Outbrain Inc.

Greetings and welcome to Outbrain Inc. First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, the conference is being recorded. I would now like to turn the conference over to your host, Jason Kiviat. Thank you, and over to you.

Good morning, and thank you for joining us on today's conference call to discuss Outbrain's first quarter 2022 results. Joining me on the call today, we have Outbrain's co-founder and co-CEO, Yaron Gilad, co-CEO, David Kaufman, 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 10-K, filed for the year ended December 31st, 2021, and the subsequent reports filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the call's original date, and we do not undertake any duties 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 first 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 David.

Thanks, Jason, and thank you all for joining us. In Q1, we delivered against the guidance we provided. At the same time, we are seeing, like many companies in our industry, softness in demand, especially in Europe, which accounts for around 40% of our business, and to a lesser extent in the U.S., where some of our advertisers are impacted by supply chain and macro issues. As a result, we are lowering our guidance for the year. We continue to be very bullish on our positioning and the market opportunity. We are continuing to expand our media supply network and gain market share and are thrilled to announce the development of a new initiative to greatly increase strategic value to media owners while generating an entirely new SaaS-like revenue stream for Outbring. It's called Keystone, and Yaron will be elaborating on this shortly. Let's turn to Q1 results. Lapping a very strong Q1 last year, our extra gross profit was up 5% or 8% on a constant currency basis, to 63.5 million, in line with our guidance. And our adjusted EBITDA of 11.6 million exceeded the guidance we provided. On the media owner side, Q1 was an exceptionally exciting quarter for us. At the end of March, one of Europe's largest publishers, Axel Springer, announced the results of the RFP for the recommendations partner across the flagship properties, built in VELT, as well as several other properties reaching hundreds of millions of unique users. They chose to return to Outbrain after seven years of trying a competitive solution, signing a multi-year, multi-hundred million dollar deal with us. Continuing along this trend, Sankei Digital, one of Japan's largest digital publishers, chose Outbrain to exclusively power recommendations on Sankei's major news sites and sports sites. We had been working with Sankei on several of their properties for several years, and we were honored to take on the major share of the business, again, replacing a competitive solution. On top of these announcements, we renewed and expanded several of our top 20 partners in the last two quarters and added several hundred new media properties. This momentum of supply wins comes from our relentless focus on delivering results for our media partners and partnerships that they can count on. At the end of March, we also started benefiting from the shift in the Microsoft Open Exchange marketplace, with Microsoft moving other partners that up to this point had exclusive and preferential access to some inventory to become real-time bidders. We believe this shift will continue to benefit us relative to other players in view of our multi-year experience in Microsoft's Open Exchange environment and the strategic nature of our partnership with Microsoft. On the product front, we continued to deploy SmartLogic on mobile and now also rolling it out to desktop and continued the wins of our header bidding integrations for in-article placement across tens of partners, adding even more supply to the expansion of existing partnerships. While these exciting wins tell the story of great momentum, this growth in new supply comes combined with slower demand and some blocking of all ads on certain war-related pages in Europe. Let me move to the demand side. Due to a volatile macro environment, supply chain challenges, and the war in Ukraine, we are experiencing headwinds, especially in Europe. We saw demand softness across the board, but particularly from brand advertisers in Europe, resulting in lower RPMs. We anticipate these external factors to continue to have a negative impact on advertiser budgets and are shifting our focus away from segments such as automotive and CPG to segments less impacted or that are recovering, such as health, financial, and entertainment, leveraging the nature of our diversified advertiser base. I want to take a moment to focus on a key aspect of our business. Outbrain is a two-sided marketplace. And like all two-sided marketplaces, for example, Uber, Google, Airbnb, it's paramount to constantly balance supply and demand. In our business, the supply usually adds up in step changes when we add big new partners. And then over time, the advertisers add incremental budgets. It's a dynamic we know very well from a decade plus of running our marketplace. And it has behaved this way in the past, sometimes faster, sometimes slower. Our growth on the supply side is solid. The demand side, however, especially in the EU, where we grew a lot of supply, is being impacted by the macro environment, causing the demand to not grow in regular sync with the size of our growing supply. This dynamic is impacting our yield in the short term as the demand is being stretched over this expanded supply, but is expected to turn into a strong growth driver when more demand will be unlocked, For example, recently we observed similar dynamics that contributed to growth in the second half of 2020 post-COVID. Turning to the acquisition of video intelligence. We closed the acquisition of VI in January, and in Q1 we were mainly focused on integration and started introducing the contextual video solution to Outbrains publishers. Since the acquisition closed, we brought the VI solution to more than 15 Outbrain publishers. I'm extremely proud of the team's work in face of the tough challenges, since some of the VI engineering team is based in Kyiv. I'm happy to update that our whole team is safe and engaged, mostly working from remote locations, and very appreciative of the outpouring of support from their colleagues. We wish for our colleagues an imminent conclusion to the fighting. I would like to refer to the revised guidance Elise will be providing. We are taking a cautious approach in view of the uncertainty in the market and the negative short-term trends we are experiencing, which are impacting run rates, driving our models. Therefore, we are reducing our extra guidance by around 15%. These are volatile times, but we view them as temporary phenomena and have successfully navigated through such turmoil before. We are investing in our key growth drivers and winning market share. We believe that our algorithmic improvements The growth of supply one in Q1 and the rollout of smart logic will be key drivers of future growth. We believe in the long-term growth of the category in general, especially in a more privacy conscious and regulated environment that favors native and contextual advertising solutions such as ours. We remain committed to profitable growth. We've made significant investments in people. For example, we grew our product and engineering team by more than 25% year over year. We've taken some efficiency measures once we identified the weakness towards the end of Q1 and will continue to monitor the progress of the year to decide on how to best balance high confidence investments with profitability. As you will see in Yaron's comments, We're also strategically broadening our solutions for media owners, and I'm very excited about the new platform and business model we've been investing in. We believe this investment, combined with smart management of our strong balance sheet, will serve our shareholders well. Leron?