll be able to also partner with Yahoo! On bidding on their display inventory as well. Today, we generate 100 of 1,000,000 of dollars from bidding, but it's still very much a startup within Tabura, and we think we can grow that meaningfully.

Speaker 2

The reason to get excited here is mainly because as the world moves to a much more privacy driven environment with no cookies and IDFA, We had the meaningful advantage being hardcoded on the page as we know people when they come back to our publisher sites, while SSPs and DSPs don't. We're laser focused on about 50 plus publishers we're testing with before rolling that out to the rest of our network. I'm optimistic about what we're seeing here. E

Speaker 3

commerce is

Speaker 2

our 3rd growth engine. I'm happy to share that e commerce is beating our expectations this quarter and it's impressive to see the strength of it. As a reminder, e commerce is where we offer retailers the opportunity to find clients on the open web on publisher sites. This represents a big upside to both retailers and publishers as users trust their local and national sites a lot. And if those review a product or offer financial services, travel, education, people trust those.

Speaker 2

There's an opportunity to make a positive impact for people as they make decisions they truly care about. There are 3 pillars to e commerce we focus on: content creation, driving traffic and monetization. Over the last 6 months, we've launched e commerce in a box with the launch of Tubular Turnkey Commerce. Every publisher that wants to get into e commerce, but has little to no content that's attractive to retailers cannot do that with Taboola. We do all of the work for publishers From using our data to know which content makes sense for us to write on behalf of the publisher to driving traffic to it and of course monetizing it with relationship with merchants Last quarter, we announced our first two publisher partners for this initiative, Time and Advanced Local.

Speaker 2

While early, both launches are off to a good start. Traffic to Tabula turnkey commerce sections of both sites is already growing fast and monetization has begun. And finally to our 4th growth engine, Yahoo! At our information session we held in March this year, we explained the process of integrating Yahoo! Into Taboola Network in 4 specific phases.

Speaker 2

Since the event, we've transitioned into Phase 1 from Phase 0, which means we're developing the technical infrastructure To allow Gemini ad spend through to Bluest platform and test on a single digit percentage of demand. We expect to go into Phase 2, which is gradually transition ad spend and supply from Gemini to Taboola in the second half of this year. The Taboola team is interacting daily with Yahoo! To migrate advertisers into Taboola platform, focusing on advertisers' performance and spend. I can share that Yahoo!

Speaker 2

And Taboola teams are working on accelerating our rollout so we can capture revenue faster. In closing, I'm energized about our position in the market. I think we have a unique opportunity to build the very first large scale must buy open web company Publishers and advertisers can rely on Google for search, Meta for social and Taboola for the open web. We are focused. We have our 4 key company priorities.

Speaker 2

We are lean and executing on our plans. While Terrible is among the largest in our space, We're still small as it relates to the $70,000,000,000 open web market, so there's a lot of growth for us to capture. What I tell myself and Cabool employees Is that we have all we need to execute on our strategy and dreams. These are times to lay low and execute, and that's all we care about. Thanks for joining us, and I'll now pass it over to Steve, our CFO, to talk more about our financials.

Speaker 1

Thanks, Adam, and good morning, everyone. As Adam noted, our Q1 results beat the high end of our guidance on all metrics. We are also raising the midpoint of our full year 2023 guidance And reiterating our 2024 expectations of over $200,000,000 in adjusted EBITDA and over $100,000,000 in free cash As Adam explained, we are very confident in those forecasts and therefore announced today both a share buyback program of up to $40,000,000 in 2023 and also our intention to continue to pay down our long term debt. We repaid $30,000,000 of our long term debt in April, which means that we have repaid a total of $91,000,000 since Q4 2022 and we intend to repay up to another $50,000,000 this year, likely in the Q3 after certain cash balances become available. Let me talk now about our Q1 results, which exceeded the high end of our guidance on all metrics.

Speaker 1

For Q1, revenues were $327,700,000 versus the midpoint of our guidance of $312,000,000 Gross profit of $89,600,000 versus the midpoint of $82,000,000 Ex TAC gross profit of $115,700,000 versus the midpoint of $109,000,000 Adjusted EBITDA of $10,100,000 versus the midpoint of 0 or breakeven And non GAAP net income of negative $4,100,000 versus the midpoint of negative $17,000,000 We generated positive free cash flow of $11,200,000 I will note that Q1 and Q2 growth rates suffer from difficult comparables in 2022 before the digital advertising market weakness. We expect to return to positive growth in the second half of 2023. Relative to our guidance, we saw over performance, particularly in the U. S. And LatAm.

Speaker 1

E Commerce continues to impress taking the momentum of the last several quarters of 2022 into this year. We're seeing strong spend from some of our key partners such as Walmart, Wayfair and Macy's as advertisers Increase the focus on immediate returns on their advertising spend. This benefits bottom of funnel channels, which for Tubular means e commerce offerings. Our teams have achieved this revenue performance while improving cost efficiency indicated by adjusted EBITDA and non GAAP net income Expenses were $118,400,000 in the quarter, down $1,300,000 year over year. This decrease was primarily the result of our focus on cost reductions that we announced in Q3 of last year.

Speaker 1

We expect to show lower expenses as a percentage of revenue on a full year over year basis for 2023. Our headcount is down approximately 8% from its peak in July of 2022 and currently stands at approximately 1730 full time employees. GAAP net loss for the quarter of 31,300,000 dollars included amortization of intangibles of $16,000,000 share based compensation expenses of $13,500,000 And hold back compensation expenses related to the Connexity acquisition of $2,600,000 which were excluded from non GAAP net income. Our non GAAP net loss of approximately $4,100,000 was above the high end of our guidance range. In terms of cash generation, we had approximately $17,500,000 in operating cash flow in Q1 with free cash flow of around $11,200,000 If you remove the impact of net publisher prepayments, which were a source of cash this quarter of $3,900,000 and interest payments on our long term debt, which were a use of cash of $5,100,000 our cash flow would have been $12,300,000 It is interesting to note that net publisher prepayments were a source of cash this quarter.

Speaker 1

This was due to the fact that new prepayments We're lower than the quarterly amortization of historical prepayments. While we expect net publisher prepayments to be a use of cash in 2023, It does show how they can become neutral to a source of cash in the future. Let's turn to the balance sheet. Cash and cash equivalents plus our short term investments increased from $262,800,000 at the end of 2022 to $274,400,000 at the end of Q1 2023. Historically, Q1 tends to be a positive cash flow quarter for us as we collect on the higher revenues from Q4.

Speaker 1

I would also like to note that with the current instability in the banking industry, We continue to evaluate our banking relationships and have minimized our exposure to regional banks in the U. S. And less stable banks internationally. This is obviously a developing situation that we will continue to monitor and adjust as necessary. Now let me shift to our forward looking guidance.

Speaker 1

For the full year 2023, we are raising the midpoint of our guidance By increasing the lower bound, but keeping the upper bound steady, we expect revenues of 1,427,000,000 dollars to $1,469,000,000 gross profit of $418,000,000 to $436,000,000 Ex TAC gross profit of $529,000,000 to $546,000,000 adjusted EBITDA of $65,000,000 to $80,000,000 and non GAAP net income of negative $5,000,000 to positive $10,000,000 For the full year, we assume that we will invest in our Yahoo! Partnership, but to be conservative, we are still not factoring in the associated revenue Our other key company priorities are performance advertising, bidding and e commerce. Despite being a year of Strategic investment, we expect to generate positive free cash flow in 2023 for the full year. We anticipate free cash to turn negative in Q2 and Q3 with significantly positive cash generation in Q4, all due to normal seasonality. Finally, we are issuing Q2 guidance.

Speaker 1

For Q2 2023, we expect revenues to be between $296,000,000 $322,000,000 gross profit between $78,000,000 $88,000,000 Ex TAC gross profit of $105,000,000

Speaker 4

$115,000,000

Speaker 1

And adjusted EBITDA between negative $4,000,000 and positive $6,000,000 and non GAAP net income of negative $26,000,000 and negative $16,000,000 Let me finish by saying that we're happy with our Q1 performance and to be able to raise the midpoint of our guidance for the full year. We are also excited about our adjusted EBITDA and free cash flow targets for 2024. The future looks bright from our vantage point, which is why we are confident in announcing our intention to both buy back shares and continue to pay down our debt. If you want to hear more about our story, we will be attending the Oppenheimer, Needham and T. D.

Speaker 1

Cowen investor events this quarter. So we hope to see many of you at those events. With that, let's open it up to questions.

Operator

Thank you. At this time, we will conduct the question and answer session. Our first question comes from Jason Helfstein of Oppenheimer. Your line is now open.

Speaker 5

Hey, thanks to everybody. Two questions. First, has the pace of the Yahoo! Integration changed since the Analyst Day? Any color there?

Speaker 5

And then number 2, on the buyback, just want to know kind of why now? And is there a formula investors should think about in terms of repurchasing a certain amount of free cash flow or EBITDA on a go forward basis or is this more just Opportunistic. Thanks.

Speaker 2

Hey, Justin. Good morning. So on the YAL front, since the event we have transitioned into Phase 1, so Back then it was Phase 0, which means that we're building the functionality to start moving revenue into our systems. We still expect Phase 2 to end back half of this year and gradually start growing revenue. What I will share that's another piece of information that's news that our teams, one, they're having great momentum and spending a lot of time together, but we're also looking to Have an accelerated plan of capturing revenue even faster.

Speaker 2

So on that one, we'll keep updating. But overall, good momentum, And we're trying to see if we can get this even faster.

Speaker 1

Hey, Jason. So to your second question about the share buyback. So I think, first of all, in terms of why now, so we feel very good about our Q1 numbers and especially about our 2024 projections $200,000,000 plus of EBITDA and $100,000,000 plus of free cash flow. So that gives us Good confidence to do a share buyback at this time. I'll note that our core is strong.

Speaker 1

We've got good publisher wins. Our investment in performance advertising is looking promising and our growth engines are strong. E commerce, we mentioned, is particularly strong right now. Tabula News is beating our projections. And as Adam just mentioned, we feel good about Yahoo!

Speaker 1

And where we're at with that. So that's the why now. In terms of kind of how to think about what we're doing and how investors should think about it. So we want shareholders to be focused on free cash flow per share, and in particular free cash flow per share in 2024 because that's what we're focused on. So the goal of buying back shares is to offset dilution from employee shares so that investors can Hold the expectation of kind of maintaining current shares outstanding levels.

Speaker 1

So that's the I think that's the expectation that should be set Is that we'll maintain our current share levels. I will say obviously, things happen and you aren't always able to achieve that, but that's the goal, Stable share count. And I'll also note that the other reason for why now is kind of given our share price right now and frankly the cost of debt, We just think it's a good ROI for shareholders to both be buying back shares and paying back debt at this point. I think we're ready for the next question.

Operator

Thank you. One moment please. Our next question comes from the line of James Koppelman of TD Cowen. Your line is now open.

Speaker 6

Good morning and thanks for taking the question. First for Adam, what do you view as the differentiating factors that are continuing to attract all these 8,000 publishers? And then can you remind us roughly what the prepayment trend is for the remainder of the year relative to last year, I think, after having one of your best years for publisher wins? And then I have a quick follow-up for Steve.

Speaker 2

Sure. I can start. So Juan, I think we're our core is very strong and you can see that both in terms of publisher wins and as well as advertisers working with us directly, 18,000 advertisers and 8,000 publishers. On the publisher front, and I mentioned that on the letter, I'm personally having Really incredible conversations with existing publishers and publishers who are yet to be working with us. And the quality of the conversation is so much about Our full platform offering as it relates to homepage personalization, we call that homepage for you, newsroom for editors.

Speaker 2

We have now 3,500 writers and editors using our newsroom product, which is it's a company on its own. And that's so valuable because it means when the publishers work with TeVula, think of the workflows and how many people on the organization Is using Tableau to make decision as to which content they should write, what helps them drive subscription, how do they move traffic around from a journey perspective. Then we have the e commerce and turnkey, time.com launched recently, nj.com have advanced, launched earlier this year. Then as to BoulaNews, which we help them drive traffic to their site. So when you think of a publisher point of view, especially in today's world, they want to have less vendors and more partners.

Speaker 2

And there are partners who can do a lot of different things with them and for them. And as part of that, I think, over time, we'll see more and more of Kind of this trend of publishers making decisions to work with less companies, but do a deeper integration, longer term partnerships, And honestly, more quality conversations. So when it comes to that, I think it's I made a joke that when I was younger, people used to say Nobody gets fired for not buying IBM, and I feel more and more publishers. It's a safe bet for publishers at all levels to choose Taboola.

Speaker 1

To your second part of that question about prepayment expectations, our expect so I mentioned in my Prepared remarks that the it was up Q1 publisher prepayments were actually a source of cash Because the prepayments that we did in this quarter were lower than the amortization of previous prepayments That we do expect them to be a use of cash for the full year though, probably on the order of sub $10,000,000 So we think that it will be going down from last year and towards 0. As Adam has said, he thinks These go to 0 over time. So this will be a lower year for that we think. I will only caveat that with the right publisher deal came along. Obviously, we would use that as a tool to win the right publishers.

Speaker 1

But our expectation right now is that there'll be sub $10,000,000 in terms of the use of cash for the year.

Speaker 6

Great. And then a quick follow-up for Steve. How should we think about ex tax seasonality for the 2023 quarters? I know we sometimes think of 2Q And 3Q is being similar in terms of percentage of the full year's ex TAC and then 4Q is higher. Is that how we should think about 2023?

Speaker 6

And are there any

Speaker 1

So we expect Right now, Q2 is actually going to be similar on an ex TAC basis to Q1. So it's a It's the seasonality over the last several years has kind of shifted a bit and you kind of see an upward trend as you go through the year. We actually expect Q2 to be similar to Q1 and then we expect the second half to improve, especially if you're looking on a year over year basis. By the way, I mentioned In my prepared remarks, Q1 and Q2 are particularly tough comps. Q3 and Q4 become easier comps.

Speaker 1

We also our expectation is at some point we'll start seeing Yahoo! Revenue, which will help us in the back half as well. So I think that's our expectations. Q2 will be similar to Q1 and then we'll see an upward trend from there.

Speaker 6

Great. Thank you very much.

Operator

Thank you. One moment please. Our next question comes from the line of Andrew Boone with JMP Securities. Your line is now open.

Speaker 7

Good morning and thanks for taking my questions. I wanted to go to 2 more product oriented questions. Adam, can you talk a little bit about Performance advertising and your learnings as you spent more time in Israel with engineers, talk about the product roadmap there. And then what are the key drivers for yield today and the rest of 2023. And then on header bidding, your publisher display integrations, Can you talk about what needs to happen for that to become the next $1,000,000,000 business?

Speaker 7

Where are you guys in testing? And what are publishers telling it? Thanks so much.

Speaker 2

Sure. And hey, thanks for joining. So, I was in Israel. I spent a month there and I joined it was so fun for me to Join every day to different tracks, be with engineers and product managers, see what they see and share my point of view. And We met clients.

Speaker 2

We had all hands. It was really energizing. I came back even more energized. And for me, that's not always that easy, but I was and I am. We're laser focused on kind of 2 buckets to simplify our thinking on the engineering side.

Speaker 2

1 is new advertisers will come into Taboola, what is their experience And how do we make them successful? We're focusing on the time for first conversions, how many conversions can they see so they get good momentum and a variety of different metrics that we believe are leading indicators to get new advertisers to want to stay and then grow. So that's one bucket and I'll speak to that in a second. The second bucket is existing advertisers. We have now 18,000, Which I'm proud of that's a growing number, which is great.

Speaker 2

And then here the question is predictability, how they can rely on us and how they can increase their spend While at least sustaining good performance or even improving performance. So think of those are like as 2 buckets, right, new clients and existing clients. And then the biggest We have multiple tracks that are focused on helping those 2 buckets be successful. The things I'm mostly excited about Probably threefold. The first one is measurement and how we continue to improve the way we measure our business on the advertiser journey.

Speaker 2

The second is on the matching front. So this is more of an AI and how do we help match the right advertiser with the right content and the right consumer. And the third one is more in debating strategies, which is this is fairly big. So as you know, we launched our target TPA in beta About a quarter ago, it's used by at the time, I shared it's produced by a few hundreds of advertisers. We're going to move that to general availability.

Speaker 2

So that's going to be great. And right after that, we're launching and I mentioned that in my letter, MEX conversions. And for those who just not Fully grasp those 2 bidding strategies and what they mean. If today 18 successful advertisers work with Tagoolah find success They work with us. They give us the CPC and budget and things of that nature.

Speaker 2

What they really care about is How what is the acquisition cost you're trying to get to and how many of conversions could they get? So if you're a flower shop and you try to get someone to become your client And you know that a client is worth $50 Really all you want to do with Taboola is tell Taboola here is $10,000 I'm willing to pay $50 Get me as many as you can and see if we can do it. That's about to happen in the second half of the year. I've seen early kind of like test of these things with some of our early advertisers. It's like back to the future.

Speaker 2

It's really great. It's how advertisers are used to work with Google and Facebook and soon it's how they're going to work with us. So all of those things are happening full force. We're shipping about 5, 6 times more features to the field Than we did a year ago, and that's mainly because we now have 200 engineers working on performance advertisers versus 50. And that's my number one.

Speaker 2

I dream about performance advertisers when I go to sleep. It has the biggest upside for our business. Like I told the Board yesterday, we had a Board meeting. I said, if we do nothing but performance advertising and we do this well, can be a $10,000,000,000 revenue company, just by doing that so much better, and we're pretty good at it already. So this is top of mind for us.

Speaker 2

About the head of bidding, so let me just say a lot of good momentum on that one as well. Microsoft is doing well. I think Stephen mentioned that. Yahoo! When that launches, I think there's an opportunity for another MSN just on the bidding front to build on the display front on the Yahoo!

Speaker 2

So that can be a big bucket. And then we have our current 50, 60 publishers that are in progress phase of us kind of moving to the next level of Rolling it to more publishers. So I don't want to share too much at this point, but I'll just say that I feel good about this becoming Incremental 100 of 1,000,000 of dollars for Tubular in line of sight between now and more publishers and just Microsoft that's continuing to perform well. So for us, Andrew, what we need to do to get there is mainly keep executing, testing the publishers that are currently working with us And then moving that to general availability so that 8,000 publishers can use it. Thank you.

Operator

One moment please. Our next call comes from the line of Lauren Martin from Needham. Your line is now open.

Speaker 3

Hey, there. Let's just follow-up on that answer right there. So Adam, how do you allocate engineering resources Between like this, how this improving the performance advertising compared to onboarding Yahoo! How do you figure out how to allocate resources to those 2 enormous tasks?

Speaker 2

So first of all, no, we allocate Resources mainly to the top four priorities, right? So there are many things Tableau is doing, but we spend management energy and resources Just as a high level on our top four priorities, performance advertising, Yahoo! E Commerce and bidding. And then within those, we do prioritize Yahoo! And performance advertising at a higher level because we think There is a short term, mid term and long term big upside for us both in terms of making our business stronger, improving our moat And like I said, increasing the yield, which as you know increasing yield for Tabula improves not only revenue but also ex margin and EBITDA margin and things of that nature.

Speaker 2

So those 2 get more resources. And then we believe that we've modeled that correctly in terms of ROI. So you know how much We put together for this year and we could speak about that again for Yahoo. Yahoo, it's we believe it's going to start ramping the second half of the year and hopefully Even faster as it relates to next year, we're working on that. So I think we're it's the right thing to do to invest in that.

Speaker 2

And obviously, some of those resources I will go to other things once Yawu is live.

Speaker 1

Yes. The only thing I would add in terms of how we allocate R and D resources is and we talked about this a little bit when we did our cutting back in Q3 of last year. We're very focused on things with sub-two year payback periods right now. So whereas previously we had some initiatives which Adam had previously called them as speedboat initiatives, they're Further out in the future, we've cut back on most of that and focused our priorities now on things that we have or our resources on things that we believe have sub-two year paybacks. So that's why we have the list of the 4 priorities because we think those are all very short term payback and frankly can have the biggest leverage on our business.

Speaker 3

Super helpful. And then, Adam, my other question for you is you touched on generative AI And I'm interested in what the use cases you're seeing over the next 3 years for generative AI. I know you've talked about content Creation and specialization in the past. But could you talk about how you think standard of AI will get built into your models over the next 3 years, the use cases for it?

Speaker 2

Yes, absolutely. So I'm not going to talk about productivity and other things because everyone is talking about that. That's a bit boring. I think at this point to talk about That context in the case of the business, what I think is interesting is, so right now we're testing, it's already part of our Taboola Ads Console and if you I think you've seen it, Laura, but for those who listen, if you haven't seen it, you should check it out. It's fairly cool.

Speaker 2

Advertisers can now On Taboola, they can get suggested title and suggested thumbnails, not only by Taboola prompting Generative AI with what we think could be good for insurance advertisers, but rather using our historic data to prompt into Generative AI Titles and thumbnails we already know from past experience have worked for advertisers in that vertical or in that type of segment. And that gives us an edge because the suggested creatives we give back to advertisers are based on previous success. And in general, my belief is that when it comes to generative AI, anyone can use it, consumers can use it and visitors can use it. But The differentiation, the big differentiation will be the data. It's a garbage in, garbage out as they say in computer science.

Speaker 2

So I think companies will have unique data. They can prompt into those engines. We'll have an edge and an advantage. We have we're fairly big. We reach 600,000,000 people every day.

Speaker 2

We're probably among the biggest in our space. So we have a lot of performance advertisers that are working with us and we're going to use we are using that data as an edge and an advantage. So that's happening now and it will be happening more and more. I think the second thing that might be interesting Is on the more landing page creation opportunity. We had a hackathon.

Speaker 2

I saw a glimpse of that. Obviously, that's not ready yet. But you can imagine that one of the challenges advertisers have now is that they're not sure how to build the landing page and integrate pixels and how to create the workflows so that They can be successful. They might have really, really good products, but they're just not building the landing pages in a way that could be successful for different channels. So if you work with Google or Facebook or Tagoolah, it could be that you need different landing pages.

Speaker 2

And I think that's going to be fascinating to see A whole universe where landing pages are being automatically generated and optimized by generative AI, and that can be very accretive In my opinion, that will take some time, but I think that can be the next step after creative optimization.

Speaker 3

Super helpful. Thank you very much.

Speaker 2

Sure. Thanks.

Operator

Thank you. One moment please. Our next question comes from the line of Steven Zhao from Credit Suisse. Your line is now open.

Speaker 8

All right. Thank you. So Adam, I think you cited e commerce strength in the Q1 results. Is this primarily a function of a ramp in Connect City or on the core product? And the advertisers you cited here And previously are generally larger and are pretty well resourced.

Speaker 8

So what can we do to broaden the client base here? And also stepping back a little bit, I'm just wondering if you can more broadly talk about what you are hearing from advertisers. It does seem like the budget cuts have Stop for the time being and overall seems stable, but are there any rising sources of worry or concern you're hearing about or conversely any Sort of optimism. Thanks.

Speaker 2

Yes. So first of all, overall what you're seeing and I think it's part of why e commerce is doing So well is that advertisers are looking to work with channels and partners that are very good at attribution for performance And to showcase that it's working, so the more you're able to show advertisers in it and that's why we're focusing on that so much, that you're a good place for them to spend their money and see ROI, You're going to get the budget, you're going to get retention, you're going to get happy clients. So we have 18,000 of those, as I mentioned, on the e commerce front, Which is, it started with Connexity and SkimLinks and now it's just more Tableau commerce holistically, or as I mentioned, e commerce in a box, We're seeing even greater advertiser success over there. So I'll say that we're seeing advertisers just coming in even stronger To work with us on the e commerce front, I think especially now they're looking for great I don't know if we're as good as Google search, but it feels to me based on the momentum that advertisers really like working with our e commerce initiatives.

Speaker 2

So again, I don't know if that's because of The overall macro is because we're great or both, but we're doing a good job on e commerce and I'm happy to see that momentum. 2, I think since the acquisition, We're working more holistically as one company. So there's a lot of synergies between data integrations, different initiatives like DCOs, Advertisers, Taboola core advertisers buying Connectity, Connectity core advertisers buying Taboola. We have more salespeople selling And cross selling, so those things are contributing to e commerce. And I'll tell you my goal is to double that business.

Speaker 2

I mean, it's a great business. It should be it's about 15% of Extech last year. I want this to be 30%. It's such a great business. It's quality advertising for consumers.

Speaker 2

So I think it's a combination of we're doing really good for advertisers. And since the acquisition, we're working better together as one And we're enjoying the benefits of that. So that was one part of the question. Feedback from advertisers is Basically, performance. And I can tell you, by the way, and I wrote this in my letter, I don't Focus anymore on recession and market softness and things of that nature.

Speaker 2

Our focus on execution and product and does it work or does it not work. I don't want to hear about Anything else personally, I come to work. I think I know what we need to do. We know what we need to do. We need to do the work and I think we have a huge upside doing that.

Speaker 2

So we have everything we need at our disposal to execute on our plans and dreams. And mainly as it relates to advertisers, I think they want the same. They want to work with companies that can showcase fast. They're putting money into their channels. They can see conversions, many of them fast, so they can stick around and increase spend.

Speaker 2

These are the 2 things advertisers want now more than ever.

Operator

Thank you. One

Speaker 8

moment please.

Operator

Our next question comes from the line of Justin Patterson from KeyBanc Capital Markets. Your line is now open.

Speaker 4

Thank you. This is Sergio Segura on for Justin. We had two questions. Just how should we think about the Pipeline of publisher additions for the rest of the year. And then a follow-up on generative AI, just how should we think about the cost implications from these investments?

Speaker 4

Thank you.

Speaker 1

Sorry. So can you repeat the question real quick? I had an audio breakup here.

Speaker 4

Sure. Yes, we had 2 just on the publisher additions, how that pipeline is looking for the rest of the year and any The way we should think about the cost implications from the investments in generative AI?

Speaker 1

Yes. So on the pub additions and And new publisher revenue. So we're ahead of our plan so far this year. So we continue to see good momentum on signing up new publishers. Adam mentioned some of the names earlier, but generally speaking, we're seeing good progress.

Speaker 1

Pipeline still looks very strong. So we expect that this year will be another very good year in terms of adding new publishers. And I think, we tend to always talk about the When we add new publishers, they tend to be lower margin initially and then we're able to grow the margin over time. So I think it's also very promising for the future because I think It will help us as we look forward, it will help us to grow ex TAC over time as we improve the margin On those publishers. In terms of generative AI and cost implications and things, again, I think Adam said, Yes, we do expect it to be a productivity boost.

Speaker 1

So we do expect it to help our AMs,

Speaker 8

for instance, be more account managers on the advertising side

Speaker 1

be more productive. Be More account managers on the advertising side Be More productive because they don't they can they don't have to sit there and work to generate new headlines And things for the advertisers, generative AI can help them with that. But even more important than that, our expectation is that it'll help us with our Advertiser success and performance advertising initiatives, it will help advertisers become more successful on our platform, Because one of the things that's important when you're advertising on a platform like ours is to test things, test new headlines, test New images, test different ways of getting your message out there, test new landing pages even with different messaging and different ways of Converting people to what the advertiser wants them to do, whether it's sign up for a newsletter, sign up for an email list, buy a product, buy a service, That landing page is key and generative AI can help all of those things. As Adam mentioned, we're already using it to generate headlines for our advertisers. We're already using it to generate images for advertisers.

Speaker 1

Landing page is probably coming soon. So I think it's Even more important than the productivity boost, we think it will have a positive impact on the success of advertisers on our platform. I'll also mention that one of the things that gives us a particular advantage in that area is that generative AI, The most important thing about generative AI and using it effectively is having the data to train it on what works and what doesn't. So if you want to generate new headlines for your advertisers, what you need to do is you need to train the generative AI tools on what has worked historically, so that the tools can basically make good recommendations to your advertisers. And the advantage that Taboola has on that front is that we're much larger than most people in our space, most people who do what we do, one The largest companies on the open web, and therefore, we have a lot more data to train these tools about what works and what doesn't.

Speaker 1

So we think we have a real advantage there. And we think, like I said, that will translate into advertiser success over time and help us expand our advertiser base and just make them more successful. Thank you, Steve.

Operator

Thank you. At this time, that concludes our Q and A session for today. I will now turn it back to management for closing remarks.

Speaker 2

Thank you, everyone, for joining us today. I think as you can tell from our Remarks and the questions and the recent communication, we're excited to be where we are. I'm personally very energized about our position in the market. I think we have an opportunity to build the very first large scale must buy open web company that both publishers and advertisers Can rely on side by side to Google for search or side by side to Meta and other social companies. Tableau can be the gateway to the open web, 2 side of the marketplace that can optimize user experience, AI and data and all those things that advertisers and publishers need and want.

Speaker 2

We're fully focused on our 4 key priorities, performance advertising, bidding, e commerce and Yahoo! We're lean, we execute on our plans And once Yahoo is launched, we expect to be at a $2,500,000,000 run rate and this is out of a $70 plus 1,000,000,000 open web market. So We're bigger, but still a small portion of this big market. So there's a lot of growth for us, and we're excited to go there. And what I tell and like I said earlier, what I tell myself And Tabula, is that at our size, we have everything we need to execute and reach our financial objectives and dreams.

Speaker 2

These are times to lay low, do the work, execute, and that's all we care about. So we look forward to interacting with many of you. Thanks for joining today, And may you all discover things you love and never knew existed. Thanks.

Operator

Thank you, and thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Taboola.com Q1 2023
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