Outbrain Inc.

Good day and welcome to Outbrain Incorporated fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would like to turn the call over to Outbrain's Investor Relations. Please go ahead.

Good morning, and thank you for joining us on today's conference call to discuss Outbrain's fourth quarter and full year 2023 results. Joining me on the call today, we have Outbrain's co-founder and co-CEO, Yaron Gali, co-CEO, David Kosman, 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 risk 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 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 such statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's fourth quarter earnings release for definitional information and reconciliations of non-GAAP measures to the comparable GAAP financial measures. Our earnings release can be found on our IR website, investors.outbrain.com, under news and events. With that, let me turn the call over to David.

Thank you, Jackie, and good morning, and thank you for joining us. Before going into the specifics of the year, I wanted to acknowledge the challenging events that faced us on a geopolitical level. The events of October 7 and the ensuing war are devastating and continue to impact so many of us. I want to take a moment to acknowledge our team in Israel and thank them for their unwavering commitment and our global team for their ongoing support. Over the past couple of years, there have been massive changes to how audiences consume content and how the advertising industry functions as a result. We believe the unique foundational assets we own give us a strong opportunity to capitalize on these changes. We are looking at 2024 as a year of return to growth extra margin expansion, and investment in new growth areas. We believe this will result in growth this year, as well as double-digit growth and a 20% plus EBITDA margin in 2025. With that said, we would like to update you on our long-term vision and strategic investment areas. Before we dive into the details, I'm going to provide a perspective on the open Internet, which is estimated to be a $100 billion advertising market, and the opportunities it presents. The open Internet provides access to an increasingly valuable resource, journalistic, non-user-generated editorial content. In addition, the open Internet also provides access to expanded and emerging environments such as mobile apps, CTV, and retail media. These environments create deep engagement and attention opportunities not found within walled gardens. and they provide unique value to advertisers. And while walled gardens continue to grow, advertisers are seeking to diversify their ad spend across channels that can provide incremental audience moments and efficient reach. Outbrain is well positioned to capitalize on this opportunity, providing a single access point for advertisers. We have an excellent starting point. due to our foundational business assets in core AI prediction technology, which has been developed over the last 17 years. First, we are one of the very few companies on the open internet with a critical mass of exclusive code on page inventory across some 8,000 publishers. This yields valuable proprietary data around consumer interest and engagement. This data, coupled with our core prediction technology, fuels our successful performance advertising business. We've been able to develop new applications of our data and technology with offerings like Keystone, optimizing total publisher revenue initiatives, including subscriptions and e-commerce, and ONIX. If third-party cookies decline, We believe that our approach to predicting consumer attention based on their editorial interest and the content will be a strong solution for a range of advertiser objectives. Second, we operate the true end-to-end supply chain and two-sided platform. Our owned and operated SSP, DSP, and native ad platform provide transparent, direct access to our critical mass of inventory. with tools tailored to a range of advertiser objectives. As the industry continues to focus on supply path optimization, owning a direct route to unique consumer moments and inventory is more critical than ever. In addition, we believe that these tools give us unique bidding capabilities that drive ROAS for performance advertisers across the open internet. This is especially differentiated in the programmatic ecosystem. So in 2024, we plan to lean on these core assets to expand in three strategic growth pillars. The first pillar is growing our share of wallet with advertisers. We plan to do so by first expanding our programmatic branding solutions with Onyx and second, further developing our performance suite to serve a diverse range of advertisers. Onyx has enabled us to grow our business with enterprise brands and agencies, significantly expanding our total demand addressable market. ONIX applies our prediction technology to maximize attention with video and high impact experiences across a dedicated environment of viewable in article inventory. In 2024, we will be focused on scaling ONIX to directly address ecosystem opportunities around supply path optimization and programmatic media effectiveness with attention. We have a strong foundation of working with enterprise brands to our performance offerings with a client base that includes companies such as BMW, GSK, Paramount Plus, Collier-Palmolive, and others, spending more than $200 million with us in 2023. We believe this presents a large opportunity to tap into new branding budgets across our existing client base, driving impactful results across the funnel. We will also continue investing in our performance business, expanding the types of customers we can service with our two unique platforms. Investment into our proprietary DSP Zementa will enable us to provide advanced controls and bespoke service offerings for large-scale advertisers seeking to drive engagement and ROAS across the open Internet. Total spend on our DSP in 2023 was approximately $125 million, representing a CAGR of approximately 20% over the last two years. It is important to mention that we don't recognize this amount as part of our gross revenue, but keep a service fee from that spend, which is part of our extra gross profit. We expect that our focus on driving strategic key accounts to leverage our DSP will result in significantly higher budgets from these advertisers through access to the new open Internet supply beyond outbrain. Both of these strategies create incremental margin opportunities for us. At the same time, we believe that our proprietary native ad platform, Amplify, enables us to drive results for customers of all sizes. We will continue to focus on new users of AI and automation to provide these customers with growth at scale. While AI has been at the core of our prediction engine for over a decade, this year we have developed new users of generative AI in our native ad platform, to reduce marketer legwork and improve creative performance with dynamic titles. We've seen great success with adoption of our key automated bidding product, Conversion Bid Strategy. Today, 73% of our native ad platform customers use Conversion Bid Strategy. Through new uses of AI and automation, we plan to further grow our core performance customer base. The second pillar, is expanding our supply footprint to reach consumers across the entirety of the open internet beyond traditional feeds. As audience consumption habits shift, we're expanding our access to audiences beyond web publishing. We plan to continue bringing our core technology and demand offering to mobile apps, OEMs, and platforms. We expect that the engagement-based bidding capabilities on our DSP will enable us to drive differentiated performance and outcome across this new supply, providing a single access point to open internet consumers while driving outcomes and ROAS. In 2023, advertiser spend that was incremental to our core publisher feed inventory accounted for over 20% of the total advertiser spend without brain. We plan to grow this supply in 2024 and beyond, to expand advertiser access to engage audiences at scale. Now to our third pillar, continuing to grow our premium publisher partnership. Bringing advertising dollars back to news by better exhibiting the value of these audiences is more critical than ever, as authentic reporting is so essential to democracy. Journalistic content will only become more valuable and differentiated. We're continuing to invest in enhancements to our core prediction engine in an effort to drive higher yield for our publisher partners. In 2023, we saw continuous CTR improvement with double-digit improvement in H2. This prediction engine underpins our core publisher and advertiser offerings with the goal of infusing publishers with sustainable year-round revenue and critical audience development solutions. As mentioned, Keystone remains a key area of investment, providing publishers with a customizable SaaS platform that optimizes total publisher revenue across subscriptions, e-commerce, and more. And finally, ONIX also enables our publisher partners to benefit from a new demand offering, monetizing new in-article video inventory for us. At the end of 2023, we secured access to more than 1,000 in-article placements. Coupled with our existing performance offering, publishers can now benefit from a total full-page monetization offering with one partner. Let me now recap our Q4 performance. First, I am pleased that we achieved our guidance both on extra gross profit and adjusted EBITDA. I want to refer to some of the highlights for Q4, which reflect the investments we have already made in each of the areas I just mentioned. We've seen great market reception to the launch of Onyx in June 2023 with more than 150 accounts running on the Onyx platform in H2. We hit our initial expectations of $10 to $20 million in Onyx revenue just six months after launching in the second half of the year. Onyx enables us to expand our demand offering for brands with solutions from brand building to performance. Toyota is a good example of this opportunity. Toyota leveraged Onyx for the pilot of its new Toyota C-HR model, using Onyx's contextual pre-roll video format to drive incremental high attention moments, building stronger awareness and consideration with its target audience. Toyota then harnessed the top of funnel successes to fuel the performance campaigns they run via our brand's performance suite. With Onyx, Toyota achieved 82% viewability 70% video completion rate, and outperform Adelaide's attention management by 41%. With our performance suite, Toyota managed to drive efficient, qualified visits to Toyota's dedicated landing page, advertising offers for the new car model. This is a true cross-funnel opportunity. We also continue to secure strategic publisher partners which is a testament to the value of our full-page monetization and our total revenue offering. In Q4, we continued our momentum of premium publishers switching from competitors, securing a long-term partnership with Newscope Australia. This marquee deal was signed early January. Additional wins from competition in Q4 include Huffington Post, Webidia Spain, Sport One, Boda International, and others. These Q4 wins complement our premium publisher wins in the last two years, demonstrating the strategic value and our relative advantage in the market. We also renewed long-term partnerships with leading premium publishers, including Dot Dash Meredith, Ocento, Le Parisien, Eton Digital, and Handelsblatt. Adoption of Keystone increased the cost of our existing and new publisher base with launches on CNN, Entrepreneur, and the Telegraph and was a key factor in our new scope deal. To sum it up, we are confident that our investment strategy started in H2 2023 and continuing into 24 will strengthen our strategic value as a leading cross funnel platform for the open internet. We believe this will drive substantial growth and profitability in the coming years. As a result, we're also providing a high level outlook for 2025 where we expect to achieve extra growth of 10 to 15% and an EBITDA margin of at least 20%. I'm personally very excited about the decisions we've made and the speed in which we are executing them. As you may have seen in the release this morning, Yaron will be stepping down from the co-CEO role. I want to take this opportunity to thank Yaron, a close personal friend, and a truly amazing business partner. We have accomplished an incredible amount over our six years working together and I'm privileged to be part of the amazing company he founded. With that, I'll turn it over to Yaron to talk about the future and what's next for him. Thanks, David.