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spk03: And welcome to Outbrain Incorporated third quarter 2023 earnings conference call. This time all participants are in listening mode. Let your ancestors know, follow the formal presentation. As a reminder, this conference is being recorded. I'd like to turn the call over to Outbrain Investor Relations. Please go ahead.
spk09: Good morning, and thank you for joining us on today's conference call to discuss Outbrain's third quarter 2023 results. Joining me on the call today, we have Outbrains co-founder and co-CEO, Jeroen Galli, co-CEO, David Kostin, and CFO, Jason Kiviat. During this conference call, management will make forward-looking statements based on current expectations and assumptions. These statements are subject to risks and uncertainties 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 31, 2022, as updated in our Form 10-Q, and in 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 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 third quarter earnings release for definitional information and reconciliations of non-GAAP measures to the comparable GAAP financial measures. Our earnings release can be found on our investor relations website, investors.outbrain.com, under news and events. With that, let me turn the call over to David.
spk04: Thank you, Randy. First, I want to touch on the situation in the Middle East. At Outbrain, we stand with the people of Israel who have been affected by the recent events. Our hearts go to all the people that are impacted by the horrific situation. We all know people that have suffered, and we pray and hope for better, peaceful days in the region. I want to take this opportunity to thank so many of you, first and foremost our employees in Israel and around the globe, for your unwavering commitment. our business partners, and our investors and analysts for the outpouring expressions of support. This means a lot to us. From an operational perspective, we have approximately 380 employees in Israel. About 30 have been called to reserve duty. Our offices are located in Netanya, north of Tel Aviv, in the center of Israel. The safety and well-being of our employees and their families is our top priority. Since October 7, we have continued to execute on our business priorities and deliver on our commitments to our customers. We do have business continuity plans in place should the situation further escalate. Now I will turn to our financial results and business trends. We are pleased with the resumption of year-over-year growth in Q3. We grew X-Time gross profit by 8% to $56.8 million. within the range of our guidance. Our adjusted EBITDA of $10.3 billion exceeded significantly the high end of our guidance and can be attributed to the top-end growth and to our cost discipline. We also saw improvements in our extract margin. In terms of current trends, the macro environment, which remains volatile, combined with the ongoing situation in the Middle East, leads us to a more cautious outlook for revenues and ex-tax gross profit in Q4, as you will hear from Jason. Since early October, we've seen a spike in war-related news pages, which are generally more difficult to monetize, as certain brands have brand safety concerns around these types of pages. We have also experienced some brand budget cuts and delays in launching campaigns, resulting in slower-than-normal seasonal Q4 uptick. Despite these near-term headwinds, going into 2024, we're excited with our differentiated position in the market, which focuses on the premium side of publishers and advertisers. Our platform offers full-funnel results for advertisers at scale on the open web and enables total publisher revenue and audience growth. all leveraging our AI-driven prediction engine. We believe this provides us with a strong foundation for further growth in 2024 and beyond. Let me turn to the advertiser side of our business. Our brand has traditionally been and continues to be a cost-per-click native advertising customer acquisition platform that uses AI to deliver strong performance on CPA goals across the open web. Yaron will touch on Q3 notable investments in AI and automation capabilities in our core buying platforms, such as the growth in our codeless conversion features for self-serve advertiser base. We continue to innovate to drive return on ad spend and scale for diverse sets of performance advertisers. we are seeing growing adoption of our performance DSP, Zementa, with traditional amplified clients moving budgets to buy more effectively across open web SSPs and not only in the outgoing marketplace. As a reminder, Zementa operates on a percent of spend through the platform, and we have seen record levels of spend growth on Zementa in 2023. Under branding and awareness front, at the start of Q3, we launched Onyx, our new brand-building platform that runs video, high-impact display, and rich media ads, leveraging our brand's AI to maximize user attention. Since the launch, we have worked with more than 100 brand advertisers. These advertisers include Sephora, Paramount, L'Oreal, Lancome, Nestle, and many others. For many of these advertisers, we are demonstrating that we can outperform incumbent vendors through a unique combination of better creatives, running on high attention placement, and utilizing smarter technology to drive attention. We continue to consistently deliver above benchmark results in terms of attention. For example, with our high-impact display ads on mobile, we see an average 58% higher attention rate versus the Adelaide benchmark. Also, in our video business, which is a core component of our Onyx offering, we switched our focus from out-stream video to in-stream pre-roll, leveraging our video intelligence acquisition. This shift is starting to pay off with higher margins for the video segments. we expect video to be even more strategic for our future growth. Another differentiated element of our offering is the ability to drive both performance and awareness for brands. This makes us one of the very few companies beyond the walled gardens that can deliver advertiser objectives across the full funnel consumer journey. As an example, For many years, AARP has been leveraging our amplified performance platform to drive objectives like audience development. Now, we have expanded the relationship to encompass branding objectives where ONIX will help them build brand awareness with potential new members. These types of engagements with advertisers get us excited about our strategy to address a larger segment of advertising budgets from both new and existing clients. Despite some of the slowdown in brand advertiser business that I referred to, we still expect to close the year, as we said before, with $10 to $20 million of Onyx business. Moving to the publisher side, we continue to focus on improving the performance of our premium publisher wins over the last 12 to 18 months. Among our renewals of long-term partnerships in Q3, I want to highlight L'Equipe in France, Berliner Verlag and Zeit in Germany, as well as Vox in the US, a partner we have been working with exclusively for close to a decade. We are currently engaged in several discussions with large publishers globally and feel strong momentum driven by several elements of differentiation. One, our focus on having a balanced portfolio of premium global publishers with no single publishers taking up outsized demand. Second, the onyx premium demand. And third, keystone capabilities and product vision. To sum it up, considering the current macro environment and the situation in the Middle East, we are more cautious about our short-term revenue outlook but we continue to leverage our cost discipline to drive profitability and cash flow generation. We are pleased with the resumption of year-over-year growth in Q3 and expect further acceleration in 2024, leveraging our strategic investments. With that, I will turn it over to Yaron.
spk07: Thanks, David. I want to join David's comments and clearly say we stand with the people of Israel, and together with our colleagues there, we are committed to overcoming and to continuing the great level of service and product that all Outbrain customers and partners have come to expect. Since our last call, we've added several new Keystone partners, New York Post, The New Republic, Entrepreneur Magazine, Publisher Desk, and others. During this last quarter, we started experimenting with an added business model for Keystone, where its cost is covered through revenue sharing on publishers' ad slots. We believe that this addition will help us further accelerate Keystone with more publishers. Two updates on the AI front, one algorithmic AI and one generative AI. First, one of our core AI algorithms has been conversion bid strategy for CBS, which automates for advertisers the optimization of their ad campaign. When using our brand CBS, an advertiser can automatically maximize their conversion or their return on ad spend, which is also known as ROAS. And CBS is based on our homegrown AI algorithm, and a majority of our current advertiser campaigns are running on CBS technology. This last quarter, we've deployed a new technology that upgrades CPS with codeless capabilities. Using this codeless layer, marketers on Outbrain can now significantly accelerate the pace of deploying new conversion events and further improve their ROAS. This technology marks a significant stride in our dedication to marketing automation combined with self-serve functionality, and it will be a foundational layer for more automation capabilities we're planning to build upon this new layer in coming months. Second, on generative AI. One of the most exciting frontiers for us with generative AI is the automation of ad variety. Ad variety is like algorithms. And the more variety we have in our ad index, the better our algorithms can match each individual ad to each individual person. So ad variety results in better ad matching, which ultimately leads to higher click-through rates, also known as CTRs, and higher RPM. One of the earliest AI capabilities we built almost 10 years ago was for automated image cropping in our ads. So, for example, our technology will auto-crop an image to better focus on faces or the areas of interest of an image. This has been a CTR driver for us for many years. Now we're experimenting in the lab with generative AI capabilities that will also enable the reverse, upscaling images and growing them while filling the new image spaces with automatically generated content. Another generative AI capability we're experimenting with in the R&D lab is the automatic creation of face variation. Now, for an advertiser, might upload an ad with a photo of one model, and then our technology can automatically offer the identical product image with a variety of, say, 20 different AI-generated model faces. Both these capabilities are still in R&D lab mode with early test groups. We expect these types of capabilities to significantly boost our ad variety, which will improve the appeal of Outbrains ads to more people and ultimately help continue driving our click rates. Anecdotally, following all of our recent investments in algorithmic and generative AI, our advertising CPRs these past couple of months have been among three-year record highs. This is especially encouraging in light of the weaker demand environments. As a reminder, our yield is a result of ad pricing times click-through rates. And with that, I'll hand it over to Jason for our financial results.
spk16: Thanks, Jeroen. As David mentioned, based on our growth and cost discipline, we exceeded our Q3 guidance for adjusted EBITDA and achieved our exact gross profit guidance. From a demand perspective, the quarter started off relatively strong in July with year-over-year growth. followed by weakening demand trends in August before a partial recovery in the last weeks of the quarter. The early portion of Q4 has shown a flatter pattern than the seasonal lift we historically see this time of year, which is driven largely by softer demand to start the quarter, as macro and geopolitical uncertainties weigh on ad budgets, as well as the impact of the news cycle on certain advertisers' budget usage, as David mentioned. Revenue in Q3 was approximately $230 million, resulting in a slight increase year-on-year. New media partners in the quarter contributed 5 percentage points, or approximately $11 million of revenue growth year-over-year. Net revenue retention of our publishers was 95%, which, while up meaningfully from the last several quarters, reflects a continued headwind in the impact of the demand environment on pricing and yields, which is the primary factor driving retention to be below 100%. As noted in the last few quarters, churn has remained low by our standards, with logo retention of 96% for all partners that generated at least $10,000, and our five largest churns amounted to only three combined points of year-over-year headwind in Q3. XTAC gross profit was $56.8 million, an increase of 8% year-over-year, outpacing revenue growth, driven primarily by improved deal performance on certain media partners and the net impact of revenue mix. As noted, our ongoing focus will continue to be on optimizing deal performance. Moving to expenses. Operating expenses decreased approximately 11% year-over-year to $43.8 million in the quarter as we continue to exercise discipline around spending. The largest component of this is compensation-related expenses, which were down approximately $5 million or 14% year-over-year as we have focused on driving efficiencies in our operations. Non-comp expenses were down slightly year-over-year as we continued to exercise prudence. Notably, Fed debt expense, though down from H1, remains at elevated levels as compared with our history, as a higher number of customers are facing cash flow pressures in this environment. As a result of our cost management and growth of XTAC gross profit, displaying the leverage in our model, adjusted EBITDA was approximately $10.3 million in Q3, growing meaningfully year-over-year and exceeding the high end of the guidance range. We believe there continues to be meaningful room for operating leverage in the future, particularly as we drive more and higher yielding demand through new products like Onyx and our expansion of video, and assuming a return to a more favorable macro environment in the future. Moving to liquidity. Free cash flow, which as a reminder, we define as cash from operating activities with capex and capitalized software costs, is approximately $2 million in the quarter. While we are pleased to return to positive free cash flow in the quarter, we still see pressures on working capital, particularly around collections with elevated DSO levels remaining from Q2 into Q3. As a result, we ended the quarter with $214 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. Year-to-date through September 30th, we have purchased approximately 2.5 million shares for $12.7 million. We continue to believe it's an attractive way to enhance shareholder value under current market conditions. Now turning to our outlook. Uncertainty from macro and geopolitical events and the typical back-half-weighted nature of Q4 seasonal uplift are considerations in our decision to present a wider than typical range of guidance for the quarter. In our guidance, we assume the continuation of the softer demand trends we have seen in the first weeks of Q4 and assume that seasonal increases in ad spend will occur at levels below what we've seen historically. With that context, we have provided the following guidance for Q4. We expect expected gross profit of $59 million to $64 million, and we expect adjusted EBITDA of $13 million to $17 million. Now I'll turn it back to the operator for Q&A.
spk03: Thank you. Now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. this time will pause momentarily to stumble the roster. First question will be from Swetha Kanjurari of Evercore ISI. Please go ahead.
spk11: Thank you for taking my questions. Jason, I have a couple for you, please. On the last point that you talked about on the outlook, for the fourth quarter, could you please provide a little bit more color on quantifying the magnitude of the headwind that you are baking in the guidance from macro and Israel and then if you are also I believe David said you are also account still expecting 10 to 20 million from on it so how should we think about the tailwinds and headwinds that are accounted for in the fourth quarter guidance and then and then for 2024 without any official guidance how should we at a high level think about acceleration and growth rate for 24 given the exit rate thank you
spk16: Jason, thanks for the question. So yeah, so maybe I'll just give you a little more color on on the guidance and what's driving it so You know, we're using our normal forecasting process, which is a seasonality based model and it takes, you know, down to date trends, what we're seeing in RPM and pages and running it out. Supply for us is fairly straightforward. It's locked in its long term. Not very many meaningful changes. Demand remains the harder thing to forecast, especially now as advertisers may be reacting to the macro and geopolitical uncertainties still. So we're considering the trends that we've seen in the first part of Q4, where we saw an impactful step down in demand. And applying that forward, we project a softer than typical seasonal lift in Q4. And that does also have an impact on XTEC margins. So maybe just to give you color to kind of what we saw. So, you know, we did see last time we spoke, you know, here three months ago, we saw positive demand trends, you know, a couple months in around June and July, building strength of demand and yields. which along with a typical Q4 seasonal uplift was the basis of our prior forecast and guidance provided last time. Obviously, we've now factored in what we've seen in October, which is first we saw a softening of demand trends in August versus those July levels with some recovery in September. But then October started off weaker than expected from a demand perspective relative to what we expected coming out of September. And we saw that toughness increase over the course of the month, really correlating with the onset of the war. Maybe a data point that would help would be, you know, we saw October revenue grow 1% sequentially from September, which is very low. You know, we typically see 6% or more, you know, the last, you know, many years. 6%, I think, the last two years and more even before that based on our history. So several drivers. It's hard to attribute specific amounts to specific things, but maybe just, you know, we do see, Certain budgets paused or delayed due to the macro and geopolitical uncertainties. It's hard to know if that slow start we saw even before October 7th And the attacks was just delays in advertisers setting budgets, which is something we did see a lot of months this year, was that the first week might have been slow, but then the month kind of comes together. Or if it was the macro pressures reducing budgets, right? So hard to know exactly. We also see just headwinds from demand mix as a negative driver. Some of the higher yielding segments are being more impacted. Examples, affiliates, outstream video, For us, a couple of our two largest geographies seem to be taking a softer trend, U.S. and Germany, than some of the other ones. As David mentioned, certain brands blocking pages with content related to the war out of safety concerns is meaningful as it's a significant percentage of our most valuable pages. This last month or so. And maybe just a stat on that would be, you know, if you look at our top 20 publishers 25% of their page use related to war related content following the attacks and it remains around 15% still These are not, you know, we're talking about US and European based typically higher yielding pages so And then not all of our supply is news based, but it is a meaningful portion. And obviously the lower RPMs do affect take rates as well. So hopefully that gives you a little bit more color. And then I think you also asked about the Onyx. We do still expect... Let me take Onyx. Sure.
spk02: I'll take Onyx. I think you heard from Jesse, I think it's...
spk04: I can tell you from looking at my career, I mean, it's a huge level of volatility and uncertainty that I haven't seen before just generally, which is impacting what Jason said. On ONIX specifically, we launched it in Cannes. We had great feedback. We launched more than 100 campaigns at this point. We're seeing both new advertisers advertising. We see cross-sell to existing performance markets that are Leveraging ONIX to also drive awareness. So we're very excited about it. We see the numbers growing significantly month over month. I mean, we talked about relatively small numbers. So it's exciting. So we stand behind the number even for this year. And looking into 2024, generally, we see ONIX and video as significant growth drivers for us as a company to move to become a full funnel partner on the open web has been a big move this year. So we see the fruits of that effort. You know, these efforts will bear fruit and result in growth next year. AI that everyone mentioned also, we see significant potential from that. On our performance business, the growth of share of wallet that we see through moving some of our segments and large customers to Zementor is also an important growth driver for next year. And just growing our publisher relationships with innovation, broadening the strategic value with Keystone. So these are the growth drivers. We haven't given any guidance for 24, but overall, when we look at all the reports out there, I think the general growth and EBITDA margin that we've seen, I think we still, you know, believe that we can achieve those. Jason, anything else?
spk17: No. Okay.
spk08: Thank you. Thank you, David. Thanks, Jason.
spk17: Thank you. Our next question will be from Andrew Boone, JMP Securities.
spk03: Please go ahead.
spk13: Thanks so much for taking my questions. I want to touch on new publisher revenue. It's slowed to $11 million. I think that's the lowest number you guys have reported as a public company. How are you guys approaching new publisher deals going forward, and how do we think about the process of adding more content?
spk16: Sure, I can start. Obviously, we had pretty, pretty big numbers for the last, uh, you know, four or five quarters and double digits and was 12, 12% growth from a new publishers last quarter. There were a lot of large wins. You know, we talked about them last year in 2022. We're obviously focused on, on the premium side of the market, uh, you know, premium publishers and, and, and, and full funnel, uh, full funnel advertisers. You know, before that 12% and so on for a few quarters, 7% was really our average for a long time. It's not a linear thing now. Obviously, you know, some partners are larger than others, and it's really not something we expected to stay at that level going into H2, you know, as we really focused on calibrating supply and demand, you know, improving the performance on current deals in this demand environment. I think 7% is probably a good average over time to continue to think about, Andrew.
spk04: Andrew, we feel pretty good about sort of competitive position there. I mean, also these deals, they're not linear. Sometimes in certain quarters, we have many of these potential new deals. I mentioned in my prepared remarks, we're excited about what is in the pipeline. I think the differentiators of focusing on the premium side of the market are helping us. Onyx is exciting for publishers. Keystone, the vision and the value that it brings also. So we feel good about that and I think that number will continue to fluctuate also depending on the market situation. When we look at new deals, we look at sort of the total economics of the deal, the impact for advertisers, the margin. but also the total dollar value that we can generate. So we feel good about competitive position and outlook for new business, but it will fluctuate.
spk13: I also wanted to ask about MFAs. There's just new concern in the industry that feels like it came up this last quarter in terms of made-for-advertising sites. Is there any impact that you guys are seeing, or how does that relate back to Outbrain? Thanks so much.
spk04: I think that there's been a lot of coverage around this topic. I think the topic has been further clarified. First, just on a general statement, it's very difficult to classify what is an MFA. Many publishers, their objective is to drive advertising. I think it's difficult to put all of them in one bucket, the different types of MFAs. I think many of them you know, generate real value for advertisers, having real people go to content and, and, and advertisers reach audiences that they want to reach at an effective cost. So that's generally hard specifically. It's a, we said previously, it's less than 5% of our extract revenues. So it's not that significant in terms of driving traffic to MFA. I think you probably saw the Jones report. 80 to 90% of the traffic that's driven to them is generated by social and search. So again, we, as long as they meet our strict content guidelines and all the other requests that come to the security and fraud, et cetera, I think there's a great category of advertisers that we have. Generally, our focus as a company has been also on helping and supporting quality journalism, premium journalism around the world. So we provide vital revenue to them. So it's, again, part of our overall business and combined with our premium publisher business too.
spk17: Thank you. Thank you.
spk03: And the next question will be from Dan Day, B-Rally FBR. Please go ahead.
spk15: Hey, morning, guys. Thanks for taking the question. So, appreciate the update on the algorithm AI bidding strategies there. Just maybe if you have any data points or anything you could share just on, you know, the subset of advertisers that, you know, you think are using these kind of AI tools better than others and whether there's been an uplift in spend and performance for them and then what you need to do to get those that aren't using them to kind of start using these AI tools and Maybe that helps increase spend per advertiser for those. Any thoughts there would be great. Thanks.
spk07: Thanks, Daniel, everyone here. So AI, first, as I mentioned in the comments, splits for us into two big buckets. One is the algorithmic AI, which we've been building in-house for almost a decade now. And the other is the generative AI. The algorithmic AI are technologies that we deploy across the board, and so they apply to all publishers, all advertisers within our system. We don't update on the results there all the time, but we did mention last quarter that for the first half, I think we've seen a increase through those algorithmic AI changes of potential click-through rate of 4%. And I did mention in this call that we've seen in the past couple of months that we've been among the three-year record highs in terms of CTRs. And that, again, is attributed a lot to all these AI changes or technologies that we've deployed. On the couple that I mentioned on the call, those are in lab R&D mode. As I said, we are live with them on a few advertisers. What we're doing with generative AI is really trying to attack ad variety from all directions. So I mentioned this in a previous call, an advertiser might upload a campaign or even one ad, and through generative AI, through our chat GPT integrations, we'll expand that and offer them 200 other variations, which they can decide whether they accept and add to the campaign automatically or not. So those tools were embedding into the product itself. They are available ultimately to all advertisers, but it's really up to them to choose which ad varieties they want to implement and choose. Many of them have been doing it, especially as it relates to creative and headlines. The newer stuff of image upsizing and all that, that is still available to a limited number of testers.
spk06: Okay, great. Thanks.
spk15: Just to turn it quickly to gross revenue and take rates. If we look beyond 2023, like I know there were some pressures from minimum guarantee deals that you did on sort of the take rate year over year in 2023. As we look to 24 and put our model together, like just to make it easy, if we were to assume gross revenue is flat, is there any reason we'd think that take rate would expand just from you know, whether it's minimum guarantees rolling off or anything other puts and takes there on take rate for 24 relative to 23?
spk16: Yeah, so, you know, don't have a specific, you know, number for you or anything like that. You know, obviously, kind of always when the take rates come up, I mentioned that we focus on ex-tech dollars and not really the take rate percentage, especially of the total portfolio. But, you know, there's certainly, you know, obviously as the rates kind of come up these last couple quarters, you know, we've been focused on some of the things we talked about actually when it was coming down, you know, in the quarters before that, which are optimizing deal performance and scaling some of our new supply and existing supply to drive higher rates. And we've had some success there. We continue to focus on that. It's one of the main things we do, both manually optimizing and our AI optimizing, learning the audience of our partners and serving them better. So the kind of thing that we do feel gets better in time, and it typically takes several quarters, But mix is always a factor as well. It could be a positive or negative factor up to even a point in a given quarter. So it's hard to say. Obviously, it depends also on the demand environment and some of the things that we're doing with Onyx and the expansion of video we see as margin lifters going forward as well. So obviously, our goal is to drive it back up.
spk17: Understood. Thanks, guys. Thank you. Again, to ask a question, please press star then one.
spk03: Our next question will be from my gal, Arian of Citigroup. Please go ahead.
spk05: Hey, good morning, guys. Hope you're all doing well. Families and employees back in Israel as well. Just maybe on ONIX, if we could expand on that a little bit. Looks to be ramping well. And I know that one... specifically is geared more towards brand budgets. And with the impact you're seeing on brand, it feels like maybe you're not seeing it on ONIX, but maybe it's doing better than expected. Just some of the puts and takes around as that launches in the current macro will be helpful to understand. Hey, Gale.
spk04: First, thanks for your kind words, David. So Onyx launched in kind of, as I said, it's been a successful launch. It helped us position the company, outbraining dialogues with the big six-hold companies in a very different way where we can broaden the value proposition and really offer a full funnel offering that we think is quite unique in the open web. So we work with brands from performance up to consideration and and and awareness the formats are different than our traditional native format so it's really focused on primarily video and it ties to the acquisition of video intelligence and pushing us more into in-stream video that is more relevant for onyx type campaigns we have high impact display that relies a lot on our brand studio where we take existing creatives and help the brands work on them to create, to generate better levels of attention and impact from those ads. Number-wise, we went into Q4. When we launched in Q3, I mean, these budgets are normally determined sort of ahead of time. So we were relatively what we think conservative in our assumptions of the 10 to 20 million. It was a broad range. We still stand behind that. Feel very comfortable about what we're tracking is pipelines. month over month growth is very strong. A current environment is not very helpful. As Jason mentioned, part of the impact we see generally on the, uh, on Q4 is grant budgets pulling back from, for example, use related pages and general macro environment is very volatile. So, uh, we're taking that into account when, you know, we were talking about the guidance for Q4. but we're very excited about it. When we look at it strategically, it really changes the whole value proposition for us, to our advertisers, our positioning in the market. And it is for us a significant growth driver on next video. And that sort of go together in 2024.
spk05: Actually, that's helpful. And for Jason, given the, The challenges in the macro, the outlook in terms of EBITDA and profitability essentially unchanged from what it was last quarter. So I feel like you're maybe tracking ahead there, making a little bit more progress. Can you just give us an update on your thoughts around EBITDA and free cash flows? We kind of work our way through the rest of this year and how you're expecting or even cost management for 2024. Thank you.
spk16: Yeah, no, obviously we've been very focused this year on a lot of what we can control, which is operating more efficiently, more effectively, having a team and just more automation and all of that. And so we've been improving over the course of the year, even our outlook and actuals on the expenses with driving to driving to positive cash even in this environment as the goal. You know, we did return to positive cash flow in the quarter and expect to stay positive and grow, you know, on it in Q4. Obviously, the headwinds on top line are limiting to what's going to happen in the short term there, but we do expect to generate positive cash flow in Q4. And obviously, as we get to 2024, nothing to share now, but that's still the mentality we have as we make our plans for next year, which is generating cash and obviously continuing to run as efficient and effectively as we can.
spk17: Great. Thanks a lot, guys. Thank you. This concludes our question and answer session.
spk03: I'd like to turn the call back over to management for closing remarks.
spk07: Thanks, operator. We appreciate your time with us today, and we look forward to updating you again in the next quarter. Until then, we wish our colleagues and friends in Israel a speedy end to the war, a return of the hostages, and peace to all people in the region. Thank you.
spk03: Thank you. Conference is now concluded.
spk17: Thank you for attending today's presentation. You may now disconnect. Thank you. Thank you. you Thank you. Thank you.
spk03: Good day, and welcome to Outbrain Incorporated third quarter 2023 earnings conference call. This time all participants are in listening mode. Let your answers follow the formal presentation. As a reminder, this conference is being recorded. I'd like to turn the call over to Outbrain Investor Relations. Please go ahead.
spk09: Good morning, and thank you for joining us on today's conference call to discuss Outbrain's third quarter 2023 results. Joining me on the call today, we have Outbrain's co-founder and co-CEO, Jerome Goliath, co-CEO, David Kostin, and CFO, Jason Kiviat. During this conference call, management will make forward-looking statements based on current expectations and assumptions. These statements are subject to risks and uncertainties 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 31, 2022, as updated in our Form 10-Q, and in 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 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 third quarter earnings release for definitional information and reconciliations of non-GAAP measures to the comparable GAAP financial measures. Our earnings release can be found on our investor relations website, investors.outbrain.com, under news and events. With that, let me turn the call over to David.
spk04: Thank you, Randy. First, I want to touch on the situation in the Middle East. At Outbrain, we stand with the people of Israel who have been affected by the recent events. Our hearts go to all the people that are impacted by the horrific situation. We all know people that have suffered, and we pray and hope for better, peaceful days in the region. I want to take this opportunity to thank so many of you. First and foremost, our employees in Israel and around the globe for your unwavering commitment. Our business partners and our investors and analysts for the outpouring expressions of support. This means a lot to us. From an operational perspective, we have approximately 380 employees in Israel. About 30 have been called to reserve duty. Our offices are located in Netanya, north of Tel Aviv, in the center of Israel. The safety and well-being of our employees and their families is our top priority. Since October 7, we have continued to execute on our business priorities and deliver on our commitments to our customers. We do have business continuity plans in place should the situation further escalate. Now I will turn to our financial results and business trends. We are pleased with the resumption of year-over-year growth in Q3. We grew XTAC gross profit by 8% to $56.8 million within the range of our guidance. Our adjusted EBITDA of $10.3 million exceeded significantly the high end of our guidance and can be attributed to the top-end growth and to our cost discipline. We also saw improvements in our XTAC margin. In terms of current trends, The macro environment, which remains volatile, combined with the ongoing situation in the Middle East, leads us to a more cautious outlook for revenues and ex-tax gross profit in Q4, as you will hear from Jason. Since early October, we've seen a spike in war-related news pages, which are generally more difficult to monetize, as certain brands have brand safety concerns around these types of pages. We have also experienced some brand budget cuts and delays in launching campaigns, resulting in slower-than-normal seasonal Q4 uptick. Despite these near-term headwinds, going into 2024, we're excited with our differentiated position in the market, which focuses on the premium side of publishers and advertisers. Our platform offers full-panel results for advertisers at scale on the open web, and enables total publisher revenue and audience growth, all leveraging our AI-driven prediction engine. We believe this provides us with a strong foundation for further growth in 2024 and beyond. Let me turn to the advertiser side of our business. Our brand has traditionally been and continues to be a cost-per-click native advertising customer acquisition platform that uses AI to deliver strong performance on CPA goals across the open web. Yaron will touch on Q3 notable investments in AI and automation capabilities in our core buying platforms, such as the growth in our codeless conversion features for self-serve advertiser base. We continue to innovate to drive return on ad spend and scale for a diverse set of performance advertisers. We are seeing growing adoption of our performance DSP Zementa with additional amplified clients moving budgets to buy more effectively across open web SSPs and not only in the outgoing marketplace. As a reminder, Zementa operates on a percent of spend through the platform and we have seen record levels of spend growth on Zementa in 2023. On the branding and awareness front, at the start of Q3, we launched Onyx, our new brand-building platform that runs video, high-impact display, and rich media ads, leveraging our brand's AI to maximize user attention. Since the launch, we have worked with more than 100 brand advertisers, These advertisers include Sephora, Paramount, L'Oreal, Lancome, Nestle, and many others. For many of these advertisers, we are demonstrating that we can outperform incumbent vendors through a unique combination of better creatives, running on high attention placement, and utilizing smarter technology to drive attention. We continue to consistently deliver above benchmark results in terms of attention. For example, with our high-impact display ads on mobile, we see an average 58% higher attention rate versus the Adelaide benchmark. Also, in our video business, which is a core component of our Onyx offering, we switched our focus from out-stream video to in-stream free roll, leveraging our video intelligence acquisition. This shift is starting to pay off with higher margins for the video segments. we expect video to be even more strategic for our future growth. Another differentiated element of our offering is the ability to drive both performance and awareness for brands. This makes us one of the very few companies beyond the walled gardens that can deliver advertiser objectives across the full funnel consumer journey. As an example, For many years, AARP has been leveraging our amplified performance platform to drive objectives like audience development. Now, we have expanded the relationship to encompass branding objectives where Onyx will help them build brand awareness with potential new members. These types of engagements with advertisers get us excited about our strategy to address a larger segment of advertising budgets from both new and existing clients. Despite some of the slowdown in brand advertiser business that I referred to, we still expect to close the year, as we said before, with $10 to $20 million of Onyx business. Moving to the publisher side, we continue to focus on improving the performance of our premium publisher wins over the last 12 to 18 months. Among our renewals of long-term partnerships in Q3, I want to highlight L'Equipe in France, Berliner Verlag and Zeit in Germany, as well as Vox in the U.S., a partner we have been working with exclusively for close to a decade. We are currently engaged in several discussions with large publishers globally and feel strong momentum driven by several elements of differentiation. One, our focus on having a balanced portfolio of premium global publishers with no single publishers taking up outsized demand. Second, the onyx premium demand. And third, keystone capabilities and product vision. To sum it up, considering the current macro environment and the situation in the Middle East, we are more cautious about our short-term revenue outlook but we continue to leverage our cost discipline to drive profitability and cash flow generation. We are pleased with the resumption of year-over-year growth in Q3 and expect further acceleration in 2024, leveraging our strategic investments. With that, I will turn it over to Yaron.
spk07: Thanks, David. I want to join David's comments and clearly say we stand with the people of Israel, and together with our colleagues there, we are committed to overcoming and to continuing the great level of service and product that all Outbrain customers and partners have come to expect. Since our last call, we've added several new keystone partners, New York Post, The New Republic, Entrepreneur Magazine, Publisher Desk, and others. During this last quarter, we started experimenting with an added business model for Keystone, where its cost is covered through revenue sharing on publishers' ad slots. We believe that this addition will help us further accelerate Keystone with more publishers. Two updates on the AI front, one algorithmic AI and one generative AI. First, one of our core AI algorithms has been conversion bid strategy, or CBS, which automates for advertisers the optimization of their ad campaign. When using our brand CBS, an advertiser can automatically maximize their conversion or their return on ad spend, which is also known as ROAS. And CBS is based on our homegrown AI algorithm, and the majority of our current advertiser campaigns are running on CBS technology. This last quarter, we've deployed a new technology that upgrades CPS with codeless capabilities. Using this codeless layer, marketers on Outbrain can now significantly accelerate the pace of deploying new conversion events and further improve their ROAS. This technology marks a significant stride in our dedication to marketing automation combined with Seltzer functionality, and it will be a foundational layer for more automation capabilities we're planning to build upon this new layer in coming months. Second, on generative AI. One of the most exciting frontiers for us with generative AI is the automation of ad variety. Ad variety is like algorithms. And the more variety we have in our ad index, the better our algorithms can match each individual ad to each individual person. So ad variety results in better ad matching, which ultimately leads to higher click-through rates, also known as CPR, and higher RPM. One of the earliest AI capabilities we built almost 10 years ago was for automated image cropping in our ads. So, for example, our technology will auto-crop an image to better focus on faces or the areas of interest of an image. This has been a CTR driver for us for many years. Now we're experimenting in the lab with generative AI capabilities that will also enable the reverse, upscaling images and growing them while filling the new image spaces with automatically generated content. Another generative AI capability we're experimenting with in the R&D lab is the automatic creation of face variation. Now, for an advertiser, might upload an ad with a photo of one model, and then our technology can automatically offer the identical product image with a variety of, say, 20 different AI-generated model faces. Both these capabilities are still in R&D lab mode with early test groups. We expect these types of capabilities to significantly boost our ad variety, which will improve the appeal of AppRains ads to more people and ultimately help continue driving our click rates. Anecdotally, following all of our recent investments in algorithmic and generative AI, our advertising CPRs these past couple of months have been among three-year record highs. This is especially encouraging in light of the weaker demand environments. As a reminder, our yield is a result of ad pricing times click-through rates. And with that, I'll hand it over to Jason for our financial results.
spk16: Thanks, Jeroen. As David mentioned, based on our growth and cost discipline, we exceeded our Q3 guidance for adjusted EBITDA and achieved our exact gross profit guidance. From a demand perspective, the quarter started off relatively strong in July with year-over-year growth. followed by weakening demand trends in August before a partial recovery in the last weeks of the quarter. The early portion of Q4 has shown a flatter pattern than the seasonal lift we historically see this time of year, which is driven largely by softer demand to start the quarter, as macro and geopolitical uncertainties weigh on ad budgets, as well as the impact of the news cycle on certain advertisers' budget usage, as David mentioned. Revenue in Q3 was approximately $230 million, resulting in a slight increase year-on-year. New media partners in the quarter contributed 5 percentage points, or approximately $11 million of revenue growth year-over-year. Net revenue retention of our publishers was 95%, which, while up meaningfully from the last several quarters, reflects a continued headwind in the impact of the demand environment on pricing and yields, which is the primary factor driving retention to be below 100%. As noted in the last few quarters, churn has remained low by our standards, with logo retention of 96% for all partners that generated at least $10,000, and our five largest churns amounted to only three combined points of year-over-year headwind in Q3. XTAC gross profit was $56.8 million, an increase of 8% year-over-year, outpacing revenue growth, driven primarily by improved deal performance on certain media partners and the net impact of revenue mix. As noted, our ongoing focus will continue to be on optimizing deal performance. Moving to expenses. Operating expenses decreased approximately 11% year-over-year to $43.8 million in the quarter as we continue to exercise discipline around spending. The largest component of this is compensation-related expenses, which were down approximately $5 million or 14% year-over-year as we have focused on driving efficiencies in our operations. Non-comp expenses were down slightly year-over-year as we continued to exercise prudence. Notably, Fed debt expense, though down from H1, remains at elevated levels as compared with our history, as a higher number of customers are facing cash flow pressures in this environment. As a result of our cost management and growth of XTAC gross profit, displaying the leverage in our model, adjusted EBITDA was approximately $10.3 million in Q3, growing meaningfully year-over-year and exceeding the high end of the guidance range. We believe there continues to be meaningful room for operating leverage in the future, particularly as we drive more and higher yielding demand through new products like Onyx and our expansion of video, and assuming a return to a more favorable macro environment in the future. Moving to liquidity. Free cash flow, which as a reminder, we define as cash from operating activities less capex and capitalized software costs, is approximately $2 million in the quarter. While we are pleased to return to positive free cash flow in the quarter, we still see pressures on working capital, particularly around collections with elevated DSO levels remaining from Q2 into Q3. As a result, we ended the quarter with $214 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. Year-to-date through September 30th, we have purchased approximately 2.5 million shares for $12.7 million. We continue to believe it's an attractive way to enhance shareholder value under current market conditions. Now turning to our outlook. Uncertainty from macro and geopolitical events and the typical back-half-weighted nature of Q4 seasonal uplift are considerations in our decision to present a wider than typical range of guidance for the quarter. In our guidance, we assume the continuation of the softer demand trends we have seen in the first weeks of Q4 and assume that seasonal increases in ad spend will occur at levels below what we've seen historically. With that context, we have provided the following guidance for Q4. We expect expat gross profit of $59 million to $64 million, and we expect adjusted EBITDA of $13 million to $17 million. Now I'll turn it back to the operator for Q&A.
spk03: Thank you. Now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. Using the speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. This time will pause momentarily to assemble the roster. First question will be from Swetha Kanjurari of Evercore ISI. Please go ahead.
spk11: Thank you for taking my questions. Jason, I have a couple for you, please. On the last point that you talked about on the outlook, for the fourth quarter, could you please provide a little bit more color on quantifying the magnitude of the headwind that you are baking in the guidance from macro and Israel and then if you are also I believe David said you're also account still expecting 10 to 20 million from on it so how should we think about the tailwinds and headwinds that are accounted for in the fourth quarter guidance and then and then for 2024 without any official guidance how should we at a high level think about acceleration and growth rate for 24 given the exit rate thank you
spk16: Hey, Shweta, it's Jason. Thanks for the question. So, yeah, so maybe I'll just give you a little more color on the guidance and what's driving it. So, you know, we're using our normal forecasting process, which is a seasonality-based model, and it takes, you know, down-to-date trends, what we're seeing in RPMs and page views and running it out. Supply for us is fairly straightforward. It's locked in. It's long-term. Not very many meaningful changes. Demand remains the harder thing to forecast, especially now as advertisers may be reacting to the macro and geopolitical uncertainties still. So we're considering the trends that we've seen in the first part of Q4, where we saw an impactful step down in demand. And applying that forward, we project a softer than typical seasonal lift in Q4. And that does also have an impact on exit tech margins. So maybe just to give you color to kind of what we saw. So, you know, we did see last time we spoke, you know, here three months ago, we saw positive demand trends, you know, a couple months in around June and July, building strength of demand and yields. which along with a typical Q4 seasonal uplift was the basis of our prior forecast and guidance provided last time. Obviously, we've now factored in what we've seen in October, which is first we saw a softening of demand trends in August versus those July levels with some recovery in September. But then October started off weaker than expected from a demand perspective relative to what we expected coming out of September. And we saw that toughness increase over the course of the month, really correlating with the onset of the war. Maybe a data point that would help would be, you know, we saw October revenue grow 1% sequentially from September, which is very low. You know, we typically see 6% or more. you know, the last, you know, many years, 6%, I think, the last two years and more even before that, based on our history. So several drivers, it's hard to attribute specific amounts to specific things, but maybe just, you know, we do see certain budgets pause or delays due to the macro and geopolitical uncertainties. It's hard to know if that slow start we saw, you know, even before October 7th, And the attacks was just delays in advertisers setting budgets, which is something we did see a lot of months this year, was that the first week might have been slow, but then the month kind of comes together. Or if it was the macro pressures reducing budgets, right? So hard to know exactly. We also see just headwinds from demand mix as a negative driver. Some of the higher yielding segments are being more impacted. Examples, affiliates, outstream video, For us, a couple of our two largest geographies seem to be taking a softer trend, U.S. and Germany, than some of the other ones. As David mentioned, certain brands blocking pages with content related to the war out of brand safety concerns is meaningful as it's a significant percentage of our most valuable pages. this last month or so. And maybe just a stat on that would be, you know, if you look at our top 20 publishers, 25% of their page use related to war-related content following the attacks, and it remains around 15% still. These are not, you know, we're talking about U.S. and European-based, typically higher-yielding pages. So, And not all of our supply is news-based, but it is a meaningful portion. And obviously the lower RPMs do affect take rates as well. So hopefully that gives you a little bit more color. And then I think you also asked about the Onyx. We do still expect... Let me take Onyx. Sure.
spk02: I'll take Onyx. I think you heard from Jesse, I think it's...
spk04: I can tell you from looking at my career, I mean, it's a huge level of volatility and uncertainty that I haven't seen before just generally, which is impacting what Jason said. On ONIX specifically, we launched it in Cannes. We had great feedback. We launched more than 100 campaigns at this point. We're seeing both new advertisers advertising. We see cross-sell to existing performance markets that are Leveraging ONIX to also drive awareness. So we're very excited about it. We see the numbers growing significantly month over month. I mean, we talked about relatively small numbers. So it's exciting. So we stand behind the number even for this year. And looking into 2024, generally, we see ONIX and video as significant growth drivers for us as a company to move to become a full funnel partner on the open web has been a big move this year. So we see the fruits of that effort. You know, these efforts will bear fruit and result in growth next year. AI that everyone mentioned also, we see significant potential from that. On our performance business, the growth of share of wallet that we see through moving some of Our segments and large customers to Zementor is also an important growth driver for next year. And just growing our publisher relationships with innovation, broadening the strategic value with Keystone. So these are the growth drivers. We haven't given any guidance for 24, but overall, when we look at all the reports out there, I think the general sort of growth and sort of EBITDA margin levels that we've seen, I think we still believe that we can achieve those. Jason, anything else?
spk17: No.
spk08: Okay. Thank you, David. Thanks, Jason.
spk17: Thank you. Our next question will be from Andrew Boone, JMP Securities.
spk03: Please go ahead.
spk13: Thanks so much for taking my questions. I want to touch on new publisher revenue. It's slowed to $11 million. I think that's the lowest number you guys have reported as a public company. How are you guys approaching new publisher deals going forward, and how do we think about the process of adding more content?
spk16: Sure, I could start. Obviously, we had pretty, pretty big numbers for the last, uh, you know, four or five quarters and double digits and was 12, 12% growth from a new publisher's last quarter. There were a lot of large wins. You know, we talked about them last year in 2022. We're obviously focused on, on the premium side of the market, uh, you know, premium publishers and, and, and, and full funnel, uh, full funnel advertisers. Before that 12% and so on for a few quarters, 7% was really our average for a long time. It's not a linear thing, though. Obviously, some partners are larger than others, and it's really not something we expected to stay at that level going into H2 as we really focused on calibrating supply and demand, improving the performance on current deals in this demand environment. I think 7% is probably a good average over time to continue to think about that, Andrew.
spk04: Andrew, we feel pretty good about sort of competitive position there. I mean, also these deals, they're not linear. Sometimes in certain quarters, we have many of these potential new deals. I mentioned in my prepared remarks, we're excited about what is in the pipeline. I think the differentiators of focusing on the premium side of the market are are helping us. Onyx is exciting for publishers. Keystone, the vision and the value that it brings also. So we feel good about that and I think that number will continue to fluctuate also depending on the market situation. When we look at new deals, we look at sort of the total economics of the deal, the impact for advertisers, the margin. but also the total dollar value that we can generate. So we feel good about competitive position and outlook for new business, but it will fluctuate.
spk13: I also wanted to ask about MFAs. There's just new concern in the industry that feels like it came up this last quarter in terms of made-for-advertising sites. Is there any impact that you guys are seeing, or how does that relate back to Outbrain? Thanks so much.
spk04: I think that there's been a lot of coverage around this topic. I think the topic has been further clarified. First, just on the general statement, it's very difficult to classify what is an MFA. Many publishers, their objective is to drive advertising. I think it's difficult to put all of them in one bucket, the different types of MFAs. I think many of them you know, generate real value for advertisers, having real people go to content and, and advertisers reach audiences that they want to reach at an effective cost. So that's generally hard. Specifically, we said previously, it's less than 5% of our extract revenues. So it's not that significant in terms of driving traffic to MFA. I think you probably saw the Jones report. 80 to 90% of the traffic that's driven to them is generated by social and search. So again, we, as long as they meet our strict content guidelines and all the other requests that come to the security and fraud, et cetera, I think there's a great category of advertisers that we have. Generally, our focus as a company has been also on helping and supporting quality journalism, premium journalism around the world. So we provide vital revenue to them. So it's, again, part of our overall business and combined with our premium publisher business too.
spk17: Thank you. Thank you.
spk03: And the next question will be from Dan Day, B-Rally FBR. Please go ahead.
spk15: Hey, morning, guys. Thanks for taking the question. So, appreciate the update on the algorithm AI bidding strategies there. Just maybe if you have any data points or anything you could share just on, you know, the subset of advertisers that, you know, you think are using these kind of AI tools better than others and whether there's been an uplift in spend and performance for them and then what you need to do to get those that aren't using them to kind of start using these AI tools and Maybe that helps increase spend per advertiser for those. Any thoughts there would be great. Thanks.
spk07: Thanks, Daniel, everyone here. So AI, you know, first, as I mentioned in the comments, splits for us into two big buckets. One is the algorithmic AI, which we've been building in-house for almost a decade now. And the other is the generative AI. The algorithmic AI are technologies that we deploy across the board, so they apply to all publishers, all advertisers within our system. We don't update on the results there all the time, but we did mention last quarter that for the first half, I think we've seen a increase through those algorithmic AI changes of potential click-through rate of 4% And I did mention in this call that we've seen in the past couple of months that we've been among the three-year record highs in terms of CTRs. And that, again, is attributed a lot to all these AI changes or technologies that we've deployed. On the couple that I mentioned on the call, those are in lab R&D mode. As I said, we are live with them on a few advertisers. What we're doing with generative AI is really trying to attack ad variety from all directions. So I mentioned this in a previous call, an advertiser might upload a campaign or even one ad, and through generative AI, through our chat QPT integrations, we'll expand that and offer them 200 other variations, which they can decide whether they accept an ad to the campaign automatically or not. So those tools were embedding into the product itself. They are available to ultimately to all advertisers, but it's really up to them to choose which ad varieties they want to implement and choose. Many of them have been doing it, especially as it relates to creative and headlines. The newer stuff of image upsizing and all that, that is still available to a limited number of testers.
spk06: Okay, great. Thanks.
spk15: Just to turn it quickly to gross revenue and take rates. If we look beyond 2023, like I know there were some pressures from minimum guaranteed deals that you did on sort of the take rate year over year in 2023. As we look to 24 and put our model together, like just to make it easy, if we were to assume gross revenue is flat, is there any reason we'd think that take rate would expand just from you know, whether it's minimum guarantees rolling off or anything other puts and takes there on take rate for 24 relative to 23?
spk16: Yeah, so, you know, don't have a specific, you know, number for you or anything like that. You know, obviously, kind of always when the take rates come up, I mentioned that we focus on ex-tech dollars and not really the take rate percentage, especially of the total portfolio. But, you know, there's certainly, you know, obviously as the rates kind of come up these last couple quarters, you know, we've been focused on some of the things we talked about actually when it was coming down, you know, in the quarters before that, which are optimizing deal performance and scaling some of our new supply and existing supply to drive higher rates. And we've had some success there. We continue to focus on that. It's one of the main things we do, both manually optimizing and our AI optimizing, learning the audience of our partners and serving them better. So it's the kind of thing that we do feel gets better in time. And it typically takes several quarters But mix is always a factor as well. It could be a positive or negative factor up to even a point in a given quarter. So it's hard to say. Obviously, it depends also on the demand environment and some of the things that we're doing with Onyx and the expansion of video we see as margin lifters going forward as well. So obviously, our goal is to drive it back up.
spk17: Understood. Thanks, guys. Thank you. Again, to ask a question, please press star then one.
spk03: Our next question will be from my gal, Arian of Citigroup. Please go ahead.
spk05: Hey, good morning, guys. Hope you're all doing well. Families and employees back in Israel as well. Just maybe on ONIX, if we could expand on that a little bit. Looks to be ramping well. And I know that one... specifically is geared more towards brand budgets. And with the impact you're seeing, a brand feels like maybe you're not seeing it on ONIX, but maybe it's doing better than expected. Just some of the puts and takes around as that launches in the current macro will be helpful to understand. Hey, Gale.
spk04: First, thanks for your kind words. It's David. So Onyx launched in kind of, as I said, it's been a successful launch. It helped us position the company, outbraining dialogues with the big six whole companies in a very different way where we can broaden the value proposition and really offer a full funnel offering that we think is quite unique in the open web. So we work with brands from performance up to consideration and and awareness. The formats are different than our traditional native formats, so it's really focused on primarily video and it ties to the acquisition of video intelligence and pushing us more into in-stream video that is more relevant for Onyx-type campaigns. We have high-impact display that relies a lot on our brand studio where we take existing creatives and help the brands work on them to create, to generate better levels of attention and impact from those ads. Number-wise, we went into Q4. When we launched in Q3, I mean, these budgets are normally determined sort of ahead of time. So we were relatively what we think conservative in our assumptions of the 10 to 20 million. It was a broad range. We still stand behind that. Feel very comfortable about what we're tracking is pipelines. month over month growth, it's very strong. A current environment is not very helpful. As Jason mentioned, part of the impact we see generally on the, uh, on Q4 is grand budgets, pulling back from, for example, use related pages and general macro environment is very volatile. So, uh, we're taking that into account when, you know, we were talking about the guidance for Q4. but we're very excited about it. When we look at it strategically, it really changes the whole value proposition for us, to our advertisers, our positioning in the market. And it's a, for us a significant growth driver on next video. And that sort of go together in 2024. Excellent.
spk05: That's helpful. And for Jason, given the, The challenges in the macro, the outlook in terms of EBITDA and profitability essentially unchanged from what it was last quarter. So I feel like you're maybe tracking ahead there, making a little bit more progress. Can you just give us an update on your thoughts around EBITDA and free cash flows as we kind of work our way through the rest of this year and how you're expecting or even cost management for 2024? Thank you.
spk16: Yeah, no, obviously we've been very focused this year on a lot of what we can control, which is operating more efficiently, more effectively, having a team and just more automation and all of that. And so we've been improving over the course of the year, even our outlook and actuals on the expenses with driving to driving to positive cash even in this environment as the goal. You know, we did return to positive cash flow in the quarter and expect to stay positive and grow, you know, on it in Q4. Obviously, the headwinds on top line are limiting to what's going to happen in the short term there, but we do expect to generate positive cash flow in Q4. And obviously, as we get to 2024, nothing to share now, but that's still the mentality we have as we make our plans for next year, which is generating cash and obviously continuing to run as efficient and effectively as we can.
spk17: Great. Thanks a lot, guys. Thank you. This concludes our question and answer session.
spk03: I'd like to turn the call back over to management for closing remarks.
spk07: Thanks, operator. We appreciate your time with us today, and we look forward to updating you again in the next quarter. Until then, we wish our colleagues and friends in Israel a speedy end to the war, a return of the hostages, and peace to all people in the region. Thank you.
spk03: Thank you. Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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