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spk20: Good day and welcome to the Outbrain second quarter 2023 earnings conference call. All participants will be in the listen-only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, Please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to the management team. Please go ahead.
spk29: Good morning, and thank you for joining us on today's conference call to discuss Outbring's second quarter 2023 results. Joining me on the call today, we have Outbring's co-founder and co-CEO, Yaron Ghalai, co-CEO, David Kossman, and CFO, Jason Kivyat. 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-K, 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. Forward-looking statements speak only as of the course 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 second 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, and the news and events. With that, let me turn the call over to David.
spk08: 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 across multiple strategic fronts. Also, as you will hear, we are innovating at a great pace, leveraging AI and other technologies. We are pleased to report a solid second quarter in which we achieved $54.6 million in extra gross profit, representing 5% sequential quarterly growth and reaching the high end of our guidance, and adjusted EBITDA of $3.5 million, exceeding the high end of our guidance. In what 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 through a product and technology-led strategy. I want to start with ONIX. Last quarter marked an exciting milestone for our company with the launch of ONIX by Outbrain. 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. From building brand awareness and consideration all the way to customer acquisition. ONIX 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 three times. This is according to Gartner data that breaks down budget allocation between performance marketing, brand building, consideration, and loyalty. So what is ONIX? What makes it unique? ONIX 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, ONIX goes one step further to maximize user attention, which has been proven to drive business impact. 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 ONIX 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 ONIX 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 DAX's UK for Ford. We used a custom ONIX ad experience called Hybrid that combines both video and display assets into an interactive ad experience. The results exceeded our customers' expectations, with Adelaide putting the campaign attention score 30% higher than the benchmark. We continue to experience higher performance than the Adelaide benchmark on our Onyx campaigns. This is a powerful testimony for how Onyx is successfully winning user attention and, as a result, driving stronger brand impact for advertisers. ONIX is now available for enterprise brands and agencies in the US, UK, Germany, France, and Italy, and will be launched in other markets later this year. We've run ONIX campaigns in these markets for premium brands like Visa, Porsche, Mattel, iHeartRadio, Opel, Alfa Romeo, and others. Our pipeline is building, and we expect to generate double-digit millions of dollars of revenue from ONIX already in H2 of this year. Just as a side comment, while ONIX is great for brand advertisers, it's also extremely strategic for our relationship with publishers, helping us elevate quality and user experience, which has been one of our key differentiators and factors in winning premium supply deals. And ultimately, it helps deliver even more revenue to our publisher partners. Moving to the general marketplace advertising results. On the revenue side, we think stabilization in the market with positive signs of growth in the last two 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. 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, Zementa is our in-house performance DSP. Unlike traditional DSPs that focus on streamlining media buying for display and video on a CPM basis, Zementa 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 advertising. Moving to the publisher side, where we entered into several new exclusive long-term partnerships in Q2, including TMZ, Washington Times, The Messenger, and others. On the device or platform side, we established a partnership with Disqus, a commenting platform, and started ramping up our placement in Samsung devices through our partnership with Upday. 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 US, Burda in Germany, CCM Benchmark in France, and Hearst Italy. So overall, we're very excited about the launch of our strategic branding platform, Onyx, that we believe will further strengthen our position in the open web as the quality partner for premium publishers and the full funnel open web partner for all types of advertisers. We're encouraged with a 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 extra gross profit and adjusted EBITDA. I'll now hand it over to Yaron.
spk19: Thanks, David. Today I'll cover three areas, an update on Keystone, an AI update, and more detail on what we're doing on ONIX 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 Sunkei from Japan, among others. 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&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's show, publishers have been loving this. My second topic is AI. On the last quarterly call, I updated that we've 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 call, I mentioned that about 50% of the automated AI headlines that advertisers were using were then originating from our ChatGPT integration. That was a long three months ago, which is decades in AI terms. Our successful integration and launch since then has now grown to be 100% of the automated headlines that we suggest to advertisers within our product, which are now coming from ChatGPT. In addition to the speed, scalability, and cost efficiencies resulting from these generative AI capabilities, we're also seeing that the ChatGPT 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 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 Spanish, Portuguese, Japanese, French, Italian, and Dutch. In parallel to these upgrades to our advertiser product, I'm also happy to update that we've now integrated the ChatGPT GenAI 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&D and business operations. As examples, we've deployed the use of Microsoft's GitHub Copilot, which is an AI assistant for coding, across our engineering teams. And we've built our own AI bot based on ChatGPT for automatic code reviews and flagging of issues relating to security and privacy compliance within our code. Moving from generative AI to our ad serving algorithms, which have been AI-based for several years. During the first six months of the year, we've deployed new and improved AI algorithms, which have so far resulted in a 4.3% improvement in CTR potential based on our internal A-B 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 our brand is at the forefront of the AI revolution. Switching gears to Onyx and attention, I believe that the world of brand advertising on the web has evolved in three 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. During this past decade or so, brands got smarter and no longer wanted to pay for ads that were never even viewable by a human being. 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 ad break will still count as 100% viewable and the advertiser pays for full cost. So we're now at the very beginning of the third big era of brand advertising on the web, and that is the era of attention. 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 newsfeeds 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're typically looking at an ad placement and deciding in a binary way whether that ad placement is viewable or not, or whether it's high attention or not. They're placement-based systems and not user-based systems. Our brand's huge advantage is that we deeply understand the user's interest of the roughly 1 billion people we serve each month. Through the news feeds we power 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 that 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. Our 15-year head start in understanding users' interest in personalization combined with this industry shift to the era of attention is the reason we're so excited with the timing of Introduceionics. And with that, I'll hand it over to Jason to cover our financials.
spk15: Thanks, Jeroen. As David mentioned, we beat our Q2 guidance for adjusted EBITDA and achieved the high end of the guidance range for expat 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, and we're cautiously optimistic about the outlook for the back half of the year. Geographically, Europe has shown stronger signals of demand recovery than the U.S. Revenue in Q2 was approximately $226 million, a decrease of 10% year-over-year. New media partners in the quarter contributed 12 percentage points, or approximately $30 million 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 an optimizing serving cost. Additionally, we continue to see a headwind from the impact of the demand environment on yield. Our churn remains low by our standards, and our three largest churns year-over-year contributed just approximately four total points of net revenue retention headwind in Q2. As another data point, our low growth retention remained around 95% for all partners that generated at least $10,000. XTAC growth profit was $54.6 million, a decrease of 8% year-over-year, driven primarily by the revenue declines. A slightly lower year-over-year decline in expect gross profit as compared with revenue is the result of largely offsetting impacts of revenue exchanges and better performance on certain media partners, which led to an improvement in margin. For both revenue and expect gross profit, currency fluctuations did not have a material impact on year-over-year gross rates for the quarter. Moving to expenses. Operating expenses remained essentially flat year-over-year, increasing slightly to $51.7 million in the quarter as we continued 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 $2.3 million of severance and related costs related to this cost reduction initiative. Absent this, personnel related costs declined $3.8 million year over year, driven by headcount reduction and FX favorability. For non-comp, we saw an increase in bad debt expense of about $1 million 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 $3.5 million in Q2. Moving to liquidity. Free cash flow, which as a reminder, we define as cash from operating activities, less capex, and capitalized software costs, was a net use of cash in the quarter of approximately $2 million. The small net use of cash was driven by the timing of working capital. As noted last quarter, in April, we repurchased $118 million aggregate principal amount of the convertible notes for approximately $96.2 million in cash, including accrued interest, representing a discount of approximately 19% to the principal amount of the repurchased notes. 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 million of cash, cash equivalents, and investments in marketable securities on the balance sheet, and $118 million of long-term convertible debt. In December, the company's board of directors authorized a $30 million share repurchase program, incremental to the $30 million program fully executed in 2022. We began executing the new program purchasing 1.5 million shares for about $7.1 million year-to-date through June 30th. We continue to believe it's an attractive way to enhance shareholder value under current market conditions. Now turning to our outlook. In our guidance, we assume a continuation of the trends we have seen in the first weeks of Q3, with seasonal increases in ad spend that we typically see to finish the year and additional growth from bringing ONIX to markets. 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. With that context, we have provided the following guidance. For Q3, we expect ex-tech gross profit of $56.5 million to $59.5 million, and we expect adjusted EBITDA of $7.5 million to $9.5 million. We maintain our previous full-year 2023 guidance of at least $237 million of ex-tech gross profit and are increasing our previous full-year guidance for adjusted EBITDA to at least $30 million.
spk24: Now, I'll turn it back to the operator for Q&A.
spk20: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Shweta Kajuria with Evercore ISI. Please go ahead.
spk04: Thanks for taking my questions. Let me try two, please. For Honest, could you please explain how the product works? So you mentioned a blizzard million dollars in revenue contribution in the back half. That's great. In terms of the mechanics of the product, so where are the ads placed? Why are they getting high? Why do they attract higher CPM? And what would be a good example in terms of why you are expanding into a higher CPM? 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? Thank you.
spk08: Hey, Shweta, David. Thanks for the question. So ONIX in terms of financials, we expect it to do between 10 to 20 million in the second half of the year. And the product is a brand awareness and consideration product targeted at enterprise brands. And it's basically placed either in mid article or end of article placement in a hundred percent show voice. It could be from an experience, could be video and it could be high impact display or a combination of the two. For example, we mentioned on the Ford example, it was a hybrid, hybrid ad where we combined video and end display. These are normally CPMs that are double digits for those brand awareness campaigns. So that's expected to drive higher CPMs in the network. We're very excited about it. It really grows 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, or others that use us for performance. And now we also have a dialogue with them around brand awareness campaigns. 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 with us because they were mostly interested in building brand awareness and consideration. So very excited about it, both from a product strategy and potential financial impact.
spk24: I'll take the second one.
spk15: So on the headcount reduction, Obviously, we felt it was proven 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 having our teams, automation, and focusing on the priority growth areas like Onyx, of course. So, you know, what we effectively, you know, did with that is we reduced our annualized costs by about $12 to $14 million. And so about half of that we expect to benefit from this year until year 23. And, you know, that brings our headcount now to about 870 people. You know, we are, you know, hiring, you know, obviously for critical positions now. And obviously some of the strategic positions around Onyx is some of our priority hiring right now. So, you know, I feel like we're back to business as usual following the reduction there.
spk21: Thanks, David. Thanks, Jason.
spk20: Thank you. The next question comes from Laura Martin with Needham. Please go ahead.
spk02: Good morning. So let's start with the bad debt number, Jason. So a million dollars, I assume it was media math. Could you talk about what you think exposure Additional exposure might be to the bad debt number.
spk15: Sure. Yeah. So we did see a 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. Our total bad debt expense was between $4 and $5 million, which for us is basically a full year number. 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 Cinecor, or the highly publicized ones. And, you know, the two of those alone accounted for like a million dollars or so of our bad debts in the quarter and in the first half. You know, of the remaining amounts, you know, we don't think there's too big of an exposure. Actually, we think, you know, a good chunk of it is really just aging and a good chunk of that aging is, you know, the big agency holdcos who are just, you know, slow payers. And, you know, part of it is that they might be collecting slower even from their brands. And so, you know, we're very formulaic, obviously, with our bad debt expense and the aging. So, you know, we see opportunity to reverse some of that expense in the second half of the year. But, yeah, I mean, I think in this environment, we should expect to have, you know, higher than normal bad debt expense.
spk02: Okay. Great. Thanks. And then, Keystone versus Onyx, are they complementary or do they go after different supply side capabilities? I know they both deepen your relationship. One is more full funnel and the other one is sort of a deeper relationship with suppliers. Are you finding the supply side guys are interested in both products or are different supply side guys interested in these two products? Do they work together or totally independently of these products?
spk08: I mean, they're separate products. They're very complimentary. One is totally focused on the advertiser side, which is Onyx, where it's more of a full funnel solution for advertisers, totally new markets for us that increases our TAM by 3x. Keystone is a supply publisher-focused product that is a business optimization platform for publishers.
spk19: two different products you want anything else uh just that they obviously they both come from the same uh r b shots and uh we obviously look at uh synergies and how they can work well together for the benefit of publishers thank you generally maybe one more comment i mean both of them are elevating the strategic relationships we have on the two sides of the marketplace keystone
spk08: is 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. These positions are in a pretty unique position in the market on the two sides of being able to provide a much broader offering, which is strategic on the two sides.
spk22: Thank you.
spk20: The next question is from Ross Sandler with Barclays. Please go ahead.
spk03: Hey, guys. Just a couple questions. So can you talk about the environment? Sounds like you started to see positive growth rates before the beginning of 3Q. You know, what geos, what categories are driving that strength? And, you know, as we look at, you know, you said geos, 10 to 20 million, which is, is a good start for Onyx. But if it is truly incremental, you know, I would guess if it's incremental budget, I would guess that the, the ramp into 24 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 24? And then the last question, the, uh, GPX-TAC margin finally turned back up for the first time in two years. So how are we thinking about that? Are we through the kind of worst of the guarantees and macro headwinds around X-TAC margin? Thanks a lot.
spk15: Thanks, Ross. So I'll start with the demand trends and I'll be brief. Yeah, 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. You know, April was mixed, softer May and stronger June. Off to a better than expected start, you know, in July relative to June. So, yeah, relatively stronger trend, you know, particularly in Europe versus U.S. Obviously the strengthening, you know, euro and the pound versus the dollar has helped there. CPCs, they're 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 pretty diversified. We're not overly concentrated. So auto, health, and retail, we're stronger. Finance has been weak and remains weaker than other verticals for us.
spk08: So maybe I'll start with the margin. 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... know that the yields will not go that the margin will not go further down and hope to 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 but but overall we are sort of excited about this trend and definitely through the second half of the year uh regarding onyx so it's uh we are we're off to to a great start i mean what we're getting right now is test budgets We're looking into budgets of Q4, which are more significant, but definitely next year our expectation is that we develop 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 campaigns. So, I mean, we're not giving a forecast for 24, but we expect that if... We hit the numbers for H2, a significant growth of it into 24 in coming years. Again, our expectation is it becomes a few hundred million dollar business over the next few years.
spk22: Thank you.
spk20: The next question comes from Andrew Boone with JMP Securities. Please go ahead.
spk06: Good morning. Thanks for taking my questions. 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 24 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, you know, 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?
spk22: Thanks so much. Thank you, Miggy.
spk19: I'll take the yield question you run here. So yield is kind of the end result of everything. It starts obviously with the technology, and we keep investing in the technology and the algorithms specifically. As I mentioned in the comments earlier, 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 rates. And so that's deployed network-wide, and those changes compound over time. The next level is obviously 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. Obviously, we're excited there. Onyx I think is a great leg with selling new types of advertisers and new campaigns. The other side is what they run with us. The more kind of algorithm food the algorithm has, the better the results are. That was the example I gave of the AI capabilities that we've built into our M5 products which take an advertiser campaign. 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 algorithm-wise.
spk15: And on the retention, I'll take that one, Andrew. So just, yeah, I mean, obviously, you know, we've said the last couple of quarters that, you know, the biggest headwind had been the demand and yield, and that remained a headwind. You know, and just to note, we did, you know, grow X tax sequentially, you know, about 5% from Q1 to Q2, despite revenue kind of continuing to see these headwinds. 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 insurance. We feel pretty low levels for us. The lapping of the war in Ukraine, particularly in Europe, there was pretty high page views last year in Q1 and Q2 from that. There's a headwind. And we've also just, you know, we've made changes and we continue to make changes in our supply bidding to optimize for market ROAS and quality and serving costs. You know, 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, you know, I think in half, too, as the comps ease a little bit, we'll expect to get to a much more normal split between retention and new. It could be around 100 in NRR and Q3 and, you know, even higher ag tech growth. So that's the plan for H2.
spk01: Thank you.
spk20: Thank you. The next question is from Eagle Aronian with Citi. Please go ahead.
spk14: Hey, guys. Good morning. I'm Max Moran for Eagle. My first question would be on the converts you brought 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? And then my second one would be on generative AI. I gave a nice update on the chat GPT integration, but just thinking more down the road, how should we think about more gen AI 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?
spk07: Hi, thanks, Max. It's David.
spk08: So regarding capital allocation and the convert, so we saw the opportunity to repurchase half of the nodes 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 had a good place on the convert. We did announce a new buyback of $30 million earlier this year. We still have significant dry powder in there, and we intend to continue to buy back some shares, not at a very high level. So we expect it to be moderate. We think the share price is still an attractive return on capital plus, but we also want to make sure that we have enough cash in hand to do acquisitions. The environment for acquisitions is becoming a little better, both on the the private side and the 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 amounts.
spk19: 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 are 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 Gen AI. I think others are looking at this as assistance to their human editors which is an approach I really like. And that's on the media side. So I think we are going to see much more efficiencies in creating content using kind of assistance with generative AI as draft starters and things like that. On the advertising side, as I mentioned, we are using generative AI for headline creation or suggestions. and 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 are 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 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 Gen AI, we're keenly looking into and playing with in 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 are going to have a lot of creatives that come through generative AI. We are not yet comfortable with hallucinations that are happening in that space, so we are 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 interesting as well.
spk08: I just want to add to Yaron's comment related to ONIX and Brand Studio. So his last point around creative is important. I mean, we use Brand Studio, which is our in-house studio, to work with existing creatives. We purpose them and create high-impact displays, create a unique ability to generate attention with creative. So in that area, we're looking quite intensively how to use AI to improve these processes, to generate better better return on those creatives and faster iteration. So, brand studio is an area where AI will have been to experimenting with AI around the brand studio for Onyx.
spk25: Okay. Thanks, guys. Super helpful.
spk20: The next question comes from Dan Day with B Riley Securities. Please go ahead.
spk11: Yeah, morning, guys. Appreciate you taking the questions.
spk13: So just to clarify on ONIX, is it something that your publisher partners need to opt 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 could be extended across the open web regardless of whether the publisher itself is a core content recommendation partner or not?
spk08: Hey, Danny, David. So they do not need to opt-in. We're using it in mid-article placements, which we have and continue to acquire, whether it's code on page or to a waterfall or who had a bidding. So this is one area. And then end-of-article placements are ones that we have, and we don't need to have them opt-in. So a lot of supply is totally in our control. And publishers are excited about the offering. It does improve user experience. It's better quality and higher yield.
spk13: 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. And then as far as pricing the product, you know, 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, you know, 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?
spk19: Yeah, so just to run 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 in our existing business. And so we know the best way long-term to create value is to first ensure that they're seeing tremendous business value from T-Stone. 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. And we also expect it will help us improve the NRR. So you will see the results baked into those. And it definitely should also help us when new publishers who are looking to diversify their revenue streams but don't really have any great technology to support those efforts.
spk08: Dan, I want to just add to the previous answer about the incrementality. So ONIX is incremental on the two sides of the marketplace. On the advertiser side, these are incremental budgets 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. These are either mid-article or end-of-article, 100% share of voice, high-impact display of video. So they are incremental. The end-of-article could theoretically have some impact on the feed itself, but it's only going to be served when it's a high RPM generating.
spk10: Great. Appreciate the answers, guys. Thanks.
spk20: 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.
spk19: Thanks, Operator. We're happy to have delivered strong results for Q2, and we continue to focus on discipline execution. As you heard, we're fed with the opportunities that recent developments in AI have 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. We look forward to updating you again next quarter.
spk20: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. © transcript Emily Beynon
spk00: Thank you. you Thank you. Thank you. Thank you. Thank you.
spk20: Good day and welcome to the Outbrain second quarter 2023 earnings conference call. All participants will be in the listen-only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to the management team. Please go ahead.
spk29: Good morning, and thank you for joining us on today's conference call to discuss Outbring's second quarter 2023 results. Joining me on the call today, we have Outbring's co-founder and co-CEO, Yaron Ghalai, co-CEO, David Kossman, and CFO, Jason Kivyat. 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-K, 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. Forward-looking statements speak only as of the course 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 second 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, and the news and events. With that, let me turn the call over to David.
spk08: 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 across multiple strategic firms. 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 $54.6 million in extra gross profit, representing 5% sequential quarterly growth and reaching the high end of our guidance, and adjusted EBITDA of $3.5 million, exceeding the high end of our guidance. In what 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 ONIX. Last quarter marked an exciting milestone for our company with the launch of ONIX by Outbrain. 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 the global scale on the open web. From building brand awareness and consideration all the way to customer acquisitions. Onyx 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 three times. This is according to Gartner data that breaks down budget allocation between performance marketing, brand building, consideration, and loyalty. So what is ONIX? What makes it unique? ONIX 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, ONIX goes one step further to maximize user attention, which has been proven to drive business impact. 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 ONIX 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 ONIX 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 DAX's UK for Ford. We used a custom ONIX ad experience called Hybrid that combines both video and display assets into an interactive ad experience. The results exceeded our customers' expectations, with Adelaide putting the campaign attention score 30% higher than the benchmark. We continue to experience higher performance than the Adelaide benchmark on our Onyx campaigns. This is a powerful testimony for how Onyx is successfully winning user attention and, as a result, driving stronger brand impact for advertisers. ONIX is now available for enterprise brands and agencies in the US, UK, Germany, France, and Italy, and will be launched in other markets later this year. We've run ONIX campaigns in these markets for premium brands like Visa, Porsche, Mattel, iHeartRadio, Opel, Alfa Romeo, and others. Our pipeline is building, and we expect to generate double-digit millions of dollars of revenue from ONIX already in H2 of this year. Just as a side comment, while ONIX is great for brand advertisers, it's also extremely strategic for our relationship with publishers, helping us elevate quality and user experience, which has been one of our key differentiators and factors in winning premium supply deals. And ultimately, it helps deliver even more revenue to our publisher partners. 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 two 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. 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, Zementa is our in-house performance DSP. Unlike traditional DSPs that focus on streamlining media buying for display and video on a CPM basis, Zementa 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, Washington Times, The Messenger, and others. On the device or platform side, we established a partnership with Disqus, a commenting platform, and started ramping up our placement in Samsung devices through our partnership with Upday. 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 US, Burda in Germany, CCM Benchmark in France, and Hearst Italy. So overall, we're very excited about the launch of our strategic branding platform, Onyx, that we believe will further strengthen our position in the open web as the quality partner for premium publishers and the full funnel open web partner for all types of advertisers. We're encouraged with a 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 extra gross profit and adjusted EBITDA. I'll now hand it over to Yaron.
spk19: Thanks, David. Today I'll cover three areas, an update on Keystone, an AI update, and more detail on what we're doing on ONIX 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 Sunkei from Japan, among others. These publishers are advancing various KPIs through the Keystone technology, such as subscriptions, e-commerce, retail, and newsletters. One of the main drivers to this growth has been an important product upgrade from our R&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's show, publishers have been loving this. My second topic is AI. On the last quarterly call, I updated that we've 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 call, I mentioned that about 50% of the automated AI headlines that advertisers were using were then originating from our ChatGPT integration. That was a long three months ago, which is decades in AI terms. Our successful integration and launch since then has now grown to be 100% of the automated headlines that we suggest to advertisers within our product, which are now coming from ChatGPT. In addition to the speed, scalability, and cost efficiencies resulting from these generative AI capabilities, we're also seeing that the ChatGPT 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 Spanish, Portuguese, Japanese, French, Italian, and Dutch. In parallel to these upgrades to our advertiser product, I'm also happy to update that we've now integrated the ChatGPT GenAI 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&D and business operations. As examples, we've deployed the use of Microsoft's GitHub Copilot, which is an AI assistant for coding, across our engineering teams. And we've built our own AI bot based on ChatGPT for automatic code reviews and flagging of issues relating to security and privacy compliance within our code. Moving from generative AI to our ad-serving algorithms, which have been AI-based for several years. During the first six months of the year, we've deployed new and improved AI algorithms, which have so far resulted in a 4.3% improvement in CTR potential based on our internal A-B 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 our brand is at the forefront of the AI revolution. Switching gears to Onyx and attention, I believe that the world of brand advertising on the web has evolved in three 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. During this past decade or so, brands got smarter and no longer wanted to pay for ads that were never even viewable by a human being. 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 ad break will still count as 100% viewable and the advertiser pays for full cost. So we're now at the very beginning of the third big era of brand advertising on the web, and that is the era of attention. 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 newsfeeds 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're typically looking at an ad placement and deciding in a binary way whether that ad placement is viewable or not, or whether it's high attention or not. They're placement-based systems and not user-based systems. Our brand's huge advantage is that we deeply understand the user's interest of the roughly 1 billion people we serve each month. Through the news feeds we power 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 that 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. Our 15-year head start in understanding users' interests and personalization combined with this industry shift to the era of attention is the reason we're so excited with the timing of Introduceionics. And with that, I'll hand it over to Jason to cover our financials.
spk15: Thanks, Jeroen. As David mentioned, we beat our Q2 guidance for adjusted EBITDA and achieved the high end of the guidance range for expat 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, and we're cautiously optimistic about the outlook for the back half of the year. Geographically, Europe has shown stronger signals of demand recovery than the U.S. Revenue in Q2 was approximately $226 million, a decrease of 10% year-over-year. New media partners in the quarter contributed 12 percentage points or approximately $30 million 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 focused on premium, high-quality supply driving the best results for our advertisers and an optimizing serving cost. Additionally, we continued to see a headwind from the impact of the demand environment on yield. Our churn remains low by our standards, and our three largest churns year-over-year contributed just approximately four total points of net revenue retention headwind in Q2. As another data point, our low-growth retention remained around 95% for all partners that generated at least $10,000. XTAC growth profit was $54.6 million, a decrease of 8% year-over-year, driven primarily by the revenue declines. A slightly lower year-over-year decline in expect gross profit as compared with revenue is the result of largely offsetting impacts of revenue exchanges and better performance on certain media partners, which led to an improvement in margin. For both revenue and expect gross profit, currency fluctuations did not have a material impact on year-over-year growth rates for the quarter. Moving to expenses. Operating expenses remained essentially flat year-over-year, increasing slightly to $51.7 million in the quarter as we continued 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 $2.3 million of severance and related costs related to this cost reduction initiative. Absent this, personnel related costs declined $3.8 million year over year, driven by headcount reduction and FX favorability. For non-comp, we saw an increase in bad debt expense of about a million dollars 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 $3.5 million in Q2. Moving to liquidity. Free cash flow, which as a reminder, we define as cash from operating activities, less capex, and capitalized software costs, was a net use of cash in the quarter of approximately $2 million. The small net use of cash was driven by the timing of working capital. As noted last quarter, in April, we repurchased $118 million aggregate principal amount of the convertible notes for approximately $96.2 million 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 million of cash, cash equivalents, and investments in marketable securities on the balance sheet, and $118 million of long-term convertible debt. In December, the company's board of directors authorized a $30 million share repurchase program, incremental to the $30 million program fully executed in 2022. We began executing the new program purchasing 1.5 million shares for about $7.1 million year-to-date through June 30th. We continue to believe it's an attractive way to enhance shareholder value under current market conditions. Now turning to our outlook. In our guidance, we assume a continuation of the trends we have seen in the first weeks of Q3, with seasonal increases in ad spend that we typically see to finish the year and additional growth from bringing Onyx 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. With that context, we have provided the following guidance. For Q3, we expect ex-tech gross profit of $56.5 million to $59.5 million, and we expect adjusted EBITDA of $7.5 million to $9.5 million. We maintain our previous full-year 2023 guidance of at least $237 million of expect gross profit and are increasing our previous full-year guidance for adjusted EBITDA to at least $30 million.
spk24: Now, I'll turn it back to the operator for Q&A.
spk20: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Shweta Kajuria with Evercore ISI. Please go ahead.
spk04: Thanks for taking my questions. Let me try two, please. For Honest, could you please explain how the product works? So you mentioned $1 million in revenue contribution in the back half. That's great. In terms of the mechanics of the product, so where are the ads placed? Why are they getting high? Why do they attract higher CPM? And what would be a good example in terms of why you are expanding into a higher CPM? 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? Thank you.
spk08: Hey, Shweta, David. Thanks for the question. So ONIX in terms of financials, we expect it to do between 10 to 20 million in the second half of the year. And the product is a brand awareness and consideration product targeted at enterprise brands. And it's basically placed either in mid article or end of article placement in a hundred percent show voice. It could be from an experience, could be video and it could be high impact display or a combination of the two. For example, we mentioned on the Ford example, it was a hybrid, hybrid, uh, ad where we combined video and end display. These are normally CPMs that are double digits for those brand awareness campaigns. So that's expected to drive higher CPMs in the network. We're very excited about it. It really grows 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, or others that use us for performance. And now we also have a dialogue with them around brand awareness campaigns. 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 with us because they were mostly interested in building brand awareness and consideration. So very excited about it, both from a product strategy and potential financial impact.
spk24: Hey, Shweta, I'll take the second one.
spk15: So on the headcount reductions, Obviously, we felt it was proven 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 having our teams, automation, and focusing on the priority growth areas like Onyx, of course. So what we effectively did with that is we reduced our annualized costs by about $12 to $14 million. And so about half of that we expect to benefit from this year, in full year 23. And that brings our headcount now to about 870 people. We are hiring, obviously, for critical positions now. And obviously, some of the strategic positions around Onyx is some of our priority hiring right now. So, you know, I feel like we're back to business as usual following the reduction there.
spk21: Thanks, David. Thanks, Jason.
spk20: Thank you. The next question comes from Laura Martin with Needham. Please go ahead.
spk02: Good morning. So let's start with the bad debt number, Jason. So a million dollars, I assume it was media math. Could you talk about what you think exposure is Additional exposure might be to the bad debt number.
spk15: Sure. Yeah. So we did see a 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. Our total bad debt expense was between $4 and $5 million, which for us is basically a full year number. 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 Cinecorr, or the highly publicized ones. And, you know, the two of those alone accounted for like a million dollars or so of our bad debts in the quarter and in the first half. You know, of the remaining amounts, you know, we don't think there's too big of an exposure. Actually, we think, you know, a good chunk of it is really just aging, and a good chunk of that aging is, you know, the big agency holdcos who are just, you know, slow payers. And, you know, part of it is that they might be collecting slower even from their brands. And so, you know, we're very formulaic, obviously, with our bad debt expense and the aging. So, you know, we see opportunity to reverse some of that expense in the second half of the year. But, yeah, I mean, I think in this environment, we should expect to have, you know, higher than normal bad debt expense.
spk02: Okay. Great. Thanks. And then Keystone versus Phonics, are they complementary or do they go after different supply side capabilities? I know they both deepen your relationship. One is more full funnel and the other one is sort of a deeper relationship with suppliers. Are you finding the supply side guys are interested in both products or are different supply side guys interested in these two products? Do they work together or totally independently in these products?
spk16: Hi, Laura. Okay, take it outside.
spk08: I mean, they're separate products, they're very complimentary. One is totally focused on the advertiser side, which is onyx, where it's more of a full funnel solution for advertisers, totally new markets for us that it increases our time by three x. Keystone is a is a supply publisher focused product that is a business optimization platform for publishers. So two different products. Yaron, anything else?
spk19: Just that they obviously, they both come from the same R&B shop, and we obviously look at synergies and how they can work well together for the benefit of publishers.
spk07: Thank you. Generally, maybe one more comment.
spk08: I mean, both of them are elevating the strategic relationship we have on the two sides of the marketplace. Keystone is a very strong strategic tool for publishers looking to diversify revenues. On the other side, existing and new, we're becoming a much broader partner. I think companies generally are looking to work with less partners. This positions us in a pretty unique position in the market on the two sides of being able to provide a much broader offering, which is strategic on the two sides.
spk22: Thank you.
spk20: The next question is from Ross Sandler with Barclays. Please go ahead.
spk03: Hey, guys. Just a couple questions. So can you talk about the environment? Sounds like you started to see positive growth rates before the beginning of 3Q. You know, what geos, what categories are driving that strength? And, you know, as we look at, you know, you said geos, 10 to 20 million, which is, is a good start for Onyx. But if it is truly incremental, you know, I would guess if it's incremental budget, I would guess that the, the ramp into 24 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 24? And then the last question, the, uh, GP X-TAC margin finally turned back up for the first time in two years. So how are we thinking about that? Are we through the kind of worst of the guarantees and macro headwinds around X-TAC margin? Thanks a lot.
spk15: Thanks, Ross. I'll start with the demand trends and I'll be brief. Yeah, 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. You know, April was mixed, softer May and stronger June. Q3, off to a better than expected start, you know, in July relative to June. So, yeah, relatively stronger trends, you know, particularly in Europe versus U.S. Obviously, the strengthening, you know, euro and the pound versus the dollar has helped there. CPCs, they're 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 pretty diversified. We're not overly concentrated. So auto, health, and retail, we're stronger. Finance has been weak and remains weaker than other verticals for us.
spk08: So maybe I'll start with the margin. So we saw an improvement of about 200 basis points versus Q1 and about 50 basis points versus last year. So we are encouraged by that. We expect... know that the yields will not go that the margin will not go further down and hope to 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 but but overall we are sort of excited about this trend and definitely through the second half of the year uh regarding onyx so it's uh we are we're off to to a great start i mean what we're getting right now is test budgets We're looking into budgets of Q4, which are more significant, but definitely next year our expectation is that we develop 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 campaigns. So, I mean, we're not giving a forecast for 24, but we expect that if... We hit the numbers for H2, a significant growth of it into 24 in coming years. Again, our expectation is it becomes a few hundred million dollar business over the next few years.
spk22: Thank you.
spk20: The next question comes from Andrew Boone with JMP Securities. Please go ahead.
spk06: Good morning. Thanks for taking my questions. 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 24 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, you know, 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?
spk22: Thanks so much.
spk19: Andrew, maybe I'll take the yield question you run here. So yield is kind of the end result of everything. It starts obviously with the technology, and we keep investing in the technology and the algorithms specifically. As I mentioned in the comments earlier, 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 rates. And so that's deployed network-wide, and those changes compound over time. The next level is obviously 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. Obviously, we're excited there. Onyx I think is a great leg with selling new types of advertisers and new campaigns. 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 M5 products which take an advertiser campaign. 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 algorithm-wise.
spk15: And on the retention, I'll take that one, Andrew. So just, yeah, I mean, obviously, you know, we've said the last couple of quarters that, you know, the biggest headwind had been the demand and yield, and that remained a headwind. You know, and just to note, we did, you know, grow X tax sequentially, you know, about 5% from Q1 to Q2, despite revenue kind of continuing to see these headwinds. 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 insurance, still we feel pretty low levels for us. The lapping of the war in Ukraine, particularly in Europe, there was pretty high page views last year in Q1 and Q2 from that. There's a headwind. And we've also just, you know, we've made changes and we continue to make changes in our supply bidding to optimize for market 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 two, as the comps ease a little bit, we'll expect to get to a much more normal split between retention and new. We expect to be around 100 in NRR and Q3 and even higher ag tech growth. So that's the plan for H2.
spk01: Thank you.
spk20: Thank you. The next question is from Eagle Aronian with Citi. Please go ahead.
spk14: Hey, guys. Good morning. I'm Max Moran for Eagle. I guess my first question would be on the Converge you brought back. Just wondering what's the plan for the rest of the Converge still on the balance sheet and just more generally how would you think about capital allocation going forward? And then my second one would be on generative AI. I gave a nice update on the UCHAT GPT integration, but just thinking more down the road, how should we think about more gen AI 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?
spk07: Hi, thanks, Max. It's David.
spk08: So regarding capital allocation and the convert, so we saw the opportunity to repurchase half of the node 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 had a good place on the convert. We did announce a new buyback of $30 million earlier this year. We still have significant dry powder in there, and we intend to continue to buy back some shares, not at a very high level. So we expect it to be moderate. We think the 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 for acquisitions is becoming a little better, both on the private side and, you know, 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 buyback set moderate amount.
spk19: Hey, Ron here. I'll take the Gen AI question. So I think generative AI is going to have a bunch of impact on media in general and advertising specifically. In media obviously every publisher we are 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 Gen AI. I think others are looking at this as assistance to their human editors which is an approach I really like. And that's on the media side. So I think we are going to see much more efficiencies in creating content using kind of assistance with generative AI as draft starters and things like that. On the advertising side, as I mentioned, we are 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 didn't think about, and they are 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 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 Gen AI, we're keenly looking into and playing with in 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 are going to have a lot of creatives that come through generative AI. We are not yet comfortable with hallucinations that are happening in that space, so we are 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 interesting as well.
spk08: I just want to add to Yaron's comment related to ONIX and Brand Studio. So his last point around creative is important. I mean, we use Brand Studio, which is our in-house studio, to work with existing creatives. We purpose them and create high-impact displays, create a unique ability to generate attention with creative. So in that area, we're looking quite intensively how to use AI to improve these processes to generate better better return on those creatives and faster iterations. So, brand studio is an area where AI will have been to experimenting with AI around the brand studio for Onyx.
spk25: Okay, thanks guys for your help.
spk20: The next question comes from Dan Day with B Riley Securities. Please go ahead.
spk11: Yeah, morning, guys. Appreciate you taking the questions.
spk13: So just to clarify on ONIX, is it something that your publisher partners need to opt 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 could be extended across the open web, regardless of whether the publisher itself is a core content recommendation partner or not?
spk07: Hey, Danny, David.
spk08: 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 code on page or to a waterfall or to head of bidding. So this is one area. And then end-of-article placements are ones that we have, and we don't need to have them opt-in. So a lot of supply is totally in our control. And publishers are excited about the offering. It does improve user experience. It's better quality and higher yield.
spk13: Great. Thanks. And then I 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. And then as far as pricing the product, you know, 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, you know, 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?
spk19: Yeah, so just to run 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 in our existing business. And so we know the best way long-term to create value is to first ensure that they are seeing tremendous business value from T-Stone. They are driving their other business KPIs. And with that growth we are confident there is 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. And we also 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 but don't really have any great technology to support those efforts.
spk08: Dan, I want to just add to the previous answer about the incrementality. So ONIX is incremental on the two sides of the marketplace. On the advertiser side, there are incremental budgets 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. 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 feed itself, but it's only going to be served when it's a high RPM generating.
spk10: Great. Appreciate the answers, guys. Thanks.
spk20: 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.
spk19: Thanks, Operator. We're happy to deliver strong results for Q2, and we continue to focus on discipline execution. As you heard, we're fed with the opportunities that recent developments in AI have 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. We look forward to updating you again next quarter.
spk20: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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