Taboola.com Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2024

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Nabula's 4th Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Jessica Karakos. Please begin.

Speaker 1

Thank you, and good morning, everyone, and welcome to Taboola's 4th quarter and fiscal 2023 earnings conference call. I'm here with Adam Singolda, Taboola's Founder and CEO and Steve Walker, Taboola's CFO. The company issued earnings materials today before the market, and they are available in the Investors section of Tubular's website. Now I'll quickly cover the Safe Harbor. Certain statements today, including our expectations for future periods, are forward looking statements.

Speaker 1

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. 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.

Speaker 1

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, Jessica. Good morning, everyone, and thank you all for joining us. Now before we talk about the business, I want to start with a word about our people. I've always said that a company's true innovation is its culture and people, and I'm so proud of the tremendous resilience displayed by our nearly 2,000 tabulars during the war in Israel. The resilience is what's driving our progress in reaching new users, delivering engaging experiences in the open web, improving our effectiveness at monetization and driving yield.

Speaker 2

We have real momentum coming into this year, and it shows in our Q4 results and strong 2024 financial guidance. Turning first to our quarterly results. With a strong end to 2023. Q4 ex TAC of $168,500,000 growing 6% versus 2023 Q4. Q4 adjusted EBITDA of $50,100,000 a significant beat to the high end of our guidance by $18,000,000 representing over 30% adjusted EBITDA margin.

Speaker 2

Free cash flow in Q4 was $10,500,000 bringing our 2023 free cash flow to $52,200,000 representing 3x growth over 2022 as well as 50% conversion to EBITDA, which is our desired stated goal. 2024 is set to be a record year for Tabula across all key measures: revenue, ex TAC gross profit, adjusted EBITDA and free cash flow. On the revenue front, we're back to fast growth. Revenue is growing 33% to nearly $2,000,000,000 this year. Ex TAC is growing 25% to $670,000,000 We are reiterating our adjusted EBITDA guidance of over $200,000,000 which is 2x 2023, and we are reiterating our free cash flow guidance of over $100,000,000 also nearly 2x of 2023.

Speaker 2

On the business front, there's a lot of good momentum. 2024 is benefiting from fast adoption of our AI offerings, and we assume yield expansion this year after 2 years of softness. Yahoo! Is ramping up, already crossing the $100,000,000 mark in Q1 with a great trust and collaboration between our teams. Now as since we signed a partnership with Yahoo, many investors have asked us what is next, what will be the next Yahoo!

Speaker 2

Type partnership. And I'm very, very happy to share that another iconic consumer brand has just chosen Taboola as its partner of choice to help them grow their advertising business. I hope to share more about this very soon. On the back of our business momentum, strong balance sheet and commitment to shareholder returns, we're announcing a new share buyback authorization of $100,000,000 which represents approximately 6% of our current market cap. 2023 was going to be an investment year for growth.

Speaker 2

We're investing more than $100,000,000 a year in R and D and AI to bring users and advertisers the same amazing experience they have when they interact with search and social platforms. Every day, we're getting closer to the size of X, Pinterest, Snap and others in revenue and ad spend, and we're paving our way to becoming the very first must buy platform for the open web. As I reflect on our journey, 10 years ago, we generated just over $200,000,000 in revenue. I remember it like it was yesterday. And this year, 10 years later, we're approaching $2,000,000,000 Now looking ahead, I see 2 key themes that will allow us to achieve our financial transformation in 2024.

Speaker 2

The first one is reaching and engaging users in the open web. With the addition of Yahoo! And now another iconic consumer brand, there's a lot of momentum here. The second one is how well we can monetize our time with consumers, specifically growth in performance advertising and AI to drive yield. Now let's expand into both of these areas.

Speaker 2

Starting with how we reach users on the open web. We're seeing great momentum of publishers choosing Taboola on the back of our technology investments. We're so much more than just money to publishers as we empower the entire publisher organization, the editorial team, subscription team, audience team, monetization team and more. Publisher win rates continue to improve with terrific new publisher partners joining Taboola family from all around the globe, including A360 Media, Postmedia, Times Internet, non entertainment and more. We renewed and expanded our scope with existing publishers, including NBC News, McClatchy, Editoria Global, Prizah, Y Net and more.

Speaker 2

In the industry, we're seeing a shift of great consumer companies getting into advertising in a bigger way. This includes Disney, Amazon, Netflix, DoorDash, Uber, Walmart and more, where to some, advertising is already one of the most profitable lines of business they have. I expect that Fortune 500 CEOs will increasingly be asked to present their advertising strategy and that the advertising industry will get to become a $1,000,000,000,000 market in years to come. This is just the beginning. Now, while I believe many of these companies would try to sell directly to big brands, many would consider partnering with a technology company like Taboola to reach tens of thousands or 100 of thousands of mid funnel performance advertisers.

Speaker 2

We have an opportunity to become the advertising engine of choice to the open web. We call it advertising in a box. Signing strategic partnerships with publishers and big consumer platforms give Taboola another way to reach users and access new premium advertisers. And we're seeing it already with Yahoo! As incredible brands are starting to spend and these are the best of the best out there, names like Samsung and Verizon, Hulu, Hilton Hotels, Southwest Airlines, Citibank and many others.

Speaker 2

On the Yahoo front, I can tell you we just had an executive off-site for the Yahoo leadership, and we're focused on executing our plans this year and into 2025. Our biggest priority is demand migration of Yahoo! Omnichannel advertisers. I'm happy to tell you we're seeing good results, and we recently shared a case study of large advertisers seeing 3x in lead volume at 24% lower cost. To share some of Yahoo!

Speaker 2

Good progress, we expect Q1 revenue to cross the $100,000,000 in revenue, which is fast ramping. Beyond working with publishers, we also reached users as part of Taboola News as we bring our publishers' content to Android devices. Taboola News had a spectacular year in 2023 with revenue growing to over $100,000,000 It is still in early stages with a lot of work ahead of us, yet we expect another strong year for Taboola News in 2024. This is because device manufacturers all around the world continue to seek differentiated offerings that delight users with personalized experiences. Beyond Publishers and Taboola News, we're also reaching users with our header bidder.

Speaker 2

We're continuing to take advantage of our direct demand, unique data and AI to bid on inventory that is not exclusively ours. Microsoft continues to be our largest bidder partner, and we expect to expand our scope across our network of publishers in 2024. Microsoft made some changes to its etech platform in Q4 that impacted all etech partners they work with, including us. This had a single digit 1,000,000 of dollars impact in Q4 and a small impact to 2024, which is already included in our guidance. Now switching to the second driver of revenue growth, how we monetize time with consumers, essentially how we grow yield.

Speaker 2

Yield represents the revenue we can generate per user. For comparison, we estimate Meta makes $200 of revenue per user a year in the U. S. Snap makes $33 and we make about $3 to $4 per user a year. While I think Tabela is among the best in the open web when it comes to monetizing user attention, you can imagine how much runway we have to improve and how much better the open web can do.

Speaker 2

When we win, the open web wins. Now the open web is about $80,000,000,000 market because it uses low yield monetization capabilities invented 30 years ago, such as display banners, text ads, interstitials and more. And on top of that, only in the open web, advertisers are asked to bid using CPC or CPM, which companies like Google or Meta don't do. Now there are 3 ways Taboola will grow yield. The first one is data.

Speaker 2

This is where Code on Page being bigger and getting a large volume of clicks from the network makes us better at driving conversions to advertisers faster. The second one is AI. Deep learning is really hard to do. We've been at it for years, and this is a key element as it relates to matchmaking between users to information. And the third one is advertisers.

Speaker 2

We have 15,000 to 20,000 advertisers as of now, while Google and Meta have 10,000,000 advertisers each. Bringing more advertisers mean better diversity and personalization to offer users the ad they may like. We're seeing great momentum from XIMIZE conversions, our advanced AI bidding technology. Advertisers are seeing up to 50% boost in conversions, while maintaining their cost per acquisition or CPA, as well as some advertisers are seeing reduced CPA by nearly 20%. Let's give an example.

Speaker 2

If you sold 10 flower bouquets with Taboola and it costs you $30 to get a single customer, you can now sell the same 10 bouquets at the cost of $24 per customer or sell up to 15 bouquets at the same $30 cost to acquire that customer. Now that's selling a lot more flowers and saving more, which is great. Now as more advertisers adopt our AI and Max conversions, we expect improved retentions, essentially lower churns as well as increase in net dollar retention, NDRs, which means advertisers are able to spend more with us over time. In Q4, we launched generative AI Ad Maker, helping advertisers kick off a campaign faster. For self-service advertisers, 1 in 4 new creatives are being generated using our new generative AI.

Speaker 2

In 2024, we're focused on enhancing our data integration with Yahoo! Continuing adoption and improvement to maximize conversions as well as launching a new maximized ROAS optimization product called maximized revenue. Maximized revenue is a way for advertisers that have direct value associated with conversions like in the e commerce space to optimize their desired return on investment. I'm happy to say that with this momentum, where already 50% of our revenue is driven by advertisers who adopted Max conversions and our exciting roadmap we're back to yield growth this year. Another segment of advertisers that is helping us drive yield growth and seeing momentum is e commerce.

Speaker 2

In 2023, we've benefited from the combined firepower of Connexity, Skin Links and Taboola. We launched Turnkey Commerce, which is where we partner with publishers to establish or expand their commerce business. This is in high demand. We essentially create e commerce content, drive traffic to it and monetize it, all powered by Tubular. I'm very, very happy to say that at the end of 2023, we signed an agreement with the Associated Press, one of the largest and most trusted news publishers in the world to power its new e commerce destination using Tabula Turnkey Commerce.

Speaker 2

E commerce represents approximately 20% of ag stack, its premium revenue and we continue to see it as an important growth driver for Taboola in years to come. Now as I'm wrapping up my part, I would be remiss in not acknowledging that our industry is facing tectonic changes this year, like cookie deprecation, gen AI and the need for performance advertising in times of recession and market softness, and we are so ready. We have more code on page than anyone. We understand intent with users clicking on Taboola tens of billions of times a year. And if history is a proxy for the future, we did dwell when Apple deprecated cookies.

Speaker 2

In summary, we're coming in strong into 2024 with exciting partnerships, fast revenue growth and a strong EBITDA and free cash flow profile. We're announcing a new $100,000,000 buyback authorization. And after 2 years of build has been soft, we're back to growth as our clients adopt AI faster than any product developed since I started Tubular. With that, let me pass the call over to Steve to review our financials and outlook in more detail.

Speaker 3

Thanks, Adam, and good morning, everyone. As Adam mentioned, we had a strong end to 2023. Our Q4 revenues were approximately $420,000,000 and grew 13% year over year, accelerating from Q3 levels. Ex TAC gross profit was $169,000,000 which represented growth of 6% year over year. Ex TAC growth was driven by double digit growth in advertising spend and included a small contribution from Yahoo!

Speaker 3

In the quarter. These positive factors were partially offset by margin compression due to the ad rate declines in 2022, which have since stabilized in 2023. Net income was $3,700,000 and non GAAP net income was $31,400,000 Adjusted EBITDA was $50,100,000 representing a 30% adjusted EBITDA margin. Year over year, adjusted EBITDA was down, which was due primarily to higher excluding Yahoo! Would have been relatively flat year over year, reflecting strong cost discipline in 2023, which we plan to continue into 2024.

Speaker 3

For the full year of 2023, we finished with over $1,400,000,000 in revenue, dollars 536,000,000 in ex TAC gross profit and $99,000,000 in adjusted EBITDA. We had a net loss of $82,000,000 and non GAAP net income of $33,000,000 We also generated $52,000,000 of free cash flow in 2023, which was up 181 percent versus 2022. Free cash flow benefited from the stronger than forecasted adjusted EBITDA, which reflects the cost controls mentioned previously, partially offset by the expenses related to the onboarding of Yahoo! Inventory in the period. Free cash flow in Q4 would have been even stronger if not for the timing of some payables and capital expenditures that we mentioned were delayed last quarter.

Speaker 3

As Adam said, our strong revenue and ex TAC gross profit performance was driven by strength in our e commerce, bidding and Tubular News businesses, as well as the initial contributions from Yahoo! And relatively stable yields in our core business. E Commerce had double digit growth in 2023, driven by strong growth in advertising budgets from some of our largest retail advertisers, as well as strong momentum in Europe. In addition, we are seeing great success ramping to Bulla's feeds and now Yahoo! Supply sources for our retail advertisers.

Speaker 3

In fact, Taboola's feed supply has become a top 10 traffic source globally for these advertisers. As we have stated previously, Taboola News grew very quickly and exceeded $100,000,000 in revenues in 2023. In total, e commerce, Taboola News and Header Bidding now represent approximately 30% of our ex TAC gross profit. This is exciting because each represents very valuable forms of supply that are valued by high quality advertisers. Our teams have achieved accelerating revenue and ex TAC performance while improving cost efficiency indicated by our strong adjusted EBITDA margin exiting 2023.

Speaker 3

Operating expenses were $489,000,000 in 2023, up $11,000,000 year over year as a result of the costs incurred to onboard the significant inventory we are gaining with the addition of Yahoo! Excluding Yahoo! As I mentioned earlier, operating expenses were essentially flat with the prior year. Our headcount is down approximately 2.5% from its peak in July of 2022. With our ongoing expense discipline and our strong growth expectations, we expect that in 2024, we will approach our long term adjusted EBITDA margin target of 30%.

Speaker 3

GAAP net loss for 2023 of $82,000,000 included amortization of intangibles of $63,900,000 share based compensation expenses of $53,700,000 and hold back compensation expenses related to the Connexion acquisition of 10 point $6,000,000 all of which were excluded from non GAAP net income. Our non GAAP net income of 32 point $6,000,000 was above the high end of our guidance range. In terms of cash generation, we had approximately 80 $4,400,000 in operating cash flow in 2023 and free cash flow of $52,200,000 This includes net publisher prepayments, which were a source of cash of $19,700,000 and interest payments on our long term debt, which were a use of cash of $18,500,000 As I have highlighted in previous quarters, I would note that net publisher prepayments were a source of cash for the full year due to the fact that new prepayments were lower than the amortization of historical prepayments. Let's turn to the balance sheet. You can see that our net cash balance remains healthy.

Speaker 3

Our net cash position of 36 point $2,000,000 remained positive at the end of Q4 even after share repurchases. Cash and cash equivalents plus our short investments decreased from $250,700,000 at the end of Q3 to $181,800,000 at the end of Q4. This reflected a $50,000,000 prepayment of our debt and $32,000,000 used for share buyback activity in Q4. Cash and cash equivalents and short term investments remained above our debt principal balance of $142,200,000 Speaking of our share repurchases, I would also like to provide an update on our share buyback and debt repayment programs. The share buyback program was initiated on June 1.

Speaker 3

And as of December 30, we had repurchased over 15,000,000 shares at an average price of $3.62 for total repurchases of $55,100,000 The average repurchase price of $3.62 represented a return of approximately 30% based on our closing price on Monday. Today, we are also announcing a new share buyback authorization of $100,000,000 that replaces our former buyback plan, which was largely exhausted. We are fortunate enough to be able to fund our organic growth investments from our operating cash flow. Given that, we believe that at current valuations, the best use of our free cash flow is to buy back shares. To the extent that we have additional cash to deploy, we intend to pay down our long term debt.

Speaker 3

We did this in October of 2023, in fact, when we voluntarily prepaid another $50,000,000 of our long term debt, bringing the total debt that we have voluntarily prepaid to $141,000,000 As always, both the share repurchase program and the debt pay down are contingent upon the availability of sufficient working capital. As an Israeli company, we are also required to obtain Israeli court approval for share repurchases. Also of note, we will be filing a general purpose shelf in the coming days. We consider it good corporate hygiene for our company at our stage to have a general purpose shelf on file. Given we believe our stock is a great value at current levels and have announced a new buyback authorization today, we obviously do not intend to issue new shares at this time.

Speaker 3

I just wanted to make that make sure that was clear. Now let me shift to our forward looking guidance. As Adam mentioned earlier, in the last 12 months, we invested in technology that advanced our e commerce and Tubular News offerings, successfully launched maximized conversions and onboarded all of Yahoo!'s global native supply onto the Tubular network. 2023 was a year in which we invested heavily in these initiatives, sometimes in advance of revenue. As we look ahead, we see the following tailwinds driving outsized growth in our business through 2025.

Speaker 3

1st, we expect the Yahoo! Advertiser migration to be materially complete by Q3 2024 and to continue ramping into 2025. 2nd, we expect yield growth to turn positive in 2024. 3rd, we expect a phased onboarding of the supply from our new iconic consumer brand partner in 2024 2025. And lastly, we expect further yield gains over time as the volume of our contextual data increases with the addition of Yahoo!

Speaker 3

And other supply to our network, which will further enhance yield. As a result, we are initiating guidance for 2024 that includes strong top line growth and improving profitability. We expect revenue of $1,89,000,000 to $1,940,000,000 which represents growth of 33% at the midpoint. We expect gross profit of $535,000,000 to $555,000,000 and ex TAC gross profit of 6.56 dollars to $679,000,000 That ex TAC is up roughly 25% year over year at the midpoint. We are reiterating our 2024 adjusted EBITDA guidance of over $200,000,000 and free cash flow expectation of over $100,000,000 I will note that the adjusted EBITDA guidance represents a doubling of that metric versus 2023.

Speaker 3

Finally, we are expecting non GAAP net income of $84,000,000 to $104,000,000 in 2024. We continue to be very excited by the addition of Yahoo! To our business. Adam mentioned earlier, we feel good about the progress with Yahoo! And we expect revenue on Yahoo!

Speaker 3

To exceed $100,000,000 in Q1. For competitive purposes and due to the fact that Yahoo! Supply has been fully integrated into our broader publisher network, we will treat disclosures around Yahoo! Similarly to how we treat other major publishers on our network on a going forward basis. Finally, we are introducing Q1 2024 guidance.

Speaker 3

This quarter, we expect revenues of $387,000,000 to $413,000,000 gross profit of $94,000,000 to $106,000,000 ex TAC gross profit of $123,000,000 to $135,000,000 adjusted EBITDA of $10,000,000 to $17,000,000 and non GAAP net income of negative 15,000,000 dollars to negative $3,000,000 Let me finish by saying that we are happy with our 4th quarter performance and excited about the step change growth that we are expecting in our business in 2024. The growth investments we have made in 2023, the additional scale that Yahoo! Is bringing and the additional supply we will be onboarding as part of a new partnership with an iconic consumer brand is accelerating our journey towards becoming a must buy for advertisers looking to reach consumers in the open web. With that, let me pass it back to Adam for some closing remarks.

Speaker 2

Thanks, Steve. I've never been more bullish about Tubular, and I'm so proud of our Tubular's dedication, passion, making us a high performing company through the most difficult of times. We're coming in strong into 2024, making it a record year for us. Revenue is growing 33% to $2,000,000,000 Extech is growing 25 percent to nearly $670,000,000 EBITDA is doubling to over $200,000,000 Free cash flow is nearly doubling to over $100,000,000 And on the back of these numbers, we're announcing an authorization of $100,000,000 of buyback, essentially looking to buy 6% of our company. As I mentioned, our industry is changing.

Speaker 2

And with companies like Netflix and Disney, Uber, DoorDash, Amazon and more expanding their advertising initiatives, I suspect we are the beginning of an exciting ad menu. Taboola has a chance of becoming the partner of choice to many of them. And as I said at the beginning of our call, in addition to Yahoo! I'm incredibly excited to have just signed another iconic consumer brand that validates Taboola's advertising in a box value proposition. Our vision is to become the recommendation engine for the open web and build the very first multibillion dollar gateway for advertisers to reach publishers, OEMs and apps outside of walled gardens.

Speaker 2

Today is a good day for us. I'm excited to get 2024 going. To everyone, thank you for being part of our journey. And with that, let's open it up to questions. Operator?

Speaker 1

Thank you.

Operator

Our first question today will be coming from Andrew Boone of JMP Securities. Your line is open.

Speaker 4

Great. Thanks so much for taking my questions. Adam, as we think about yield improvements in 2024 and the inflection that you guys are expecting, can you just help us understand what the key drivers are as well as what are the products that are your key priorities in terms of improving yield over the next year? And then I want to step back and talk about a big picture question for Yahoo and Tubula. If I go back and I think about 2022 pro form a revenue of kind of that $2,500,000,000 of gross revenue, is that still on the table?

Speaker 4

Is that still kind of the roadmap as we think about maybe 2025? Or what are the puts and takes as we think about kind of that benchmark? Thanks so much guys.

Speaker 2

Sure. Thanks for the question and good morning everyone. So on the yield front, there's a lot going on. As you know, it's our number one investment as a company because we think this drive the most amount of value to our clients, our partners and to Tagoula itself in a competitive way as we're adopting and going after a new business. Let me just dive into that.

Speaker 2

2024, we're starting strong with Lex conversion already crossing the 60% adoption. As a quick reminder, Max conversion is kind of our AI that allows clients and advertisers to work with us in a similar way to how they work with Google and Facebook where they don't have to tell us what is the CPC they want to bid or what is the CPM they're looking to buy. They just give us their budget. At times, they give us their target for what is worth what is the client's worth and redo the rest. It's the fastest adopting product since I started Taboola, and it's really fantastic.

Speaker 2

We're seeing great case studies, not only from Tableau's advertisers, now also with Yahoo! Advertisers migrating to Tableau's technology. And we're publishing those case studies because we're seeing advertisers that essentially either are able to spend more or new advertisers that are turning less. And these are the really good two metrics for us to follow. Again, the flower examples on my letter, but essentially just from a numbers perspective, we're essentially seeing up to 50% boost in the amount of conversion at the same price.

Speaker 2

And in other times, we're seeing the same amount of conversions, but the price is being reduced by 20%. These are serious numbers. And also just from the client's perspective, the experience they have working with us, it's so much simpler and more easy to do than they have to do with in the Epic industry, which I would argue one of the Achilles heel of the Epic industry is that we're still working with advertisers the way we used to work 30 years ago, whereby everyone around us, mainly platforms and walled gardens, has evolved to using AI. So I want by the end of this year, really the vast majority of Tableau's business, as you know, approaching $2,000,000,000 to be using AI and CPC and CPM to be kind of a story from the past. What's coming next for us, we're going to launch in H2 max revenue.

Speaker 2

This is on top of max conversion, it's another sophisticated AI bidding strategy allowing clients that know what is the price associated with a purchase to give us that margin and revenue goals they have and we optimize for that. This is going to launch in the second half of the year, which will be additive to max conversion. GenAI is continuing to get great adoption by self-service. As you know, I love self-service. This is an opportunity to get kind of introduced to great new clients.

Speaker 2

There are a lot of times they come small, but they potentially become big. And 1 in every 4 creative titles and thumbnails And you just saw with OpenAI, they're now already the industry is talking about video creation, so who knows where that goes. But 1 in 4 creative is using Gen AI. So that's been great. E commerce is another source of bolstering our yield in 2024.

Speaker 2

You may have seen that I mentioned in the letter that Associated Press just chose to grow to launch its e commerce business. You all know time.com, you know, Advanced, also working in e commerce with Turnkey and now AP, that was a new announcement today. And all that is helping us to essentially attract new retailers and improve our basically weighted average yield across the network. Then you add data integration. We're looking to expand our contextual data segments with Yahoo!

Speaker 2

That's something that I'm very excited about, especially in the back of kind of H2 cookie deprecation. So that's also going to compound our ability to drive yield. And last but not least, more advertisers. So we're migrating advertisers from Yahoo! We expect that to be fully complete in Q3.

Speaker 2

And these are the best, the creme de la creme, best of the best. You see others, Samsung and City Verizon, these are fantastic kind of enterprise advertisers. All of those things from the technology side, the data side and the client side are compounding our yield expansion. And you may have seen also, and I mentioned that on earlier in my remarks, that after 2 years of kind of softness in yield that all of us have experienced in this industry, Tabula, we kind of assume that if nothing happens in the market, we will do better than the market. So we assume that yield is back to growth in 2024.

Speaker 2

It's in our budget. It's in our guidance. So we expect, all of these initiatives to come to fruition.

Speaker 3

And then to your second question about the $1,000,000,000 opportunity with Yahoo! The simple answer on that is yes, we believe there's more than $1,000,000,000 of value in that partnership. By the way, we did say that we expect to see $100,000,000 in revenue from the supply in Q1. So that's encouraging. That's a good step towards that.

Speaker 3

Advertisers will be fully migrated only in Q3. So that's also key to capturing the base value of the partnership. And then from there, what we expect is that the revenue will continue to grow as we capture synergies to get us to the full $1,000,000,000 value. So yes, we expect it. It will happen over time.

Speaker 4

Thank you so much.

Operator

Thank you. One moment for the next question. And our next question will be coming from Jason Helfstein of Oppenheimer. Your line is open.

Speaker 5

Hey, everybody. Just some clarification and then a question. So to be clear, so the $100,000,000 in Yahoo! That's not cumulative, that's like for Q1, correct?

Speaker 3

Correct. That's $100,000,000 on Yahoo! Supply

Speaker 5

in Yahoo! Right. And then you said the 4th quarter, obviously, it was like meaningfully below that. You're not giving the number, but we have to guess. Just repeat the language you said, how much it was like the way you described it in the Q4?

Speaker 3

We said low tens of millions.

Speaker 5

Okay. So I mean like so kind of hit the elephant in the room here. I mean if you play around with the math that means that like the kind of ex Yahoo! The business is decelerating, but like that's not really fair, right? Because at the end of the day you have certain amount of advertiser demand, there is different publishing sources, different yields you're trying to get.

Speaker 5

So just how should we all look, we're

Speaker 3

going to all kind of

Speaker 5

play with math for the next year to look at the kind of the with and without Yahoo! Impact. Like how are you thinking about that? Because I don't think you're describing the business is like slowing down. So just how do you think about like the puts and takes around bringing that inventory in kind of like the yields you get out of that versus other inventory and like should we be doing that math on the growth ex Yahoo!

Speaker 5

And then just one quick follow-up on Identity and cookies. Thanks.

Speaker 3

Okay. So I'll take that first question and it's a good question. So

Speaker 6

first of

Speaker 3

all, we're growing nearly $500,000,000 in top line revenue this year, so 33% year over year, so obviously strong growth. A good chunk of it is Yahoo! But not all of it. As you observed, the complexity of that is that Yahoo! Comes with both supply and advertiser demand.

Speaker 3

In the $100,000,000 that we just talked about, that is Q1 and that's revenue on the Yahoo! Supply. But it's a mix of Taboola advertisers and Yahoo! Advertisers. So where the top line growth comes from over time is also migrating the Yahoo!

Speaker 3

Advertisers over and growing our overall advertiser base, thanks to this really great high quality supply we have. So in order to get full growth, we need to go there. That's wave 1, and we expect to have the advertisers migrated by Q3. And then as I mentioned before in answer to Andrew's question, then wave 2 is to start to grow the synergies to get to the full $1,000,000,000 of value. So you are correct that it's not as simple as you just bring over the supply and you're done.

Speaker 3

We have to bring over the advertisers. It's more complex. So that's kind of the way to think about it. And you're right, our core business is still growing. It's just that Yahoo will take time to get to the full ramp.

Speaker 5

And then just on Identity, you've talked in the past that you're not dependent on cookies and so folks should be less concerned about kind of where we go from here. However, there's going to be more identity metrics that obviously are going to be adopted and coming to the market on 3rd party metrics. Like can you use those metrics to drive kind of even more yield even though you don't need to use identity? Thanks.

Speaker 2

Yes. I mean, I think we'll take the right thing about it is, from a downside protection in terms of risk that companies might have, we believe the risk is mitigated for two reasons. 1, we have the past with Apple deprecated cookies in 2020 and we did well. In fact, we actually accelerated yield. So that's good.

Speaker 2

And the second thing is that we have a large amount of first party cookies today as we store we reach 600,000,000 people a day and people click on to pull up tens of billions of times. So we think we have a good kind of setup for cookie deprecation. So from the way I think about it is we can do well and potentially even grow because again in the past other demand came to us when it couldn't find other channels and we were a good channel to spend money on. If there's anything in the market that can accelerate that even further, we'll take it. I just don't personally, I feel comfortable because we don't need any new solution to do well.

Speaker 2

I think we have what we need to cross that bridge successfully to our publishers and advertisers. And again, just as a reminder, the vast majority, about 90% of our revenue comes from clients who buy from Taboola Direct. No problematic, no agencies, which means that we have pixels on their pages. So when someone moves from our publishers to their pages, we know we drove that conversion. So that's why we don't need 3rd party cookies to demonstrate value to clients as they buy from us.

Speaker 2

This is a fundamental point. There is potentially even further upside to yield, but the downside is mitigated.

Speaker 7

Thank you.

Operator

Thank you. One moment for the next question. Our next question will be coming from Laura Martin of Needham and Company. Your line is open.

Speaker 8

Good morning, you guys. My first one is on political. So globally, there's a really strong election cycle going on in 2024. And can you remind us how that impacts your impression growth and your readership and how that flows through to revenue in a political year please? And then I'll ask my second one after you answer that one.

Speaker 2

Good morning, Nora. Thanks for the question. Hey, it's up. So, we the way we think about it historically, we did see some bump in kind of demand coming on political season, but especially from video with some more kind of increase in video demand in our guidance and where we kind of like manage the business, we don't assume that is coming. So we kind of want to be conservative in terms of what might happen.

Speaker 2

There's also potentially acceleration in traffic because there's more viewership and things of that nature. Again, we don't assume those things as a material kind of like financial benefit to us. But historically, we did see some nice bumps. But again, nothing too significant that we would like to sort of embed in our planning.

Speaker 8

Okay. So that's an upside driver because it's not in the numbers. It's helpful. By the way, they're talking about $17,000,000,000 of spending in the U. S.

Speaker 8

Alone. So I think it might be a bigger political year than people than your historical lift. That's good. The second question I had for you, Adam, is I'm really curious as you bring over these new types of advertisers that Taboola has never had with Yahoo! Like Verizon and Citi and these big enterprise high quality branding customers.

Speaker 8

Does that, interested in what kinds of challenges or what kinds of things they need that your historical advertisers have not? And secondly, does it give you a new product ideas? When you think about product roadmap? Are there things these types of advertisers are asking for that could sort of, if you develop them could really forever accelerate the trajectory of revenue growth of Tubular. What's your point of view on that?

Speaker 2

Yes. This is it's such a good question because we obviously, this is a very new type of segment of clients that get introduced to Taboola. Most of it right now is on the Yahoo! Side, right? Like we're filling that incredible kind of publisher with a mix of Taboola and Yahoo!

Speaker 2

Advertisers. But what we're seeing is, 1st of all, they really appreciate the technologies we can bring to table. So they're adopting Max conversion, our pixels, and these are new things to them. And it allows us and our account managers to and I sit a lot of our account managers almost daily to see the graphs and to see the trends. And these are really good trends, both in terms of increase of budgets and performance as it relates to conversion rates and CPA.

Speaker 2

So it's early days, it's only $100,000,000 So it's still early days, but I'm seeing really good things and they're very happy. So these clients want to spend time with us and the Yahoo! Team and this is all good beginning. Where I think it's going is this potentially will allow us to develop new formats and kind of new experiences that those clients are used to getting either historically from Yahoo! Or on other channels.

Speaker 2

And I think that might open up a whole new way users would experience sponsored content and ads on its own network, as well as in Yahoo! Over time. So I would say, stay tuned for potential UX innovation and formats and experiences that those brand advertisers are looking for that we are yet to offer. So I do think they might make us even better, those clients. And we try to be humble.

Speaker 2

We're learning. We're asking questions. And we're spending time with them. But I'm excited mainly by the performance. That's the most important thing.

Speaker 2

But I'm sensing they would like us to further develop the way we present ads on the open web and that might affect not only our relationship with Yahoo! But further how we render ads across our entire network, Disney and NBC the rest of our great partners.

Speaker 8

Thanks very much.

Operator

Thank you. One moment for the next question. Our next question will be coming from James Kopelman of TD Cowen. Your line is open.

Speaker 7

Good morning. Thanks for taking the question. The first one is for Adam. In the letter you referenced the amount of contextual data that Taboola has for AI and deep learning. Can you talk about how you view Taboola's growing data set as a differentiator when it comes to training AI and leveraging generative AI over time?

Speaker 7

And then I have a follow-up for Steve.

Speaker 2

Yes. Sure. So as it relates to just the amount of data we have, I think the most important thing, and I speak a lot about becoming the must buy for the open web. And what I mean by that is, it's a matter of how big is your actually gross revenue and your spend, because this is a good proxy for how relying advertisers become on you, because you're big enough that it's worth their time to spend money with you. Because again, I think today the ad tech industry is a bit fragmented or too fragmented for advertisers to rely on you.

Speaker 2

And I'm looking at companies like Snapchat and Pinterest and X, it's in the $2,000,000,000 to $4,000,000,000 range. And now we're getting into that range. So I think, 1st of all, the most important thing to become a must buy is growing revenue and become get that flywheel going so that advertisers want to work with you and it's worth your time. 2, the footprints we have and the code on page Jibla has, I would argue is probably the largest in the open web or in the world. I don't know of any company that has first party relationship with publishers like Taboola at our size, which really gives us first party access to everything that takes place on the page from context to scrolling to clicks to purchases to things of that nature.

Speaker 2

And I think that's growing exponentially obviously with Yahoo! So this is the I think one of the most important assets the company has, which is code on page exclusively for long term. And this is what gives us also predictability as a business to know that we don't expect any big shift one way to the other. And then as we look into GenAI, I think it's important to kind of reference what exactly is GenAI can do to the market. JAI eventually is going to be a technology that is available to everyone.

Speaker 2

What's going to make a difference from one company to the other is really the amount of data and the type of data you can prompt into the engine so it can get better outcome. So as an example, when an advertiser comes to Taboola and says, suggest thumbnails and titles for me, we are able to say, well, we've seen let's take an example, an insurance client comes to Taboola, we're able to say, we've seen $1,000,000,000 of insurance spend over the last few years and we can pump that into the engine. And then we're getting really great kind of authentic and new original titles and thumbnails we can suggest to the clients. So I think what makes us special here is the amount of data we have, our size. And this is also why I love the Yahoo!

Speaker 2

Partnership. And as I mentioned in the letter, there's another iconic consumer brand that is signed and starting to roll with us. All of those will give us more data to prompt into the Gen AI. And we have a senior person leading Gen AI to BOLA now. And I can tell you we're working on very exciting things because I believe that the biggest opportunity Gen AI has to the advertising industry is to simplify the experience of Binance.

Speaker 2

Today, it's very, very complicated to succeed. I think Gen AI can make it really simple. So what's to come is our unique data into Gen AI and producing special creative that others don't have.

Speaker 7

And then for Steve, high level, how should we think about the seasonality of both gross revenue and X TAC in 2024 given the various moving parts around Yahoo! The new unnamed publishing partner and your typical historical seasonality? And then finally, just want to ask about OpEx efficiencies.

Speaker 3

What are some of the ways that you're able

Speaker 7

to limit headcount increases this year even as you scale? Thank you.

Speaker 3

So in terms of the seasonality, so Yahoo! Is like a very large publisher in our traditional core business. So I think their seasonality is very similar to our historical pre Connexity seasonality. So that's the way to think about adding them to our network. As a company, as you know, we've become more and more 4th quarter dominated because of our e commerce business in particular.

Speaker 3

And this year, obviously, with the bringing on Yahoo! Over the course of the year, we'll be more back half loaded than usual as well. But generally, the way to think of seasonality with Yahoo! Is it's like a large publisher and they have very similar seasonality to other large publishers. They're number 1 or number 2 in news, sports, finance, and that is pretty much what the kind of core of our base is.

Speaker 3

So that's the way to think about seasonality. In terms of OpEx and how we control headcount here, I think we've shown pretty good cost discipline over the course of last year. I mentioned in my prepared remarks that our OpEx for Q4 and in fact for all of 2023 would have been flat year over year, except for the hiring that we did for Yahoo! To support that. I would expect that our 4th quarter OpEx base is probably going to be similar to what it is the rest of this year.

Speaker 3

There may be a slight increase as a result of some additional hiring that we have to do for Yahoo! But we're really working on kind of keeping a lid on costs. And the way we do that is we find efficiencies and we find ways to leverage the people we have to do more. Frankly, we're using generative AI and other AI tools internally now to generate productivity and to improve things. So a great example of that is exactly what Adam talked about.

Speaker 3

Historically, our account managers who support our advertisers used to spend a lot of time helping the advertiser figure out like what's a good headline, what's a good creative or image for this ad. Now we have generative AI tools that help them do it, can generate a dozen of them instantly, whereas it used to take a lot of thought and a lot of time to come up with a dozen. So it's all about productivity, finding ways to leverage your people across more accounts, I think we're doing a pretty good job on that.

Speaker 7

Great. Thanks guys. I appreciate all the color.

Speaker 3

Thanks James.

Operator

Thank you. One moment for the next question. Our next question will be coming from Dan Day of B. Riley Securities. Your line is open.

Speaker 3

Yes. Good

Speaker 6

morning, guys, and thanks for taking the questions. So this iconic consumer brand that you've mentioned here, possible to say whether it's a traditional open web publisher that you typically partner with, but maybe on a bigger scale. So you feel like it's worth specifically calling out or maybe like a new type of partner? I'm thinking something like a retail media network or a company maybe new to the advertising business or something along those lines. And then if there's any prepayment or anything else that could impact cash flow associated with this publisher win?

Speaker 2

Yes. We can't say the name. It's not a traditional publisher. So it's an iconic brand that signed and rolling out with us. I don't think we can mention the name, but I hope we can mention that soon.

Speaker 6

Okay, great. So question, it seems like every week for since you last reported, we're hearing about layoffs at open web publishers, how much this industry is really struggling to survive for a lot of them, especially how they're struggling to generate traffic of search and social and anywhere near the levels they have in the past. So given you're in part dependent on them generating traffic their properties, how do you think about that as either a headwind and opportunity for you to help them through these struggles?

Speaker 3

Sorry, Daniel, I missed part of that question. Can you give it to me again?

Speaker 6

Yes, yes. Just generally like open web publishers are struggling, a lot of them going through layoffs and struggling to generate traffic. So just how you think about your role as an ad tech partner here in helping them continue to generate traffic and what you can do there?

Speaker 2

Sure. So I can take this one. So overall, on our network, we're not seeing any material impact today. I think also many of our publishers are enterprise big publishers that have a lot of direct traffic. So to date, we haven't seen any material impact.

Speaker 2

And then also, I think this is an opportunity for us because the way we approach working with publishers, it's really the most strategic level whereby they're able to use our Homepage for you to drive Homepage personalization. They're able to use our e commerce business to drive kind of diversification of revenue subscription. And we have Match AI to help them kind of personalize a page once user lands on it. And I think if you're a publisher, especially if you're a senior person on the publisher side or a senior product manager, when you think about who do you want to work with, you just want to make sure that you can work with companies that can drive audience growth, because you're concerned about that going down. You want to make sure to work with companies that can increase your engagement with consumers and then as well as kind of like your ARPU or your lifetime value.

Speaker 2

So I think this is such an important differentiation we have. I can tell you, I just had a call a week ago with a fairly big publisher from the CEO. And the CEO asked me, what about Toulouse News? Are we getting Toulouse News as part of the deal? And I said, well, of course.

Speaker 2

And I said, but we have to work for a long time because we can't just put people on and off. And the entire conversation was about added value. It wasn't about CPMs. It wasn't about yields. It wasn't about guarantees.

Speaker 2

It wasn't about register. It was about other things publishers are thinking about. So this is, to me, such a fun part of my job as well as an exciting moment that publishers want to work with us because all the technology investments we make beyond just money.

Speaker 3

So Daniel Okay,

Speaker 6

great. Just

Speaker 3

to Yes, I guess back to your first question about the iconic consumer brand, I checked with our PR folks and what we're allowed to say is we were selected by Apple as an official advertising partner for Canada and Australia at point. So I think that's what we're allowed to say.

Speaker 6

Okay, awesome. Yes, good to hear. Thanks, guys.

Operator

Thank you. One moment for the next question. Our next question is coming from Justin Patterson of KeyBanc. Your line is open.

Speaker 6

Great. Thanks for the question. I just wanted to up level the conversation a little bit around these bigger brands that are opening up like Yahoo! Originally and then now Apple in there. It seems like this is just a new opportunity for Taboola, how are a lot more of these bigger brands?

Speaker 6

I guess, one, just what's really changed around that? Was it just Yahoo! That opened this door over the past year? And then 2, as you've gone through Yahoo! How should we think about just the incremental investment to support more of these brands win more business and scale up over time?

Speaker 6

Thank you.

Speaker 2

I'll start to do Ken. First of all, I can't believe the CFO was able to bring the news about Apple and not me. But we're not Steve. We're going to have to talk about this afterwards. But it's obviously, we're very excited about Apple Children's Duo into this exciting market.

Speaker 2

So to your question, I think to me what's fascinating is that you can already see companies like Amazon and others speaking about advertising being the 2nd or third line of EBITDA they have. So the trend is that advertising is going to become a $1,000,000,000,000 market. And I believe board members of all Fortune 5 other companies are going to ask their CEOs what is your advertising strategy because it's too big. And if you reach consumers, it cannot be ignored. Not only that, it can be a fantastic, if not one of the most lucrative growth engines for Fortune 500 companies all around the world.

Speaker 2

Now I think the way it's going to pan out is that many of these great companies would want to sell directly to the top of the market. They would like to build relationship with enterprise accounts. However, there are 2 things that would be missing. One, it's unlikely they're going to sell to tens of 1,000 or 100 of 1000 performance mid funnel advertisers. And the second thing is that it's unlikely they'll develop a technology that is able to use AI and data and match make between users and ads in a way that works for advertisers continue to buy.

Speaker 2

And this is exactly I think where Taboola has an opportunity, which I'm very excited about. I mean, I never knew I never thought few years ago we'll be in a position when we announced a $1,000,000,000 partnership with a great company like Yahoo! And now, Steve stole my thunder, but now Apple chose Taboola. And I think this potentially can become an opportunity for the company to kind of be this ad engine or call it advertiser in a box for all these companies that say, well, we should get $1,000,000,000 or more from the advertising space. So I'm excited about it.

Speaker 2

This is more than I ever thought will happen. But I do think it's happening. And again, we're seeing exciting partnership Pinterest with Yahoo! Netflix with Microsoft. This is really a whole new beginning in my opinion.

Speaker 2

And I hope we can play a big part of it.

Speaker 3

In terms of incremental

Speaker 6

Sorry. No, go ahead. Sorry, Steve. Yes.

Speaker 2

In terms

Speaker 3

terms of incremental investment required to support these types of partnerships, I guess what I would say is the reason I think we're winning some of these great partnerships is because we have invested so much in our performance advertising capabilities. And while I think we have a long ways to go, I still consider us in the early innings here in terms of being great. We are world class at it and I think that's what helps us win these partnerships. Obviously, every partnership we do of significant scale has some unique requirements. Yahoo!

Speaker 3

We're definitely learning from their as Adam mentioned earlier, we're learning from their advertisers things that they would like, maybe they got some of it from Yahoo! Previously, maybe there's new things we're learning that they would like that they never got from Yahoo, but we could do. So yes, you always invest something in terms of building capabilities for any large partnership, but it's all part of kind of our core business. Like as Adam said, we're learning from these advertisers things that they want, we're investing in it, that will impact and positively impact all of our business, not just that partnership. So while there's investment, it's basically just a way to advance your business.

Speaker 3

And it's true of all these partnerships that we're signing.

Speaker 6

Got it. Thank you both. And from what it's worth, Adam, you still brought the thunder

Speaker 2

there. Thank you. Thank you, sir. I appreciate that. I mean, we still get a review after this, but thank you.

Operator

Thank you. And this does conclude today's conference call. You may all disconnect.

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Key Takeaways

  • Taboola closed Q4 2023 with ex-TAC gross profit of $168.5 M (+6% YoY) and adjusted EBITDA of $50.1 M (30% margin), driving full-year free cash flow of $52.2 M (3× growth, 50% EBITDA conversion).
  • For 2024 the company is forecasting a 33% revenue increase to ~$1.9 B, 25% ex-TAC gross profit growth to $670 M, and a doubling of both adjusted EBITDA (> $200 M) and free cash flow (> $100 M).
  • Rapid adoption of AI products—Max Conversions (60% advertiser adoption) boosting conversions up to 50% or cutting CPA ~20%, generative AI Ad Maker (1 in 4 new creatives), and upcoming Maximize Revenue tool—is expected to drive yield expansion after two years of softness.
  • The Yahoo! partnership is already generating over $100 M of Q1 revenue, with advertiser migration targeted by Q3, and Taboola has also signed an undisclosed iconic consumer brand and was named an Apple advertising partner in Canada and Australia.
  • Taboola is broadening its open-web footprint via publishers (e.g., NBC News, Associated Press), Taboola News (> $100 M 2023 revenue), and header bidding with Microsoft, positioning itself as the ad engine of choice outside walled gardens.
AI Generated. May Contain Errors.
Earnings Conference Call
Taboola.com Q4 2023
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