Outbrain Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 11 speakers on the call.

Operator

Good day, and welcome to the Outbrain Second Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to the management team. Please go ahead.

Speaker 1

Good morning, and thank you for joining us on today's conference call to discuss Outbrain's 2nd quarter 2023 results. Joining me on the call today, we have Outbrain's Co Founder and Co CEO, Yaron Galai Co CEO, David Kussman and CFO, Jason Kiviat. During this conference call, management will make Forward looking statements based on current expectations and assumptions. These statements are subject to risks and uncertainties and may cause actual results to differ materially from our forward looking statements. These risk factors are discussed in detail in our Form 10 ks Filed for the year ended December 31, 2022, as updated in our Form 10 Q and other reports and in subsequent reports filed with the Securities and Exchange Commission.

Speaker 1

Forward looking statements speak only as of the court's original date, and we do not undertake any duty to update any such statements. Today's presentation also includes references to non GAAP financial measures. You should refer to the information contained in the company's 2nd quarter earnings release for definitional information and reconciliations of non GAAP measures to the comparable GAAP financial measures. Our earnings release can be found on our IR website, investors. Outbrain.com under News and Events.

Speaker 1

With that, let me turn the call over to David.

Speaker 2

Thank you, Imelda. Thank you all for joining us. I'm excited to share with you our financial results and the significant progress we are making Multiple strategic fronts. Also, as you will hear, we are innovating at a great pace, leveraging AI and other technology. We are pleased to report a solid second quarter in which we achieved $54,600,000 in Exstar gross profit, representing 5% sequential quarterly growth and reaching the high end of our guidance and adjusted EBITDA of $3,500,000 exceeding the high end of our guidance.

Speaker 2

Inmod is still an uncertain but relatively stable macro environment, We continue to, a, focus on driving growth and better performance within our current marketplace, while maintaining tight cost controls and b, Making strategic investments, growing our addressable market both on the advertiser side and publisher side to a product and technology led strategy. I want to start with On X. Last quarter marked an exciting milestone for our company with the launch of On X by Outbrain. Onyx is a new brand building platform focused on driving high attention from video and high impact rich display ads for premium enterprise brands. With our core performance platform and now with the launch of Onyx, We are proud to be one of the very few advertising platforms that can offer true full funnel capabilities to advertisers at a global scale on the open web.

Speaker 2

From building brand awareness and consideration all the way to customer acquisition. On X is expected to deliver incremental value to us Through premium brand campaigns carrying high CPM, which will be delivered outside of our traditional feed. This launch means we expect to do a lot more with existing and new customers. It increases our total accessible market by an estimated factor of 3 times. This is according to Gartner data that breaks down budget allocation between performance marketing, Brand building consideration and loyalty.

Speaker 2

So what is Onyx? What makes it unique? Onyx is a brand building platform for enterprise brands and agencies. It is built to deliver strong ROAS from video and high impact display campaigns. While most of the advertising market is focused on ad viewability and video completed views, Onex goes one step further To maximize user attention, which has been proven to drive business impact.

Speaker 2

With marketers focusing more and more On Outcome and ROAS, attention is gaining momentum as a much smarter success KPI for advertisers. We partnered with Adelaide, a leader in attention measurement to allow Onex to capture attention units in real time and use predictive AI to find moments and opportunities to maximize customer attention for every campaign. Yaron will elaborate later on the technology and how we leverage our powerful prediction capabilities developed over 15 years. We launched On X in mid June and we're off to a great start with more than 25 brands already live or committed to testing. One of the first campaigns we tested was in partnership with DAXIS UK for Ford.

Speaker 2

We used a custom on the X ad experience called hybrid That combines both video and display assets into an interactive ad experience. The results exceeded our customers' expectations with Allied putting the campaign attention score 30% higher than the benchmark. We continue to experience higher performance than the other line benchmark on our On X This is a powerful testimony for how Onex is successfully winning user attention and as a result driving stronger brand For advertisers, Onex is now available for enterprise brands and agencies in the U. S, UK, Germany, France and Italy and will be launched in other markets later this year. We've run Onyx campaigns in these markets for premium brands Visa, Porsche, Mattel, Iheartradio, Opel, Alfa Romero and others.

Speaker 2

Our pipeline is building and we expect to generate Double digit 1,000,000 of dollars of revenue from Onex already in H2 of this year. Just as a side comment, While Onyx is great for brand advertisers, it's also extremely strategic for our relationship with publishers, helping us elevate quality and user which has been one of our key differentiators and factors in winning premium supply deals. And ultimately, it helps deliver even more revenue Moving to the general marketplace advertising results. On the revenue side, we're seeing stabilization in the market with positive signs of growth in the last 2 weeks of the quarter And sequential growth over the course of Q2 and stronger start in Q3. From a vertical perspective, we saw year over year growth in auto, Health and Retail.

Speaker 2

In addition to the continued innovations we make for conversion bid strategy, One interesting area of progress in Q2 was the increased adoption of ZEMENTA by our core advertisers. As a reminder, Dementa is our in house performance DSP. Unlike traditional DSPs that focus on streamlining media buying for display and video on a CPM basis, Zimanta is connected to most major native advertising SSPs and it allows marketers to run performance based campaigns Across the entire open web. If this trend with ZEMENTA continues, we expect this to lead to increased share of wallet with many of our performance advertisers. Moving to the publisher side, where we entered into several new exclusive long term partnerships in Q2, including TMZ, On the device or platform side, we established a partnership with Disqus, A commanding platform has started ramping up our placement in Samsung devices through our partnership with Upday.

Speaker 2

With existing partners, I want to highlight our success in renewing partnerships to secure our long term business growth with the recent renewals of multi year deals with New York Post in the U. S, Boda in Germany, CCM Benchmark in France and Hearst Italy. So overall, we are very excited about the launch of our strategic branding platform, Onyx, that we believe will further strengthen our position In the open web is the quality partner for premium publishers and the full funnel open web partner for all types of advertisers. We're encouraged with the 5% sequential growth in extra gross profit in Q2 and our profitability and expect significant acceleration in growth rates in the coming quarters, both in Exact gross profit and adjusted EBITDA. I'll now hand it over to Yaron.

Speaker 3

Thanks, David. Today, I'll cover 3 areas, an update on Keystone, an AI update and more detail on what we're doing on Onex as it relates to attention. First, Keystone. We had a strong quarter of new publisher launches. Since our last earnings call, we went live with Keystone on CNN, Axel Springer's Build, Arena Group's The Street and Sankei from Japan among others.

Speaker 3

These publishers are advancing various KPIs through the Keystone technology such as subscriptions, e commerce, Retail and newsletters. One of the main drivers for this growth has been an important product upgrade from our R and D team. Deploying the Keystone code and integrating it with publisher systems has been a barrier to quickly launching with interested publishers. So in Q2, we built and launched a new no code solution for Keystone, which leverages the unique code on page position we already have with publishers. At the new launch is so publishers have been loving this.

Speaker 3

My second topic is AI. On the last quarterly call, I updated that we built ChatGPT into our advertiser product called Amplify. This follows an automated AI headline generator that we built in house several years ago. At the time of our last I mentioned that about 50% of the automated AI headlines that advertisers were using were then originating from our chat GPT integration. But that was a long 3 months ago, which is decades in AI terms.

Speaker 3

Our successful integration and launch since then has now grown to be 100% of the automated headlines that The cost efficiencies resulting from these generative AI capabilities, we're also seeing that the ChatGCT headlines adopted by Advertisers are yielding on average a 7.5% higher click through rate than the headlines they've created manually within their campaigns. Better ROAS for our advertisers typically leads to an increase in advertising dollars spent with us. Our initial GenAI integration was limited to the English language. Over the last quarter, we've added within our advertiser product support for generative AI headlines In parallel to these upgrades to our advertiser product, I'm also happy to update that we've now integrated the Chat GPT, Gen AI capabilities into Keystone, allowing publishers to quickly scale and better personalize their various business offerings to their own audiences. We've also been busy deploying AI capabilities into our R and D and business operations.

Speaker 3

As examples, we've deployed the use of Microsoft GitHub Copilot, which is an AI assistant for coding across our engineering teams. And we've built our own AI bot based on ChatGpc Moving from generative AI to our ad serving algorithms, which have been AI based for several years. During the 1st 6 months of the year, we've deployed new and improved AI algorithms, which have so far resulted in a 4 point 3% improvement in CTR potential based on our internal AB testing. So as you can see, our product And engineering teams are racing to build and deploy these new AI capabilities across our algorithms, our products and our operations to ensure that Outbrain is at the forefront of the IR revolution. Switching gears to On X and attention.

Speaker 3

I believe that the world of brand advertising on the web has evolved in 3 main eras. The first was the reach era. During this period, advertisers were focused mostly on buying ad impressions regardless of how and where those ad impressions happened. To use TV advertising as an analogy, brands were paying for their ads whether the TV set was turned on or off. The second was the viewability era.

Speaker 3

During this past decade or so, brands got smarter and no longer wanted to pay for ads that were never even viewable by human beings. They started demanding viewability as the major metric they bought advertising against. To jump back to the TV advertising analogy, viewability ensures that the TV set is on when the ads are shown, but it doesn't ensure that Anyone is actually paying attention to them. So bathroom or beer runs during the outbreak will still count as 100% viewable and the advertiser pays for full cost. So we're now at the very beginning of the 3rd big era of brand advertising on the web, and that is the era of attention.

Speaker 3

Brand advertisers now want to make sure that their dollars aren't just theoretically viewable, but rather that a human being is paying attention to them. Therefore, in the coming months, we're all going to be hearing the word attention come up often by many companies in the space. Now I want to explain why Outbrain with its 15 year heritage of powering news feeds for the world's best publishers has such a strong and differentiated position in this era of attention. Most companies in online advertising are thinking of attention the way they did about viewability. They are typically looking at an ad placement and deciding in a binary way whether that ad placement is viewable or not or whether to tie attention or not.

Speaker 3

They're placement based systems and not user based systems. Now, our brand's huge advantage is that we deeply understand the users' interest of the roughly 1,000,000,000 people we serve each month. Through the news feeds we tower exclusively with code on page, our technology understands what links and ads are likely to be the most engaging to each individual user. Through this deep understanding of users' interest graphs, we can predict on a user by user basis which specific ad will generate attention. The shift of brand budgets to attention will likely be significant amongst all players in the space, but we strongly believe The biggest winners won't be those that make binary decisions on a placement level, but rather those that can make user by user predictions as to which brand ad will generate the highest levels of attention by each user and audience.

Speaker 3

Our 15 year Head start in understanding users' interest and personalization combined with this industry shift to the era of attention is the reason we're So excited with the timing of introducing Onyx. And with that, I'll hand it over to Jason to cover our financials.

Speaker 4

Thanks, Yaron. As David mentioned, we beat our Q2 guidance for adjusted EBITDA and achieved the high end of the guidance range for ex pet gross profit. From a demand perspective, we experienced a softer start to Q2 with a stronger relative performance in June, where we started to see days of year over year revenue growth in the back half of the month. The early portion of Q3 has continued this trend from June. We're cautiously optimistic about the outlook for the back half of the year.

Speaker 4

Geographically, Europe has shown stronger signals of demand recovery than the U. S. Revenue in Q2 was $226,000,000 a decrease of 10% year over year. New media partners in the quarter contributed 12 percentage Points are approximately $30,000,000 of revenue growth year over year. Net revenue retention of our publishers was 78%, Reflecting the lapping of the strong level of ad impressions in the prior period, driven by several factors, including the prior period having heightened traffic around the war in Ukraine, As well as being more selective and effective in supply we bid into, as we focus on premium high quality supply driving the best results for our advertisers and on optimizing serving costs.

Speaker 4

Additionally, we continue to see a headwind from the impact of the demand environment on yields. Our churn remains low by our standards and our 3 largest churns year over year contributed just approximately 4 total points of net revenue retention headwind in Q2. As another data point, our logo retention remained around 95% for all partners that generated at least $10,000 Extech gross profit was $54,600,000 a decrease of 8% year over year, driven primarily by the revenue decline. Slightly lower year over year decline in expect gross profit as compared with revenue is the result of largely offsetting impacts of revenue mix changes and better performance on Certain media partners, which led to an improvement in margin. For both revenue and ex Did not have a material impact on year over year growth rates for the quarter.

Speaker 4

Moving to expenses. Operating expenses remained essentially flat year over year, Increasing slightly to $51,700,000 in the quarter as we continue to exercise discipline around spending. There were several offsetting factors driving the flat year over year costs. To adjust to the continued macroeconomic uncertainty, create additional operating efficiencies and support the company's strategic growth and profitability objectives, We announced at the end of May a reduction in our workforce of approximately 10%. Included in Q2's operating expenses are $2,300,000 of Severance and related costs related to this cost reduction initiative.

Speaker 4

Absent this, personnel related costs declined $3,800,000 year over year driven by headcount reduction and FX favorability. For non comp, we saw an increase in bad debt expense of about $1,000,000 year over year, which was driven by several customer bankruptcies, particularly in the programmatic advertising space. We are monitoring closely to mitigate the risk of further losses. As a result, adjusted EBITDA was approximately $3,500,000 in Q2. Moving to liquidity.

Speaker 4

Free cash flow, which as a reminder, we define as cash from operating activities less CapEx and capitalized software costs There's a net use of cash in the quarter of approximately $2,000,000 The small net use of cash was driven by the timing of working capital. As noted last quarter, in April, we repurchased $118,000,000 aggregate principal amount of the convertible notes For approximately $96,200,000 in cash, including accrued interest, representing a discount of approximately 19% to the principal amount of the repurchase note. We viewed the chance to repurchase a portion of the debt at a considerable discount to be opportunistic, given the strength of our balance sheet, With remaining cash balance that retains the optionality to invest in opportunities that can drive further shareholder value. As a result, we ended the quarter with $218,000,000 of cash, cash equivalents and investments in marketable securities on the balance sheet and $118,000,000 of long term convertible debt. In December, the company's Board of Directors authorized a $30,000,000 share repurchase incremental to the $30,000,000 program fully executed in 2022.

Speaker 4

We began executing the new program, Purchasing 1,500,000 shares for about $7,100,000 year to date through June 30. We continue to believe it's an attractive way to enhance shareholder value under current conditions. Now turning to our outlook. In our guidance, we assume a continuation of the trends we have seen in the 1st weeks of Q3, With seasonal increases in ad spend that we typically see to finish the year and additional growth from bringing Onex to market. Despite a lower level of visibility into advertising budgets, we have incremental visibility to our EBITDA plan based on the cost actions we've taken earlier this year.

Speaker 4

With that context, We have provided the following guidance. For Q3, we expect ex tech gross profit of $56,500,000 to $59,500,000 And we expect adjusted EBITDA of $7,500,000 to $9,500,000 We maintain our previous full year 2023 guidance of at least $237,000,000 of Exact gross profit and are increasing our previous full year guidance for adjusted EBITDA to at least $30,000,000 Now I'll turn it back to the operator for Q and A.

Operator

We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster.

Speaker 5

Thanks for taking my questions. Let me try to see. For Onyx, could you please explain how the product works? So you mentioned double digit $1,000,000 in revenue contribution in the back half. That's great.

Speaker 5

In terms of the mechanics of the product, so where are the ads Why are they getting high why do they attract higher CPMs? And what would be a good example in terms of why you're driving you are expanding into a higher TAM? That would be great. And then the other question I had was for Jason. In terms of headcount reduction, are you good with The headcount you have today and what are you thinking for the remainder of the year?

Speaker 5

Thank you.

Speaker 2

Hey, Shweta, it's David. Thanks for your question. So Onex, in terms of financials, we expect it To do between $10,000,000 to $20,000,000 in the second half of the year, the product is a brand awareness and consideration product targeted Enterprise brand and it's basically placed either in mid article or end of article placement in 100 percent show voice. It could be From experience could be video and it could be high impact display or a combination of the 2. For example, we mentioned on the Ford example, it was a Hybrid ad where we combine video and display, these are normally CPMs that are double digits for Brand awareness campaign, so that's expected to drive higher CPMs in the network.

Speaker 2

We're very excited about it. It We may grow our offering to a full funnel partner to brands. We're leveraging many existing brand relationships that we have with Customers like Disney, for example, others that use us for performance and now we also have a dialogue with them around brand awareness campaign. So we're leveraging that. But it also really opens the door for us to have much more strategic dialogues with the big holding companies, the big agencies and enterprise brands that Didn't work before we asked because they were mostly interested in building brand awareness and consideration.

Speaker 2

So very excited about it, both from a Product, strategy and potential financial impact.

Speaker 4

Hey, Shweta, I'll take the second one. So on the headcount reduction, Obviously, we felt it was prudent in this environment to exercise discipline around costs as we have in the past and improve our cost structure going forward. What we announced was about a 10% workforce reduction and really focused on efficiencies around hubbing our teams, Automation and focusing on the priority growth areas like Peconicx, of course. So what we effectively did with that is We reduced our annualized cost by about $12,000,000 to $14,000,000 and so about half of that we expect to benefit from this year and full year 2023. And that brings our headcount now to about 8 70 people.

Speaker 4

We are Hiring, obviously, for critical positions now and obviously, some of the strategic positions around Onex is some of our priority hiring right now. So, we feel like we're back to business as usual following the reduction there.

Speaker 5

Thanks, David. Thanks, Jason.

Operator

The next question comes from Laura Martin with Needham. Please go ahead.

Speaker 6

Good morning. So let's start with the bad debt number, Jason. So $1,000,000 I MediaMath, could you talk about what you think exposure additional exposure might be to the bad debt number?

Speaker 4

Sure. Yes. So we did see higher bad debt expense in Q1 as well. So maybe I'll talk about it with respect to the full first half of the year. Total bad debt expense was between $4,000,000 $5,000,000 which for us is basically a full year number.

Speaker 4

So exceptionally high in this first half of the year. Really a few drivers, obviously, the kind of macro pressure on many in the advertising and programmatic Businesses is the main driver there. We did see a few large bankruptcies driving close to half of that bad debt expense In the first half of the year, obviously, there's a few big programmatic companies, MediaMath and Synacor are the highly publicized ones. And The 2 of those alone accounted for like $1,000,000 or so of our bad debts in the quarter and in the first half. Of the remaining amounts, we don't think there's too big of an exposure.

Speaker 4

Actually, we think a Good chunk of it is really just aging and a good chunk of that aging is the big agency holdcos Who are just slow payers and part of it is that they might be collecting slower even from their brands. And so we're very formulaic obviously with Bad debt expense in the aging. So we see opportunity to reverse some of that expense in the second half of the year. But yes, I mean, I think in this environment, We should expect to have a higher than normal bad debt expense.

Speaker 6

Okay. Great. Thanks. And then Keystone versus, Onyx, are they complementary or do they attack or do they go after different supply side I know they both deepen your relationship. 1 is more full funnel and the other one is sort of a deeper relationship with suppliers.

Speaker 6

Are you finding the same The supply side guys are interested in both products or different supply side guys interested in these two products? Do they work together or totally independent Hi,

Speaker 7

Lourdes. Hi, Lourdes. Okay.

Speaker 3

David, take it.

Speaker 2

Lourdes, I mean, they are separate Product, they're very complementary. 1 is totally focused on the advertiser side, which is Onex, where it's more of a full funnel solution for advertisers, totally new markets for us that this increases our TAM by 3x. Keystone is a Apply publisher focused product that is a business optimization platform for publishers, so 2 different products. Yaron, anything else?

Speaker 3

Just that they obviously, they both come from the same R and D shops and we obviously look at

Operator

Thank you.

Speaker 2

And generally, maybe one more comment. I mean, both of them are elevating the strategic relationship we have on the two sides of the marketplace. Keystone It's a very strong strategic tool for publishers looking to diversify revenues on the advertiser side, existing and new. We're becoming a much broader partner. I think companies generally are looking to work with less partners.

Speaker 2

This positions us in a pretty unique position in the market on the 2 side of being able to provide a much broader offering, which is strategic on the 2 side.

Operator

The next question is from Ross Sandler with Barclays. Please go ahead.

Speaker 8

Hey guys, just a couple of questions. So Can you just talk about the environment? It sounds like you started to see positive growth rates before the beginning of 3Q. What geos, what categories are driving that strength? And as we look at, you said $10,000,000 to $20,000,000 which It's a good start for Onex.

Speaker 8

But if it is truly incremental, I would guess If it's incremental budget, I would guess that the ramp into 2024 would be more than just like a low single digit Incremental bump to revenue. So how do you think about that product scaling as we get into 2024? And then the last question, the GPX TAC margin finally turned back up for the first time in 2 years. So how are we thinking about that? Are we through the kind of worst of the guarantees and macro headwinds around Thanks a lot.

Speaker 4

Thanks, Ross. So I'll start with the demand trends and I'll be brief. Yes. So what we saw obviously in Q1 was sequential improvement each month of the quarter in terms of demand, while Q2 was much more mixed. April was mixed, softer May and stronger June.

Speaker 4

Q3 off to a better than expected start in July relative to June. So yes, relatively stronger trends, particularly in Europe versus U. S. Obviously, the strengthening euro and the pound versus the dollar has helped there. Yes.

Speaker 4

CPC is still down year over year in Q2. But obviously as we lap easier comps into Q3, we can see an inversion there. And just maybe anecdotally, we did see an improvement in yields sequentially Q2 versus Q1. So again, positive Trends and really reasons for optimism going forward. Verticals wise, we're not overly diverse We're pretty diversified.

Speaker 4

We're not overly concentrated. So auto, health and retail were stronger. Finance has been weak and remains weaker than Other verticals for us.

Speaker 2

And so maybe, Tejas, I'll start with the margin. Yes, so we saw an improvement of About, I think, 200 basis points versus Q1 and about 50 basis points versus last year. So we are encouraged by that. We Expect that the yields will not go that the margin will not go further down and Hope to get it back to prior levels. I think to get it to historical very high levels, I think it will be dependent on some market recovery.

Speaker 2

But overall, we are sort I'm excited about this trend and definitely through the second half of the year. Regarding Onyx, so it's we're off to a great start. I mean, what We're getting right now with test budgets. We're looking into budgets of Q4, which are more significant. But definitely next year, our Expectation is that we developed really strategic relationships with many of these holding companies and many of these brands and then you're going into a different Order of magnitude of brand dollars and campaign.

Speaker 2

So I mean, we're not giving a forecast for 2024, but we expect that if We hit the numbers for H2, a significant growth of it into 2024 and in coming years. And our expectation is it becomes a few $100,000,000 business over the next few years.

Speaker 9

I wanted to ask about tools to improve yield. How are you guys thinking about key drivers as we get to the back half of this year and into 'twenty four on key drivers that can step up yield? And then secondly, just quantifying that is, as I think about net publisher retention historically, it's been 108, 110 kind of in that level. Is there a path to get back there? Do you guys think that you guys can recover to those levels kind of as macro stabilizers?

Speaker 9

Thanks so much.

Speaker 3

Andrew, maybe I'll take the yield question around here. So Yield is kind of the end result of everything. It starts obviously with the technology and we investing in the technology and the algorithms specifically. As I mentioned in the comments earlier, we've just in the algorithm Updates we've done in the first half of the year, we've seen a potential increase of over 4% in click through rate. And so that's deployed network wide and those changes compound over time.

Speaker 3

The next level is So the level of data and quality of that and on top of that, it's the ad base. So into that Part of the yield go, a few things. One is just getting the advertisers selling and macro has to do with that. So Obviously, we're excited there. On X, I think, is a great leg with selling new types of advertisers and new campaigns.

Speaker 3

The other side is what they run with us. The more kind of algorithm food the algorithm has, the better the results are. And that was The example I gave of the AI capabilities that we've built into our MFi products, which So once we've sold it, they take the advertiser campaign and through AI, they recommend a variety of new headlines and variations, Which when the advertisers accepted those, what we've seen is more than a 7% improvement in click through rate, which translates To yield, so the yield result, I'd say, is kind of the result of all the activities we do operationally, business, technology and

Speaker 4

And on the retention, I'll take that one, Andrew. So just yes, I mean, obviously, we've said the last couple of quarters that the biggest headwind had been the demand and yield and that remains a headwind. And just to note, we did grow ex tax sequentially about 5% from Q1 to Q2 despite revenue kind of continuing to The one thing we noted on the call this time was just ad impressions were year over year headwind in Q2. Several factors, no material difference in churn still. We feel pretty low levels for us.

Speaker 4

The lapping of the war in Ukraine, particularly in Europe, there was pretty high page views last year in Q1 and Q2 from that, was a headwind. And we've also just We made changes and we continue to make changes in our supply bidding to optimize for marketer ROAS and quality and serving costs. And That might have a negative impact on revenue and ad impressions, but we're driving higher, we think, ag tech and profitability because of it. And so that's the goal. And I think in half 2 as the comps ease a little bit, we'll expect to get to a much more normal split between retention and new, that could be around 1 100 in NRR in Q3 and even higher expec growth.

Speaker 4

So that's the plan for H2. Thank you.

Operator

Thank you. The next question is from Yigal Aronian With Citi, please go ahead.

Speaker 7

Hey guys, good morning. Ian Maxmore on for Eagle. My first question would be on the converts you bought back. Just wondering what's the plan for the rest of the converts on the balance sheet? And just more generally, how we should think about capital allocation going forward?

Speaker 7

And then my second one would be on generative AI. I gave a nice update on the UChat GPT integration, but just I guess thinking more down the road, how should we think about More GenAI integrations from here where you think it could impact and Over the next couple of years, how you think it could impact the advertising space for you guys?

Speaker 2

Thanks, Mike. It's David. So regarding capital allocation and the convert, so we saw the opportunity to repurchase Half of the note at a very attractive price, so we did that in April of this year. We're continuing To look at that opportunity, but right now, I think we're at a good place on the convert. We did announce a new buyback of $30,000,000 earlier this year.

Speaker 2

We still have significant dry powder In there and we intend to continue to buy back some shares, not at very high level. So we expect it to be moderate. We think the Again, share price is still an attractive return on capital for us, but we also want to make sure that we have enough cash in hand To do acquisitions, the environment of acquisitions is becoming a little better, both on the private side and public side. So we definitely want to make sure we also have enough cash for that. So I think we are right now at a good balance With the buybacks at moderate amount.

Speaker 3

Hey, Ron here. I'll take the Gen AI question. So I think generative AI is going to have a bunch of impacts on media in general and advertising specifically. In media, obviously, every publisher we're talking to is looking to incorporate generative AI Tools or assistance, some obviously are going more extreme and are talking publicly About generating content with GenAI, I think others are looking at this as assistance to their human editors, which is approach I really like. And that's on the media side.

Speaker 3

So I think we're going to see much more efficiencies in creating content using Kind of assistance with generative AI as draft starters

Speaker 4

and things like that.

Speaker 3

On the advertising side, as I mentioned, we're using generative AI for Headline creation or suggestions, we take the seed that is provided to us by the advertiser, which is the message they want to get out. But then With Generative AI, we can generate 200 different variations, which they can think about and they're not going to Deploy big teams to create those variations, but when they get those recommended automatically, It makes them very efficient at looking at them, reviewing them and approving them. And again, we're seeing direct Positive impact in our advertising systems with click through rate and better return on ad spend with those advertisers that are adopting that. Last piece, which I think is going to be interesting on GenAI, we're keenly looking into and playing within the lab, but haven't released anything. It's Obviously, on the image side, I think everything has to do with creatives and this is going to impact I think in a larger way the advertising industry, We're going to have a lot of creatives that come through generative AI.

Speaker 3

We're not yet comfortable with the hallucinations that are happening in that space. So we're still tinkering with that, but Haven't launched anything yet, but obviously I think over time generative AI on the image and creative side is going to be It's going to be interesting as well.

Speaker 2

Just want to add to Yaron's comment related to Onex and Brand Studio. Last point around creative is important. I mean, we use the brand studio, which is our in house studio to work with existing creatives, repurpose them and create High impact displays create a unique ability to generate attention with creative. So in that area, we're looking Quite effectively, how to use AI to improve these processes to generate better return on those Creative and faster iterations of Brand Studio is an area where AI we have been to experimenting with AI around Brand Studio

Speaker 7

Thanks. Okay. Thanks guys. Super helpful.

Operator

The next question comes from Dan Day with B. Riley Securities. Please go ahead.

Speaker 10

Yes, morning guys. Appreciate you taking the questions. So just to clarify on Onik, is it something that your publisher partners need Into, are you only able to serve these impressions on publisher partners or is it something kind of more like a traditional SSP that Maybe it could be extended across the open web regardless of whether, the publisher itself is a core content recommendation partner or not.

Speaker 2

Hey, Dan, it's David. So they do not need to opt in. We're using it in mid article placement, which we have and continue to Acquire whether it's called on page or to a waterfall or to had a bidding, so this is one area. And then end of article placements Once that we have and we don't need to have them opt in. So a lot of the supply is totally in our control And publishers are excited about the offering.

Speaker 2

It does improve user experience with better quality and higher yield.

Speaker 10

Great. Thanks. And then, appreciate the commentary on the new Keystone wins in the quarter. You mentioned a couple of pretty large publishers in there. Just whether you can talk about the recurring revenue from that becoming material at some point?

Speaker 10

And then as far as pricing the product, it's tough days for publishers right now. Do you feel like you need to price it as a discount in this environment to Drive adoption first and then down the line you could increase prices, as you prove out the product or has that not been a concern in your pricing as expected?

Speaker 3

Yes. So this is Yaron here. Thanks for the question. On the pricing side, we're obviously working with these publishers and we work with them at a Very large capacity in our existing business. And so we know that the best way long term To create value is to first ensure that they're seeing tremendous business value from Keystone.

Speaker 3

They're driving their other business KPIs. And with that growth, we're confident there's plenty for everyone to have. We don't break out the Keystone revenue from the rest of the business, But Keystone is really a great way to help us both with retention of publishers. It's very strategic for them. It starts Getting us involved with all their business objectives, not just with native advertising.

Speaker 3

And we also would expect it will help us improve the NRR. So you will see the results baked into those and it definitely should also help us win new publishers who are looking to diversify their revenue streams, We don't really have any great technology to support those efforts.

Speaker 2

Then I want to just add to the Two quick answer about the incrementalities. So Onex is incremental on the two sides of the marketplace. On the advertising side, there are Incremental budget that we never had access to, which really increased our and very significantly. And on the publisher side, these are Outside of the feed. So they're not placements that are in the feed.

Speaker 2

These are either mid article or end of article, 100% share of voice, high impact display or video. So they are incremental. The end of article could theoretically have some impact on the PD cell, but It's only going to be served when it's a high RPM generating.

Speaker 10

Great. Appreciate the answers guys. Thanks.

Operator

Thank you. This concludes our question and answer session. I would like to turn the conference back over to the management team for any closing remarks.

Speaker 3

Thanks, operator. We're happy to have delivered strong results for Q2 and we continue to focus on disciplined execution. As you heard, we're excited with the opportunities that recent AI introduced and we're staying on the forefront of this revolution by implementing AI capabilities across our product algorithms and operations. We're also very excited with the launch of Onyx, our innovation for brand advertisers focused on attention. Thanks for your time.

Speaker 3

We look We look forward to updating you again next quarter.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Outbrain Q2 2023
00:00 / 00:00