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spk09: Good day and welcome to Outbrain, Incorporated second quarter 2024 earnings conference call. At this time all participants are in a listen-only mode. Question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd like to turn the call over to Outbrain's investor relations. Please go ahead.
spk02: Good morning and thank you for joining us on today's conference call to discuss Outbrain's second quarter 2024 results. Joining me on the call today we have Outbrain's CEO David Kostman as CFO Jason Kivviet. 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 10K, Files for the Year Under December 31, 2023, as updated in a subsequent report filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the call's original date, but we do not undertake any duty to update any such statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's second quarter earnings release for definitional information and reconciliations of the non-GAAP measures to the comparable non-GAAP financial measures. Our earnings release can be found on our IR website .outbrain.com under News and Events. With that, let me turn the call over to David.
spk03: Thank you, Sam. Good morning and thank you for joining us today for our second quarter 2024 earnings call. Last Thursday we announced the definitive agreement to acquire Teeds, combining the companies into a platform that we believe will define the next generation of open Internet advertising. This is a transformative merger that positions us as one of the largest open Internet advertising platforms. It dramatically changes our financial profile in terms of profitability and growth opportunities. We believe the combination will deliver significant accretion to our shareholders, to synergies, and the financial leverage of the transaction. The two companies have amazing teams of talented, innovative, driven people that have been instrumental in establishing our two companies as category creators and leaders, outgrowing performance and Teeds in branding. Together we believe we will create a scaled global platform that can deliver outcomes for advertisers currently only rivaled by World Gardens. We've been clear that our vision is to become a true -to-end, full- funnel platform for the open Internet, with a level of service and standards centered on serving brands' needs. The news of our merger with Teeds allows us to take a massive leap forward in executing this strategy. The reception we've seen from many industry players reinforces our confidence in the merger's rationale. Many of our partners, from media owners to brands and agencies, express their excitement about the opportunities the new company would create. For example, Peter Wurtenberger, Executive Vice President at Axel Schringer, wrote to us, this is a significant milestone for both companies and we are thrilled to see your expanded capabilities. We look forward to seeing the positive impact this partnership will have on the industry and on our collaboration. And another one, Alexandre Chabann, CEO of Group M France, one of our agency partners wrote, this merger of the leaders in performance marketing and video branding promises to be an exciting and transformative alliance. These statements are just two of many examples of the overwhelmingly positive feedback from so many of our clients and I want to take this opportunity to thank them for that and for their continued partnership. The two companies will continue to operate as standalone businesses as we've prepared the post-merger integration plans. Closing, which is subject to regulatory approvals, outbid shareholder vote and other standard closing conditions is expected by Q1 2025. Now I want to provide an update on Q2 and the progress on our 2024 growth drivers. For Q2, I'm pleased to report that we delivered extra gross profit of $56 million towards the higher end of our guidance. We significantly exceeded our adjusted EBITDA guidance with $7.4 million and we generated positive free cash flow for the fourth consecutive quarter. These results are driven by positive trends in our core business and the momentum in our growth drivers. As you may recall, these growth drivers we talked about revolve around three pillars. The first pillar refers to expanding our share of wallets with advertisers across both brands and agencies as well as performance advertisers. Onyx direct sales continue to grow through the combination of new clients, new markets and rebookings. We successfully launched Onyx in Israel and Spain and have several campaigns live in both countries. This is in addition to the US, UK, Germany, Italy and Japan. In addition, Onyx has continued to see strong rebooking rate of nearly 40% in Q2, reflecting the business impact Onyx has delivered for our clients. Notably, we secured multiple campaigns from enterprise partners such as Disney+, Purina, Nissan, including a great campaign promoting the Taylor Swift AeroStore. Sorry, I had to mention this campaign to get some credit with my daughter. On the performance side of our business, one of our main initiatives is shifting certain buyer profiles to our DSP, LeManta. Our DSP enables these clients to drive raw at a larger scale on the open Internet, allowing advertisers to capture a larger share of wallets from these clients at a higher extract margin. In the first half of 2024, we achieved remarkable growth on our DSP with advertisers' spend growing by approximately 50% in comparison to the first half of 2023. Moving on to our second pillar, we've continued to expand our supply footprint outside of traditional feed, enabling advertisers to reach consumers with a range of placements across the entirety of the open Internet. These revenues, which are on inventory beyond our traditional feed, represented approximately 27% of our revenue in Q2 2024 versus 24% in Q2 2023. Our third pillar, we continue to invest in deepening our partnerships with top premium media owners. We signed new exclusive feed partnerships, among others with EBRY in France and the Daily Beast in the U.S. We also renewed several partnerships, including Ad Alliance in Germany and Vox in the U.S. This resulted in logo retention of 99% in Q2. Also Keystone, so continued adoption by some of our top premium publishers. Let me share a few highlights on our products and our goal. We launched a new AI-driven targeting solution, Predictive Demographics. Predictive Demographics enables our clients to reach relevant demographic audiences without relying on third-party cookies. Outland Predictive Demographics is establishing itself as a real option for demographic targeting among demand-thread buyers, with early data showing an adoption rate surpassing traditional third-party targeting segments by up to 40%. For one of our recent clients, a public health campaign in the U.S., Predictive Demographics drove 2.7 times higher click-through rate in comparison to campaigns using third-party demographic segments. We are encouraged by these results, which signal to us that advertisers are looking for privacy-forward audience solutions that can drive results. On the heels of Google's announcement to reverse the plans to deprecate third-party cookies in Chrome, we remain committed to driving results with contextual and privacy-centric signals. The successful launch of Predictive Demographics is a reflection of this. On the algo side, our click-through rate has witnessed double-digit growth in the first half of 2024, and we've also witnessed our third consecutive quarter of -over-year RPM growth, sustaining our upward momentum. In conclusion, our second quarter has been marked by growth, new partnerships, and innovative strides in improving campaign performance and user engagement. I'm confident that our trajectory remains strong and that we are well positioned for sustained success in the future. We are thrilled to embark on the next chapter with Teeds and are focused on executing our strategy to build towards becoming the preferred pool-funded platform for brands on the open Internet. With that, I'll turn
spk05: it over to Jason. Thanks, David. As David mentioned, we achieved our Q2 guidance for
spk07: ex-tech cross-profit and exceeded our Q2 guidance for adjusted EBITDA, generating positive free cash flow for the fourth consecutive quarter. Overall, we feel we have made updates to our revenue mix and cost structure that are having a positive impact on our profitability now and expect that to continue in the future. Revenue in Q2 was approximately 214 million, reflecting a decrease of 5% -over-year. New media partners in the quarter contributed 6 percentage points for approximately 14 million of revenue growth -over-year. Net revenue retention of our publishers was 89%, which reflects a continued headwind from the impact of the demand environment on pricing as well as downward pressure of ad impressions from certain key supply partners, as noted in the prior quarter. Consistent with recent quarters, logo retention was 99% for all partners that generated at least $10,000, and our five largest churns amounted to only two combined points of -over-year headwind on NRR. With respect to advertising demand, pricing remains low relative to our history, and while it remains down -over-year, we have seen positive trends over the course of Q2 with improvement -over-month. This, along with continued improvements in click-through rates, drove acceleration in RPMs, which have now seen growth -over-year for the third consecutive quarter. Ex-tech growth profit was 50.7 million, an increase of 3% -over-year, outpacing revenue for the fifth quarter in a row, driven primarily by net favorable change in our revenue mix and improved performance from certain yields. As noted previously, the investment areas we are focused on are largely areas that we are focused on, and these areas are helping bring net to fruition. While ex-tech growth profit returned to -over-year growth in Q2 on the strength of these accelerating growth areas and the positive momentum of RPMs, over the past two quarters, we have noted volatility from one of our key partners transitioning to a new bidding technology, Outbrain being one of the first partners to complete this transition in early May. The transition involves access to new supply opportunities for us, and we remain focused on the optimization and rescaling of our demand. This volatility impacted our ex-tech growth profit in Q2 by a high single-digit percentage. Our overall Q2 ex-tech growth profit would have grown double-digit percentage -over-year, excluding this one isolated headwind. Moving to expenses. Operating expenses decreased by approximately 1% -over-year to 51.2 million in the quarter as we continued to balance investments in our strategic priorities with continued cost and discipline. The OPEX decline -over-year was driven by compensation and bad debt savings, as well as timing benefits of expenses shifting from Q2 into H2, offset partially by the increased professional fees related to our announced anticipated transaction with fees. As a result, we doubled our adjusted EBITDA -over-year to 7.4 million. 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 $300,000 in the second quarter as a result of offsetting impacts of profitability, strong collections of receivables, timing of income tax and other payments, and seasonality. As a result, we ended the quarter with $229 million of cash, cash equivalents and investments in marketable securities on the Bound Sheet and $118 million of long-term convertible debt. In December 2022, the company's board of directors authorized $30 million share repurchase program. And in Q2, we purchased approximately half a million shares for $2 million. As of June 30th, we have $6.6 million remaining under our current authorization. Given the pending acquisition of fees, we currently do not intend to continue repurchasing shares. Turning to our outlook. In our guidance, we assume regular seasonality and, as noted in the prior quarter, continued execution of our growth drivers. Additionally, our guidance reflects the outbring as a standalone business with the assumption that the announced transaction with keys will not close before year end. With that context, we have provided the following guidance. For Q3, we expect ex-tech growth profit of $58 million to $62 million, and we expect adjusted EBITDA of $8 million to $10.5 million. We maintain our previous full-year 2024 guidance for ex-tech growth profit of $238 million to $248 million and are increasing our guidance for adjusted EBITDA to $31.5 million to $36
spk05: million. Now I'll turn it back to the operator for Q&A.
spk09: Thank you. Ladies and gentlemen, the floor is now open for questions. If you do have a question, please press star 1 on your telephone keypad at this time. Again, that's star 1 if you do have a question or comment. And we'll take our first question from Andrew Boone from JMP Securities. Please go ahead, Andrew.
spk01: Good morning and thanks so much for taking my questions. You highlighted the growth in RPMs in the quarter. Can you talk about the drivers of that and your confidence that this can continue? And then Jason, can you wrap that into the implied guidance for 4Q and talk about your confidence just given the implied acceleration that full-year guidance implies for 4Q? And then Dickie, just stepping back, can you talk about the conversations that you're having with advertisers just in the last week, understood still very new, but what's the reception been to the announcement of the TEEDS acquisition? Thanks so much,
spk07: guys. Sure. Thanks, Andrew. It's Jason, and I'll take the first couple there. So as far as what's driving RPMs, I mean, it's the third quarter in a row that we're seeing RPMs up year over year. One constant driver has been the click-through rates, which we've been kind of each quarter breaking our previous records as far as just how high those click-through rates are. A lot that goes into that, obviously, algorithmic improvements, use of additional data signals, optimization, some of our dynamic placements that we're using are helping drive higher click-through rates. So click-through rates have been a good thing for a long time for us and going in the right direction. The one kind of new thing I'd say this quarter was we started to see just a better trend on cost per click on CPCs, which have been a headwind and remain a headwind for us year over year in Q2. But over the course of the quarter, we started to see it go in the right direction as far as just narrowing the headwind year over year. So that was a real positive. It comes with maybe some market dynamics and also some changes we made internally as well. So good things there at RPMs. And we obviously see it not only driving better revenue but also better margins. And then as far as the confidence in the back half and Q4, we do expect acceleration in Q3 versus Q2 and also Q4 versus Q3 versus the 3% excess growth we saw in Q2. We get to I think 6% in Q3 at the midpoint and 17% in Q4 at the midpoint. So maybe just a lot of the good things that we see driving the success in Q2 and into Q3, we see continuing into Q4. So that's definitely a piece of it, but I think a big piece of it, and that step up from the 6% growth to 17%, the difference is a lot of it's coming from year over year comps actually. So eight points of even comps in Q4 is one way to look at it. Last year we didn't have a normal Q4. Obviously it started with the attacks on October 7th and the war and the impact on our war and the impact on our war on the Q3. We also saw a lot of the related news page views and just advertising demand. And also just we talk about the key tech partner transition. We did start to see some headwinds on that really in Q4 last year. So the two of those things combined ease the comps for Q4, and that's driving eight points of improvement as compared to the Q3. And then continued success of the growth drivers that we're already seeing some success with obviously. And yes, RPM's election. So those are more smaller items there flowing through our model, but all that combined.
spk03: Hey, Andrew, I'll take the second one. Thanks. So it's been actually a very exciting week with overwhelmingly positive feedback from players in the industry, both advertisers and video owners, publishers on the advertiser side specifically. They really do this as a huge opportunity to have one player that can provide the full funnel solution on the open Internet. When we talk about full funnel, that means branding, consideration and conversions on an -to-end basis due to the advantage of the data. So it was overwhelmingly both the Teets on the Teets side and on our side. Really people are expecting as quickly as possible for us to close this and be able to bring them the value proposition we're talking about, which is really the combination of leaders in performance, which is us, and leaders in branding that is Teets. So it's been great and it's been a very exciting week, as you can imagine.
spk01: Thank you.
spk09: Thank you. And we'll take our next question from Yigal Aronian from Citi. Please go ahead, Yigal.
spk06: Hey, good morning, guys. You have Mac Don for Yigal. I guess first maybe just start with what you're seeing in the ad macro. You know, it seems like maybe it's been a little more mixed. But, you know, what you're seeing now and kind of how you see that playing out through the rest of the year, if there's anything maybe geographical or vertical to call out.
spk07: Sure. And I could start with that. So, yeah, like I said, we did see, you know, continued RPM and even CBC gains over the course of Q2, which is, you know, a combination of a lot of factors. So it's hard to know how much of it is macro versus, you know, internal or specific to us. But we did see positive things. So that's a good sign. Geographically, I'd say, you know, we see strength in Europe, particularly, you know, Germany, which is our second largest market, and Spain, where a couple of our stronger markets throughout the quarter. And, yeah, I mean, going forward, I think it's hard to predict anything, I guess, macro-wise going forward. But, you know, we obviously hope to see the continued acceleration of what we saw through Q2 is what we're, you know, hoping for, but not overly relying on, I'd say, on our guidance.
spk06: Okay. Thanks. Yeah, that's helpful. And then maybe just spending a little time on Zamantha, you know, obviously some good growth there. You know, is there anything maybe, like, specific? You have some call-out on what's driving this. And then, you know, maybe just kind of, like, bigger picture. You know, when, you know, in a combined company, how do you see, you know, Zamantha fitting in with Teeds and, you know, maybe just with the TechStack, too, as you look to combine, obviously, early days, but maybe just any early thoughts on how you think about combining those going forward?
spk03: Sure. Yeah, I'll take that, Max. So on Zamantha, it's been one of our growth drivers for this year, been willing to grow the share of all its performance exercises by just delivering superior rewards to them and also allowing them to spend more on the entirety of the open Internet, again, in line with our vision of becoming the main gateway for the open Internet for both brand advertisers and performance. We started last year to ship some type of clients that just had better performance on the Zamantha platform into that. So that causes two things. A, they spend more because they still spend on the outbribe the publisher network, but they also can spend on third-party platforms, other SSPs and so on. And that grows the share of all of them. Also, we, for us, it's a margin enhancer. We've seen, we said, 50% growth in the spend on Zamantha, and I think that will continue to be one of the main growth drivers for the company standalone. As to the combination, we think it's a little bit early days. We have not yet gone deeply into sort of product planning, et cetera. We just started, I think we mentioned, the post-merger integration planning. Generally, I would say the Zamantha platform is very, very focused on performance bias. So I believe it will continue to be part of our growth drivers in the future for those type of bias.
spk06: Okay, great. Thanks, guys.
spk09: Thank you. And we'll take our next question from Laura Martin from Needham. Please go ahead, Laura.
spk10: Yeah, I also have two. The first one is, when you think about revenue synergies, is it a bigger upside driver that Teeds will be able to sell in performance advertising from the outbrain core business or the reverse? Outbrain adds more upper funnel from the Teeds client base.
spk03: Hey, Laura. It's actually on both sides. So what we've heard and also throughout the process, Teeds was going sort of to the mid and to conversions, but again, only with enterprise brand bias. So that's the focus in terms of the customer base. And that customer base also has different objectives on their campaigns. So we see a huge opportunity, and also the Teeds management sees a huge opportunity to just drive leveraging our prediction technology algorithms, just better conversions and lower funnel business for the brand advertisers. At the same time, we have about 40% of our business today is with brand and enterprises. They do mostly performance. I mentioned a few campaigns that we have. So for example, if you look at a automotive client like Audi, we mentioned it in the call, they can really have us as the partner for the entirety of the funnel. So I think it's in both directions. When we gave the synergy number that we when we announced the deal, the $50 to $60 million, that doesn't include minimal top line synergies. It's mostly just around operating synergies and other opportunities across the two networks.
spk10: OK, thanks. And then Jason, for you, the gross revenue came in really light, but the net revenue, which is how we value you, came in right in line sort of with our estimates. So is that related to this this unique client that had an impact and it only had an impact on gross revenue, but not net revenue? Is that how I should take your commentary about the one time disruption of I assume it's Microsoft?
spk07: Yeah, so yeah, so the partner, yes, it definitely impacted both. It's not it's not just one line or the other line. A lot of the things that we're focusing on right now are things that are that are higher margin segments or drivers. I think Samantha DSP business is a good example of that in that the way that works is it's actually a net revenue business and that the fees that are charged for customers to use the platform and buy media spend are recognized on a net revenue basis. So it's just an accounting thing there. And we might see some trade off in gross revenue in exchange for XTAC when we're doing that.
spk03: I mean, I just want to add on the lower on the one partner. So again, strategic partner, they made the transition. We are the first native partner to make a full transition, sign the new agreement with them that that transition also involves access to new types of supply within within Microsoft and Outlook and games and others. So it's a transition. We were the first to completed. We feel so big upside opportunities potentially down the road. But I think we just need to be cautious with sort of how we scale up our bias on that.
spk02: Thank you.
spk09: Thank you. And we'll take our next question from James Heaney from Jeffries. Please go ahead, James.
spk08: Great. Thank you, guys. Could you just talk about the growth that you saw from Onyx in the quarter? And maybe if you could comment on your pivot from being more of a performance out platform to servicing more upper funnel objectives. And I have another follow up.
spk05: So we're talking about Onyx. We had strong bookings. We don't break
spk03: it down specifically, but strong bookings, good adoption. We launched it in more markets and I'm excited about sort of second half of it. I think that that's actually one part of the business that, you know, in the second half may get someone impacted by the team. I mean, it is addressing sort of the upper funnel opportunities with large agencies. And so that that's Onyx.
spk08: Great. And then, Jason, just on your full year, Eva, that guide being raised, I'm just curious where you're seeing the majority of the cost savings in the business and then, you know, I'm just broadly speaking how to think about the balance, growth and profitability.
spk07: Thank you. Sure. Yeah, well, we do. You know, we've been a bit, you know, focused on in the last couple of years on just improving our business model in general. And I think that we've done a lot of that both in terms of, you know, changing our revenue mix and our approach to these investment areas that tend to have higher margins and higher profit margins as well, which I think we've been pretty successful at if you look at the take right now versus where it was a year or two years ago, but also with cost structure. And we've, you know, been been pretty focused on that last year and the year before. And we continue to focus on it this year. And so, you know, we've been outperforming our plans on cost. And, you know, some of that comes with just operating more efficiently, really, you know, being hard on ourselves with, you know, which which areas to invest in and which not and, you know, really scrutinizing our spend on that. You know, we do expect to step up in the second half of the year on costs in some areas. Obviously, some of the hiring we've done for the investment areas happened during Q2. And so we expect that to be a little bit higher in the second half of the year. But, you know, we think it's a nice setup for us to obviously deliver the higher level of EBITDA and remain prudent in our spending.
spk05: Thank
spk09: you. Thank you. And we'll take our next question from Zach Cummins from B. Riley. Please go ahead.
spk04: Hi, good morning. Thanks for taking my questions. Jason, I was curious, what are your assumptions that you're baking in for Microsoft in the second half of the year? Are you assuming you're relatively stable from these Q2 levels or any sort of improvement baked into the second half?
spk07: Yes, so we obviously are looking at this very closely. You know, again, we believe we're the first native partner to complete this transition, and we've been very focused on driving the rescaling, as we said a few months ago. You know, I think right now what we've seen is just volatility. And that's really our approach to the forecast for the second half of the year is accounting for it with just a greater range of variability in our Q2 and our H2 numbers. Because on one hand, we do see upside. On the other hand, we've seen volatility. And so we thought the best approach was to just account for it with a wider range of variability.
spk04: Understood. And in terms of just your overall footprint on the open Internet, I think metrics you shared was 27% on your non-traditional formats on the open Internet. Can you speak to the ideal mix as you go over time in terms of your footprint, just for standalone outbrain? I'm curious how you're continuing to drive that strategy.
spk03: So we are really trying to build ourselves as the main gateway to the entirety of the open Internet. We have a strong asset in the bidding technology that we acquired through Zementa that allows us to really go way beyond just our publisher base. So ideally, we grow both. I mean, we've had some great wins on the premium publisher side this quarter. So again, we're very, very focused on our core supply base and brand and enterprises on Tremium. We believe that sort of Tremium supply drives premium demand. We're also going for performance on third parties where they're looking for pure ROAS and Zementa is just a great platform to do that. Again, overall, we see ourselves in terms of the organic growth that we deliver through these efforts as the outperforming competition on organic growth. And that's what we're looking at in terms of, again, growing the entire budget base that we can deliver both on our publisher base and on the third party supply.
spk04: Understood. Well, thanks for taking my questions and best of luck with the rest of the quarter.
spk09: And that will conclude the question and answer session. I'd like to turn the floor back to David Crossman for closing remarks.
spk03: Thank you, Kevin. So thank you all for joining us today. We appreciate your support and partnership and looking forward to the exciting journey ahead together with all our shareholders. Thank you very much.
spk09: Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.
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