Outbrain Inc.

Good morning, and welcome to Outbrain's third quarter 2021 earnings conference call. Today's call is being recorded, and we have allocated an hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Jason Kiviat. Please go ahead.

Good morning, and thank you for joining us on today's conference call to discuss Outbrain's third quarter 2021 results. Joining me on the call today, we have Outbrain's co-founder, Co-CEO, David Kostman, and CFO, Elise Garfalo. During this conference call, management will make forward-looking statements based on current expectations and assumptions. These statements are subject to risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. These risk factors are discussed in detail in our form thank you for the quarter ended June 30th, 2021, filed with the Securities and Exchange Commission, as updated in our subsequent reports filed with the Commission. Forward-looking statements speak only as of the call's original date, and we do not undertake any duty to update any such statement. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's third 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. With that, let me turn the call over to Yaron. Thanks, Jason.

We're very excited with our Q3 results, which exceeded the high end of our guidance on the key metrics. We achieved this while staying very focused on our core business. David and Elise will cover our results in more detail shortly. Over the past quarter, we had the opportunity to meet with a large number of investors. Based on the feedback and questions we got in those meetings, I want to talk today about three themes that came up from several investors. First, Outbrain's place in the broader ad tech ecosystem. Second, quality of recommendations. And third, the impact of privacy changes like those in iOS 14. Kicking off with the first topic, where does Outbrain sit in the ad tech ecosystem? We view ourselves as an operating system of sorts for publishers and other media owners that currently monetize through ads. How is an operating system different from most of ad tech? Here are a few ways to think about it. First, ad tech occupies leading placements on the page. In contrast, Outbrain typically powers the entirety of the media owner's feed on all of their pages, videos, and apps. Second, ad tech typically bids for each ad placement and only serves the ad if they win that particular bid. In contrast, Outbrain is typically chosen as the exclusive feed partner for two to three years at a time. Our top 20 partners have been using us for seven years on average, giving us strong predictability and visibility. Third, ad tech's sole value to the media owner is in the payment they make for each ad they serve. In contrast, Outbrain delivers significant value to the media owner on top of the ad monetization. For example, about half of the links we serve on publishers are what's called organic links, pointing to other stories and other videos within the same publisher. Those do not currently generate any direct revenue for us, but they do generate significant value for our partners, which is a big reason of why Outbrain is so sticky with them. An even better example is a product called audience campaigns. This product, which is part of our operating system for media owners, allows them to use their feed real estate for driving their company's diverse business goals. For example, they can use audience campaigns to drive more user subscriptions or to hit their commitments to brands for sponsored content viewerships. To summarize, while we generate our revenues like Facebook and Google via ad monetization, the characteristics of our business are very different from most of ad tech. We power the entirety of the media owner's feed, we do it for multiple years, not fleeting impressions, and we deliver to our partners significantly more value than just the ads themselves. Our focus has always been on how we can deliver the most added value to media owners with products like audience campaigns. And that's an area we plan to focus on even more in the future. The second topic I want to talk about is quality. A few months ago, we announced our most significant algorithmic effort in recent years with the new algorithm called Quality Rating. As the name implies, this algorithm change is focused on quality of the ads and recommendations. There are two main reasons we're investing in this new algorithm. First, we believe that our three constituencies, media owners, advertisers, and users, will all benefit from the improved quality of the recommendations in the feed. Specifically, brand advertisers have been indicating that they would increase their spend on outbrain-powered feeds as the quality of recommendation improves. Second, we view this as a potential driver of yield growth by expanding the reach of users who engage with outbaring recommendations. Historically, our algorithms have been very tuned for maximizing user engagement, and they did so by giving the most consideration to actual engagements or clicks, while hardly giving any algorithmic attention to those silent audiences who don't tend to click on recommendations. But those silent audiences are roughly 95% of those exposed to outbrain recommendation. And it's a huge yield opportunity for us to be able to better address even a small percent of those. We're currently working with two major US publishers on the launch of the first phase of quality rating. This is the groundwork for soliciting quality signals from about a third of their desktop users. When we announced quality rating, we said that we will gradually roll this out well into next year in order to allow media owners and advertisers to adjust to the changes and ensure their expected ROI from Outbrain is not negatively impacted during the transition, like they sometimes experience when Google or Facebook made algorithmic changes. We will obviously keep updating on this area in future calls. Another topic relating to quality is the placement of the feed. There's this common myth we hear often about ads above the fold being of naturally high quality and therefore more desirable quality, while ads at the bottom of the page are viewed as less desirable. The reason we chose to focus in our early days so intensely on the end of the article placement is that it's actually, in our view, among the best real estate from a user engagement point of view. At the top of the page, we've found that most users ignore all the ads. Outbrain is primarily a CPC or cost per click based company. And just like Google search on most of our ads, we only earn money when the user finds it interesting enough to click and engage with the ad. Cost per click is the model that typically delivers the best return on ad spend for advertisers. That said, expanding into new placements on the page is an exciting incremental growth opportunity that we are pursuing because it is valuable to deepen our relationships with publishers and have a diverse inventory for different advertiser needs. David will talk more about this. In the long run, we believe it's more likely for high engagement partners like Outbrain to expand to other placements like MidArticle than it is for low or no engagement companies to expand into content recommendations. The third and final topic I'll cover is the cookie deprecation and IDFA ATT changes in the iOS ecosystem. Now, we've all seen the massive hits that companies like Snap and Facebook have taken in their mobile ad revenues due to the changes made by Apple. What's important to understand is that those companies that were hardest hit are those whose monetization happens primarily within the native iOS app environment. We believe that Outbrain is very well positioned for these changes, While two thirds of our business is mobile, only about 4% of our revenue is generated within iOS native app environments. In addition, we've always relied on our contextual targeting capabilities and the first party data that we have from powering the feeds on so many premium publishers. Both contextual and first part data are proving to be very effective. Companies like Facebook rely heavily on PII, personally identifiable information, to profile users and then retarget those users with ads across different apps. Our brain has no PII and has never had any. Therefore, our contextual and other technologies that do not rely on things like IDSA have been able to nicely compensate on yields for whatever impact it may have had. As our industry is a very dynamic one that constantly poses new opportunities for us, I will keep updating you on topics such as privacy, quality, and other areas where we see exciting opportunities. And with that, I'd like to hand things over to David, who will cover our Q3 results.