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.

I appreciate the kind words. 17 years ago, I recognized that consumers needed better personalization of their content and ad experiences. that publishers needed better ways to engage people and monetize, and that advertisers needed great ROAS on the open internet. That's when I decided, together with Ori Lahav, my co-founder, to create Outbrain and pioneer many of the things that inspired other companies over the years. Since then, we've generated over $5 billion for our partners, which has been a crucial way for many of the world's best publishers to keep journalists, editors, and fact-checkers employed. which, as we all know, are so crucial for our functioning democracies now more than ever. Today, many of Outbrain's innovations are taken for granted, as this is obviously how things are done. As a founder, I'm tremendously proud about that. It's every founder's dream to move from untested, widely doubted ideas to forming multibillion-dollar markets where their fundamentals are taken for granted. Before I talk about the CEO transition, I want to acknowledge the shifts in our industry and the opportunities they present to Outbrain as the company evolves into its next chapter. Advertisers are moving through paradigm shifts, both because of consumer habit changes and traditional ad targeting methods, which are evolving with the decline of third-party cookies. Accordingly, publishers on the open internet are also challenged on both ad monetization and audience development. I strongly believe in the points that David has raised about Outbrain's ability to provide compelling solutions for both advertisers and publishers amidst these industry changes. Through the combination of Outbrain's expanded performance suite and our entirely new branding platform, Onyx, advertisers will be able to connect the steps of the consumer journey across the open internet. This has the potential to create huge value for our publisher partners, giving them one reliable partner to provide sustainable year-round monetization from both brand and performance budgets. As we look to the future, we're focused on utilizing the core prediction technology that has enabled us to recommend relevant editorial and paid experience for over 17 years to new supply environments and new publisher revenue goals. Through Keystone, we enable partners to both diversify their revenues on top of ads and to enhance their audience development at a time where search and social are no longer as reliable as they were in the past. And I believe Outbrain will only become a more critical partner for publishers as we use new solutions like Onyx to bring even more advertising dollars back to news. But beyond products like Onyx and Keystone, what gives me the most confidence about Outbrain's future is the incredible leadership team we've grown over the years. The average tenure of both our executive team as well as the key employees driving business each day is over 10 plus years. That's a real rarity in tech. And for the past several years, Outbrain's management team has been receiving amongst the high scores in our company-wide engagement surveys. Of everything I've built over the years at Outbrain, it's our team of people at Outbrain that I am most proud of, and it's this incredible quality of talent which gives me tremendous confidence and comfort in the future of Outbrain through this transition. So for all these reasons, I feel now is the right time to phase out of my role as co-CEO. It's clear that Outbrain is entering a new and exciting era, applying the best parts of our business to new areas as the industry around us changes. As an entrepreneur, I view times of change as times of opportunities for companies like Outbrain. Therefore, I'm very excited about the company's prospects to do this. CEO transitions can be difficult for companies, especially after a tenure as long as 17 years. In Outbrain's case, we've had the privilege of our next CEO, David Kostman, already operating as co-CEO together with me for the past six years. David is greatly respected at all levels of the company and is deeply trusted by our customers and our shareholders. For all these reasons, I'm confident that our CEO transition will be as smooth as can be. On a personal note, I look forward to continuing as chairman of the board and serving as an advisor to the company. I have no plans for a new or next company upon departing Outbrain, and I look forward to this next chapter after 17 amazing years. And with that, for my last time, I'll hand it over to Jason to cover financials.

Thanks, Jeroen. As David mentioned, we achieved our Q4 guidance for both ex-tech gross profit and adjusted EBITDA. From a demand perspective, I had mentioned last quarter that October had shown a flatter pattern than the seasonal list we historically see that time of year. which we believe was driven by transient factors. The delaying or reducing of budgets in the early part of the quarter resulting from geopolitical and macro uncertainties, along with lower monetization from the war-related news that dominated much of our large publisher partners' content in October. We then saw recoveries in November, particularly around Black Friday and Cyber Monday. Despite the softer October, Q4 saw a recovery of yields, or RPM, which returned to year-over-year growth for the first quarter since Q1 2022. Notably, as demand levels remained soft relative to our supply levels, the yield growth was driven by higher click-through rates, benefiting from algorithm and optimization improvements. Revenue in Q4 was approximately $248 million, reflecting a decrease of 4% year-over-year. New media partners in the quarter contributed 4 percentage points, or approximately $11 million of revenue growth year-over-year. Net revenue retention of our publishers was 91%, which reflects the continued headwind from the impact of the demand environment on pricing, which remains the consistent factor driving pressure on our revenue and on our net revenue retention. We did also experience a decline year over year of ad impressions, also contributing to the retention being below 100%, driven largely by page view volatility from certain supply sources and platforms, as opposed to churn. Consistent with recent quarters, churn has remained at similarly low levels, 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 Q4. Into Q1, we have seen a slightly higher seasonal step down from Q4. While yields remain up year-over-year, continuing the momentum from Q4, the supply volatility from certain partners and platforms has driven ad impressions to be down year-over-year. Based on what we've experienced, we also see opportunity for growth from these sources into late Q1 and beyond. In our guidance, we applied a wider range of outcomes reflecting the volatility. Hashtag gross profit was $63.8 million, an increase of 8% year-over-year, outpacing revenue for the third quarter in a row, driven primarily by improved deal performance on certain media partners and the net impact of revenue mix. Moving to expenses. Operating expenses decreased approximately 8% year-over-year to $47.5 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 $4 million or 11% year-over-year. We began 2024 with a headcount of approximately 870 FTEs, which is down about 11% from January 2023, as we have focused our attention on driving greater efficiencies in our operations and now on redeploying resources towards higher confidence growth areas that David mentioned. As a result of our cost management and growth of expect gross profit displaying the leverage in our model, adjusted EBITDA was $14 million in Q4, approximately doubling year over year. Moving to liquidity. Free cash flow, which as a reminder, we define as cash from operating activities, less capex and capitalized software costs, was approximately 21 million in the fourth quarter, benefiting from higher profitability and seasonal working capital benefits. While we are pleased to have such strong free cash flow in the quarter, we still see pressures on working capital, particularly around collections with elevated DSO levels remaining from Q2 into Q4. Considering free cash flow for the full year 2023, we saw a net use of cash of approximately $6 million, which excludes a $4 million benefit from our investment portfolio that benefits cash from investing activities as opposed to free cash flow. As a result, we ended the quarter with $231 million of cash, cash equivalents, and investments in marketable securities on the balance sheet and $118 million of long-term convertible debt. In December 2022, the company's board of directors authorized a $30 million share repurchase program, incremental to the $30 million program fully executed in 2022. In 2023, we purchased approximately 3.7 million shares for $17.8 million. In total, in 2022 and 2023, we have reduced our outstanding share count by approximately 12%. We continue to believe it is an attractive way to enhance shareholder value under current market conditions. Now turning to our outlook. As discussed today and in prior quarters, visibility to advertising budgets remains limited. In our guidance, we assume that current macro conditions persist with no material deterioration or improvements in regular seasonality. With that context, we have provided the following guidance for Q1 and full year 2024. For Q1, we expect ex-tech gross profit of $50.5 million to $53.5 million. and we expect adjusted EBITDA of negative $1 million to positive $1 million. For full year 2024, we expect EXPECT gross profit of $238 million to $248 million, and we expect adjusted EBITDA of $30 million to $35 million. To provide additional context to how we see 2024, our expectation is that we begin to see more meaningful year-over-year growth of XTAC gross profit over the course of the year, while expenses increase slightly sequentially over the year. For XTAC, we expect mid-single-digit percentage growth year-over-year in Q2 and Q3, followed by double-digit growth in Q4, driven by returns from our focused investment areas David touched on. Expanding our supply beyond our traditional fees, growing enterprise brand and agency spend, growing performance advertiser spend, and growing and optimizing publisher revenues. Notably, many of the areas we're focused on are areas where we expect that we can drive extract gross profit growth that outpaces revenue growth. As we assume a flat macro environment with no material list from pricing improvements, our assumed growth over the course of the year is driven by our execution of these investment areas, contributing more meaningfully in the second half of the year. Now I'll turn it back to the operator for Q&A.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Shweta Kajaria with Evercore ISI. Please proceed.

Okay, thank you for taking my questions. Could you please comment on your confidence of getting to 20% plus EBITDA margins next year? So your full year guide right now, if I did the math right, implies low double-digit percentage margins. So that's a meaningful expansion. So could you please help us put that together? And then Jason, just your confidence in the back half-weighted growth for top line and You just mentioned some of the drivers, but how much visibility do you have in your ability to deliver accelerating growth in the back half of this year? And then wishing you all the best year-round. Thanks a ton. It's been great. Looking forward to seeing what you do next.

Hi, Shweta. Thanks, Shweta. Thank you. Sorry. Thank you. Let me take the first point on 25. I mean, there's a reason we're giving an outlook. I mean, you can see we're giving in this call many more metrics than before. We're very excited about the future. We're very excited about opportunities on the open Internet, both with our existing base and on other platforms. And you heard the strategic pillars of growth we're highlighting. We're looking at real expansion of share volume with advertisers, both on the sort of brand awareness side that we're building with Onyx and much deeper into shelf volume with our performance advertisers, which has been the core of our business. So we see many segments there where we can grow significantly through the use of the Zementa bidding technology and expanding the reach to third-party supplies way beyond our publisher base. So that's the second one, going beyond the publisher base and offering much larger supply base for them. And then growing the premium publisher base publisher partnerships that we have something we announced Newscope Australia. We've had a string of major premium publisher wins. We think there's a lot of opportunity there to grow and it's coming through the offering that we give them. That is very strategic. The combination of the feed and Keystone sort of looking at e-commerce optimization, subscriptions and others gives us a, we believe a big advantage and also the quality of Onyx demand and the mid article placement. So we're becoming a more strategic partner there. And so overall, this is giving us – and we made investments. I mean, you can see it in our expenses. They're a little higher than probably what you expected, so we made some new strategic investments. Second half, we're doing it in 24, and that's where we have really good confidence around the 25, and we gave that outlook of we've seen real double-digit growth in 2025 and also very focused on the adjusted EBITDA margin of 20%.

Sure. Hey, Shweta, it's Jason. I'll touch on the second question that you had. So as far as just how we build our guidance, it's our normal seasonality-based model, of course, and we're considering the trends that we've seen into Q1, which is a continuation of Q4's growth and yield year over year, which, again, like I mentioned on the call, we haven't seen in quite a few quarters here. We're also considering the isolated supply volatility that I talked to on the call, which we think is temporary, but we're obviously expanding our range and being cautious about it. As far as the impact of these growth drivers over the course of the year, many of them are areas that we expect will grow margin. And so what you'll see is we're kind of doubling down on a lot of the areas that we think can pay off. And there's a balance of some of these items have more immediate payoffs, optimizations of our network, acceleration of our supply outside the feed and partner-specific performance, along with some that have probably a little bit longer-term payoffs that are more back-half-weighted, the penetration of ONIX and the shift to more video formats. What you'll see in our guidance is a slightly more back-weighted than our 2023 or 2021 performance. but not more meaningfully from a top-line perspective. And obviously, I think our costs are really headcount related as far as our investments go, and they're really evenly spaced throughout the year, which skews EBITDA towards the back half consistent with our history. But I think we'll be able to kind of monitor results and control that as we need.

Okay. Thanks, David. Thanks, Jason.

Our next question is from Andrew Boone with JMP Securities. Please proceed.

Good morning and thanks so much for taking my questions. I wanted to ask a bigger picture question just on the health of the overall digital publisher. You know, we've seen shutdowns in terms of Vice, BuzzFeed just sold Complex. It just feels like it's very tough sledding out there for digital publishers. Can you just opine on the overall health of the industry and how that relates back to Outbrain? How viable do you guys need digital journalism to be for Outbrain to work and grow revenue? And then secondly, I want to ask about the second pillar of growth that you talked about earlier, expanding supply. Tactically, what does that look like? Help us better understand what additional sources of supplies could be and then how that relates back to kind of growth. Thanks so much.

Hey Andrew. Okay, thanks Andrew. I'll take the first stab of the overall, and then Dickie will jump in with the second question. So first of all, as we've said and as we've been executing, I think the view of just publishers for us is quite narrow. So we grow outside of traditional publishers in three main ways. The first one is through our programmatic extensions, through the DST that we own, Zananta. We now reach plenty of non-publisher or non-feed inventory. The second is through our platform partnerships. We've been growing business with non-publishers such as Samsung Phones and OEMs and folks like that. And the third, which we also mentioned here, still small but growing, is NF Presence, which some of it is publishers, but much of it is – into the future isn't necessarily. So the way I think of this in Outbrain terms is less of the word publishers. They are obviously very important partners for us, and will be for the future. But it's not necessarily – I think of this more as content consumption time or canvases where consumption happens. that's still plenty big and moving maybe, you know, shifting between different types of companies. But for us, as long as that kind of consumption and time spent happens, that's an opportunity for us. Also with publishers, with some of the pressures, I think Albrain is their number one best partner of choice because we're both a – a reliable, solid monetization partner growing the monetization opportunities through things like ONIX with code on page and the tremendous size of our footprint. We have a lot of first-party data which makes us pretty resilient compared to other things publishers have. And then the other pillars that are very important for these publishers, especially these days, audience development which they are not getting as much of from search and social operators, a fantastic partner for them on that, and revenue diversification through Keystone. So all those things I think become even more important for the publishers into the future. And then just the last point in terms of growth, open Internet is – I'm not good with TAMs, but call it the $60 to $80 billion in TAM. And growing within that, we think, is a big opportunity. So things like Onyx, where it's both incremental growth on the types of budgets we bring in, but also on the real estate side with our partners, I think is a big opportunity for us. David?

I think Jeroen answered both questions, but I will just add. that when you look at the traditional publishers, the most premium ones, if you look at the top 50, top 100, I mean, paid views, and we analyze that all the time, are pretty constant. We do believe that we bring strategic value to them. We're looking right now at the election year, which traditionally will increase paid views. And generally, when you look at trends of consumption, we do believe that short-form video is sort of getting to some plateau. there's a lot of value in, in the deep journalism and value there. So, but again, I think what you hear more is, is on, on the longer tail of publishers than, than the bigger ones. But clearly, I mean, that industry is under pressure and our strategic role here is to, again, provide audience development and help them monetize on, on a variety of ads and other, and other revenue sources like e-commerce. And as Aaron said, I mean, we, We do look at third-party supply. We said it's about 20% of our business today. We see a big opportunity there, and sort of it's Uninex by doing that, increasing that third-party supply by our very strong bidding technologies. We also grow shareholder from advertisers.

Thank you.

Our next question is from Laura Martin with Needham & Company. Please proceed.

Hi, so I'm going to build on Andrew's comment and ask you about the threat to the open Internet more generally. Connected television is growing faster and that's sort of a collection of walled gardens and cookies deprecation risks signal loss in the open Internet which may push ad spending at least in the near term into walled gardens where there's no signal loss. So could you speak to the health of the open Internet which is where you participate, and why you think it will have a robust two to three years forward.

Sure. So first of all, maybe we need to – thanks Laura. I think we might need to start making distinctions between walled gardens, which in my mind is basically where you have logged in or registered users, versus big tech companies. And I think the shift to walled gardens is not necessarily all bad or all doom and gloom. We can see some of the best publishers, back to Andrew's question, some of the best publishers are in a way a walled garden. But many of those companies are not necessarily the big tech Google, Facebook type companies. And even though they have kind of a walled garden environment, and first-party data and registrations and all that, they need partners like Outbrain to build out their monetization and audience development capabilities. Not each one of those is going to be building their own suites and ad stats and all that like Google and Facebook and some of the big tech companies do. In those terms, I think of Walt Gardens as great partners for us because the signal fidelity, the data fidelity is higher. They'll only partner with usually one exclusive partner or a couple of meaningful partners, and that data synchronization and ability to better target, I think, is just going to benefit from that. I think the other thing we should all be paying attention to is it's true the growth of those big tech Googles and Facebooks has been tremendous. I do think if we look at many governments around the world and the regulations that are coming and the limitations they're trying to place, those are generally targeted at those big tech companies while trying to benefit the the open Internet or journalism-based publishers or those types of categories. And what's happening in Australia and Canada, I think, in terms of giving some of the capabilities back to publishers, I think is also an important dynamic. I don't think that world necessarily is becoming easier and easier for the big tech companies. I think the open Internet might be a beneficiary of that.

Okay, super helpful. I want to add one point. I mean, as you also noted, we're becoming, as a company, much more focused also on how do we serve much better a wide range of advertisers. From an advertiser perspective, the open Internet delivers incremental audiences. We have an endless number of cases showing that we do something on YouTube, but we deliver to them incremental audiences that we can target in a better way using ads unique signals that we have. We talked about cookie deprecation, but the contextual signals are super critical here. We develop audiences for them so it's incremental. And also there's a pricing question in terms of where do you get your incremental yield? And the open internet is there and delivering that. So for for any advertiser, the open internet is an important part of the overall span, delivering incremental value and audiences. And in many respects, it's better targeting. If you think you want to target someone that's interested in a certain vertical, we aggregate those publishers that do that. So there's a lot more there. I mean, we estimate that market. We set it on our call. It's about $100 billion advertising. And by the way, we're also expanding beyond what you call traditional publishing. So I think the combination of all that gives us a lot of optimism on the future.

Okay, my second one, and I have three. My second one is about industry structures. So when you guys came public, you sort of were in direct competition with one other company. That company has really taken sort of a hard left or right. It's really pivoted away from what I would call your core business. My question is, Does that make it easier for you to participate? Is your sort of world opening up as they sort of leave this space and move in really different directions? News, e-commerce, big brands, Apple announced yesterday. Does that leave you more of an open green field to compete, to price better and have less competition?

So... Yeah, I mean, I think the companies have taken different directions and we are very focused around the demand side and offering a cross funnel offering for advertisers. We launched Onyx. Onyx is very differentiated. It is value that's delivered in a different environment, different experiences, video, high impact display in certain placements of the page. And it really allows us, I mean, we've been very focused on developing that cross funnel notion for advertisers. on the traditional publisher side where we have that competitor. I mean, you've seen our, our wins over the last two years. I mean, I think we clearly differentiated around premium publisher wins. It's coming from a combination of the strategic value that our offering brings to those publishers. I mean, back to your earlier question, we still believe that's a big opportunity in business. So by delivering better value, higher monetization, better audience tools, and a broader value proposition strategically with Keystone. We believe that on that side, I think, again, it's been demonstrated, I think, in terms of market share. You saw the names that we talked about, major wins. So on that front, I think that's helping us that our competitor is looking at other things. Also, when you look at right now, the issue of demand density is coming a lot into play here with with us being able to really focus on delivering our demand into existing and not having to really take the same level of demand and spreading it around. You referred to the Apple news. I would urge you to look into the details of that. I mean, we don't know much about that. And, you know, again, if companies take a different direction, I think it's actually a good thing.

I agree with that. Okay, my last one is super quick. You gave this really intriguing statistic about the 73% of your clients were using the conversion bid strategy. And my, my quick question is, what kind of lift are you seeing in using those Gen AI tools that is getting 73% adoption, which is quite high.

So did you see, sorry, go ahead, Yvonne.

So we haven't shared specifics, but we do see an increase from the deployment of CVS. And just to be clear, CVS, or conversive bid strategies, outbrains kind of equivalent version to Google's PMAX, where the advertiser sets their goals, their business goals, the sales they want to make, the revenues, conversions they want to make. And then there's no bidding or cost that they need to set, but rather Outbrains algorithms run that all for them. So I think the best indication, this has gone from nonexistent a couple of years ago to over 73% of the campaigns running on TBS now. And I think that's the best indication with performance marketers that that's where they are finding value. It's two big values. First of all, there's the simplicity of setting up a CBS campaign. You just need a lot less manual labor on the side of the advertiser. There's less campaign management, cost management, and all that. And the other is improved ROI. It just maximizes their return on ad spend. And so we don't break out or haven't at least discorded the specific uplist we're seeing, but I think just given the indication of so many of you haven't touched switching to it, you can imagine that that's the dynamic.

Thanks very much. Thank you.

Our final question is from Ugal Aronia with Citi. Please proceed.

Hey, good morning, guys. You got Mac on for Ugal. Maybe just look into the 2024 double-digit growth outlook. I wonder if we could help us just kind of bridge that. How much is maybe just strengthening of the, you know, kind of current core business and how much of that is, you know, driven by some of these new growth pillars you outlined? Maybe specifically on Onyx, how you see that ramping, you know, in 2024 and 2025? I know you've given some, you know, quantified the 4Q impacts. or the last six months, but maybe any expectations for 2024 and 2025?

Sure. Thanks, Max. It's Jason. I'll start on this, and maybe David could touch on the onyx part of the question. As far as just getting to growth, maybe one helpful data point in how we see the year growing is that I mentioned I mentioned on the call just some volatility in small pockets of supply. Without that, and it's very isolated to a couple of partners who have either changes that they made in the auction or technology or policy changes, and absent that volatility, we would have seen or we would expect to see, I should say, growth of X-PAC in Q1 in the high single-digit percentages. So it's not that we're far off from that double digit growth that we're guiding to there, absent kind of this one-off which we are cautious about but do view as temporary with some optimism around there. and obviously optimism around all the areas that David talked about and optimism around just positive yield trends that we started to see in Q4 and ramping in Q1. So it's kind of a combination of the things. I mean, as far as maybe just giving you just a sense of magnitude of some of those investment areas, I think the expansion, I'd say for 2024, XTAC, the expansion of supply beyond the traditional feeds and the performance share of wallet increase are probably the top two contributors this year. But, you know, we really see contributions from all four over the course of the year. And then maybe David can touch on, you know, the enterprise branding agency and Onyx. Sure.

On ONIX and generally brands and agencies, we said on the call we have about a $200 million business that is brands and agencies that a lot of it is performance that we're also now leveraging into ONIX. ONIX has delivered better than expectations in the second half of last year. We're only talking about specific about half a year, so you can imagine that we assume that it will more than double performance. in 2024. And the important thing here is that we are in a very different dialogue today with advertisers and agencies around this cross-funnel notion and ability to really help them link it all together. That's very unique to us in the ecosystem and in the open Internet. And I'm also very excited about, again, the other growth drivers that Jason referred to, I think, again, you, Keystone brought us, we have today Keystone on about 15 publishers. That's also an important growth driver for us, and that's helping us on the publisher side. But the brand side is very exciting. Onyx, in terms of the acceptance in the market, has been something that's been very successful, and we think that's going to be a big growth driver in the future, really focused around increasing our ability to share wallets from the demand side, both on the brand with ONIX and on the performance side.

Okay, great. Thanks. Very helpful.

And then maybe just one on cookie deprecation. Are you guys exposed? Maybe if you could help us think about your exposure to cookies. I understand it's a lot of but, you know, how much exposure do you have to cookies? You know, and with your exposure to news publishers, how do you see, you know, with cookies deprecating any impact to their CPMs and flow through to your business? And, you know, maybe it seems, you know, some of your new products like Onyx and Keystone maybe put you in a better position, you know, helping them leverage 1P data. So is that maybe the right way to think about it?

Thanks, everyone here. So with cookies first, it's important to make a distinction between, as you did, between first-party cookies and third-party, what's being depicted as third-party cookies. That is data signals that we definitely use. We try to use any data signal that we have. But it's actually some of the weakest or the less meaningful data signals that we use. We have a tremendous amount of first-party data being the engine powering the feeds on many of those publishers, and those are usually exclusive partnerships where we're operating as the only one powering that feed. That gives us a tremendous amount of data, not just because code on page, and we're powering those ads on feeds on every one of the pages, on web, on their apps, But it's also far beyond that because we are powering usually all their internal or organic recommendations which get much higher engagement rates than ads ever do. And it's a lot of first party data and signals that we can use. So when you try to compare that to say anyone in ad tech, it's just a different kind of order of magnitude of data and first party data that we have code on page on every one of those pages powering both the ads and the non-ads. And you're absolutely right with things like Keystone giving us even more data signals on those places. I'll also mention myself and a core of our team here at Alfrane and our previous company. We invented the space of contextual advertising about 20 some years ago. And so we kicked off Alfrane with a tremendous amount of expertise On contextual, that obviously uses no cookies at all. That works at its best on any page, and I feel like we're the experts in vet-to-vet space in the world. And then on things like ONIX and video, all the targeting signals are very different. We don't do retargeting across different sites. We're powering those experiences on those partners that we work with. the way to think of it. Maybe just the last point, cookies, third-party cookies were deprecated on a bunch of environments a few years ago, about three years ago on Safari and Firefox. And we've been just going from strength to strength on the main indicator that we have, which is click-through rate ever since. So if you take that as any indication of what's coming with Google Chrome this year, I think we've done quite well.

All right, awesome. Thanks. Appreciate the talk.

We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.

Thanks.

Jeroen here. Thanks for joining us today. We're very excited about this new chapter for the company with exciting strategy pillars like the enterprise brands with Onyx, expanding advertiser share of Wallet with our performance marketing suite, and expanding our exclusive code on page through improved monetization with Keystone. as well as the programmatic reach through our DSP's Vanta. On a personal note, it's been the privilege of a lifetime to work with 1,000 or so incredible Outbrainers. I'm excited for the future of the company as it starts its new chapter, and I'm confident that our fantastic group of people will continue caring and building our unique company culture for many years to come. I look forward to serving you all, the Outbrains shareholders, as the company's chairman. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.