Innovid Corp.

Greetings and welcome to InnoVID Q3 2023 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brinlija Johnson. Thank you, Mrs. Johnson. You may begin.

Thank you, operator. Before we begin, I remind you that today's call may contain forward-looking statements and that the forward-looking statement disclaimer included in our today's earnings release, available on our investor relations page, also pertains to this call. These forward-looking statements may include, without limitation, predictions, expectations, targets or estimates regarding our anticipated financial performance, business plans and objectives, future events and developments. Changes in our business, competitive landscape, technological or regulatory environment and other factors could cause actual results to differ materially from those expressed by the forward-looking statements needed today. Our historical results are not necessarily indicative of future performance and as such, we can give no assurance as to the accuracy of our forward-looking statements and assume no obligation to update them, except as required by law. In addition, today's call will include non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margins and free cash flow. We use these non-GAAP measures in managing the business and believe they provide useful information for our investors. These measures should be considered in addition to and not as a substitute for our GAAP results. Reconciliation of the non-GAAP measures to their corresponding GAAP measures, where appropriate, can be found in the earnings release available on our website and in our filings with the SEC. Hosting today's call are Zika Nader, Innovid's co-founder and CEO, as well as Anthony Colini, Innovid's CFO, both of whom will participate in our Q&A session. And now I'll turn the call over to Zika to begin. Zika, go ahead.

Thanks, Brinlee, and thank you all for joining the call today. Before I begin, I would like to thank our teams around the world for their hard work. We reported an excellent quarter in our own track to close out a great year. As many of you know, one of our development teams is located in Israel, and we'd like to give a special thanks to them for continuing to deliver on track despite the heartbreaking situation in the region. I will start our call with our third quarter results and provide some recent business updates and highlights. I will then turn it over to our newly appointed Chief Financial Officer, Anthony Colini, who will provide further details on our Q3 performance and share updated guidance, followed by a presentation by Q&A. I am pleased to report we deliver a strong third quarter, exceeding our prior guidance for both revenue and adjusted EBITDA. We are well positioned for continued execution in the fourth quarter to deliver a solid full year 2023. As a result, we are raising our full year revenue and adjusted EBITDA guidance, and now expect adjusted EBITDA margins of at least 12% compared to 10% prior. This is the third consecutive quarter of outperforming our guidance, and I'm proud of the team's ability to execute as we continue to improve financial metrics on all fronts. We remain committed to expanding our margins and positioning ourselves for accelerated growth as the macro environment improves. Looking at the quarter, our Q3 revenue grew 5% year over year, and importantly, we more than doubled our adjusted EBITDA to $6.5 million compared to last Q3. This follows a strong Q2 in which our adjusted EBITDA margin grew from negative 5% in Q2 of 2022 to 13% last quarter. Additionally, as our operation profitability increased, we generated $4.1 million in positive free cashflow this quarter. Our improving bottom line results over the last few quarters demonstrate that our products are profitable at their core. We have a business model where we generate margin expansion even as we continue to invest in exciting new and innovative technologies. We have a strong competitive mode and are capitalizing on our inevitable transformation of the market as more and more viewers watch television through CTV. We continue to see more streaming platforms implementing ad-supported offerings. Recently, Amazon Prime Video announced it will join the overall ad-supported CTV trend and will introduce ads into Prime Video next year. This creates huge value for the industry, our partners, and innovation. There's also been a rapid shift in TV viewership. This quarter, it was widely reported that linear TV viewership fell below 50% in the US for the first time, which is a major milestone. Even in a world where ad budgets continue to be impacted by the macro environment, we expect that advertising dollars will meaningfully shift to align with eyeballs and time spent on CTV platforms. Innovative CTV revenue from ad serving and personalization grew 9% over last year, outpacing our overall revenue growth. We believe the inertia behind the trend will continue to accelerate. Position us to benefit once ad budgets normalize and we can capitalize on this massive opportunity as more impressions transition to CTV. Another growth driver, Innovative XP, our measurement offering, grew 8% as compared to last year, representing 23% of total revenue in the third quarter. We are pleased with a ramp up in measurement as we continue to cross-sell and extend usage. Growth this quarter was also fueled by significant new customer wins, including Revlon, Fanatics, Box Health, and On Running. In addition, existing large publisher partners such as NBC Universal have expanded their commitment for usage of our measurement solutions to help prove the value of their inventory. Turning to our platform, we continue to invest in new functionality to power the future of TV and how brands can reach consumers in new and powerful ways using the latest breakthroughs in AI technologies. Innovate is a data-rich business that generates an unparalleled CTV dataset. This dataset is the optimal foundation for sophisticated AI tools that can deliver exceptional value to our clients. I'm excited to announce that we have implemented leading generative AI engines into our platform. Using these AI engines, our clients will be able to generate images, videos, voiceover, and ad copy based on the first and third-party data feeds. Those never seen before unique creative ads are then streamed, measured, and optimized by Innovate platform based on customer set strategies. We have also implemented a natural language query engine into our platform that will allow our clients to gain valuable information and insights about the CTV campaigns via a conversation-like interface. Now, I would like to share with you a few words regarding our 2024 product strategy. Innovate's ability to apply AI algorithms to our ad server data uniquely positions us to optimize CTV ad investments. In October, we launched Instant Optimization, a machine learning solution that empowers converged TV advertisers to immediately improve ad performance. Our Instant Optimization solution goes beyond measurement by intelligently selecting the most impactful creatives to serve at the delivery time. We see considerable opportunity to optimize the CTV market to drive outcomes for lower investments using our proprietary data and technology. We are excited about the momentum we've seen over the last few quarters with increasing revenues, expanding adjusted EBITDA margins, and improved positive free cash flow. We continue to roll out the valuable product enhancements, sign new clients, and expand our existing partnerships. Although the market has not fully rebounded and we are experiencing different spend levels across our verticals, we are encouraged by the continued shift in viewership from linear to CTV and believe we are well positioned for growth. Once the market normalizes, we expect higher future growth rates and higher profitability margins. As we've demonstrated over the last few quarters, we remain committed to operational execution and expanding margins. We plan to share more about our excitement around 2024, including our product innovation and pipeline in which CTV performance optimization is the main theme at our upcoming Investor Day on November 30th in New York City. Before I turn the call over to Anthony Calini, our new Chief Financial Officer, I want to thank Tanya for all her contributions to InnoVid over the last 11 years. Tanya has been a key pillar in our success to date and has built a strong finance team during her tenure. Tanya, I wish you all the best in your future endeavors. I am excited to welcome Tony to his first InnoVid earnings call as our new Chief Financial Officer. Tony has over 20 years of financial experience at leading private and public technology companies. He possesses deep experience in helping growth companies scale in a sustainable way and bring extensive SaaS and enterprise software experience to our team. Tony, welcome to InnoVid.

Thank you for the warm welcome, Zvika, and good morning, everyone. I'm incredibly excited to join InnoVid and be part of this experienced and passionate team. It's only been a few weeks, but the opportunity here is clearly apparent to me. The combination of a growing business, strong secular trends in CTV migration, a leading platform, world-class customers, and a leverageable operating model are all powerful attributes that contribute to creating sustainable long-term value. As you just heard from Zvika, our dedication to driving profitable growth is once again evident in our results. We beat the top end of the revenue guidance range by .5% and delivered an adjusted EBITDA margin of 18%, the second straight quarter of EBITDA expansion. Now let me dig a little more into the numbers. Q3 revenue grew 5% year over year to 36.2 million. If we break that down further, ad serving and personalization revenues were up 4% year over year, reflecting the continued pressure on ad spend in the broader markets. As a reminder, InnoVid's ad serving and personalization revenue closely correlates with ad impression volume served through our platform. Within this category, CTV revenue, which comes from ad serving and personalization, increased 9% as more impressions continue to transition to connected TV. Measurement revenue grew 8% as compared to last Q3 as we continue to build out our products to take full advantage of the valuable data set generated from the ad serving side of the business. As a percentage of revenue in Q3, ad serving and personalization made up 77%, while measurement accounted for 23%. A few more comments on the CTV activity this quarter. Q3 CTV revenue excluding measurement grew 9% over last year and CTV video impression volume grew 7%. Additionally, we reached another high point this quarter with 55% of all video impressions coming in from the ad serving side of the CTV. Mobile volume grew by 8% and represented 35% of all video impressions, while desktop volume decreased by 12% and reflected 10% of all video impressions. Both mobile and desktop have been inconsistent in the first three quarters of 2023, while CTV has continued gaining share of total video impressions and demonstrated constant growth even against the backdrop of the uncertainty in the market. Revenue, less cost of revenue, calculated out to 77% of revenue, improving from 75% in Q3 last year. As the business scales, our margins continue to improve, reflecting the operating leverage embedded in our business model. Now, moving on to expenses. We're pleased to report that we are continuing to see the impact of efficiency efforts and the integration of the TV Squared acquisition. As Q3 total operating expenses, excluding depreciation, amortization, and impairment totaled 35.8 million, a decrease of 7% from 38.6 million last year. Employee count at quarter end was 460, a 14% decrease compared to the previous year, and resulted in a 16% reduction in compensation expenses, excluding stock-based comp. We remain committed to managing our cost base while protecting investments in high-growth areas to drive improved profitability and long-term value creation for our shareholders. Q3 net loss was 2.7 million, or a per share loss of 2 cents. The outstanding common share count at the end of the quarter was 140.1 million shares. Adjusted EBITDA was 6.5 million, representing an 18% adjusted EBITDA margin, as compared to just 8% in Q3 last year and 13% in Q2. This improvement reflects the impact of our modest revenue growth, lower cost of revenues as a percentage of revenue, and lower operating costs. We ended Q3 in a strong financial position with 47.7 million in cash and cash equivalents, and 20 million drawn on our revolving debt facility, with an additional 30 million available on that line. And during the quarter, we generated 4.1 million in positive free cash flow, an improvement of 78% from 2.3 million in Q3 2022. Finally, let me touch on our outlook for the fourth quarter and the full year 2023. We are confident in the underlying strength of our business and anticipate continued strong financial performance given recent trends over the last few quarters, as well as early returns thus far in Q4. We expect Q4 total revenue in a range of 35 to 37 million, representing four to 10% year over year growth. We expect Q4 adjusted EBITDA in a range of 5.5 to 7.5 million, as compared to 2.9 million in the fourth quarter last year. For the full year, we expect revenue of 136 to 138 million, reflecting 7% to 9% annual growth, and EBITDA between 16.6 and 18.6 million, reflecting an adjusted EBITDA margin of at least 12%. In conclusion, we are proud of the team's work and encouraged by our third quarter results and the momentum we are seeing in the business, even in light of the broader uncertainty across the ad market. We believe we are well positioned to become the essential technology infrastructure for the future of TV advertising and to experience outsized growth as ad spend returns to more historic level. We remain committed to innovation and value creation for our customers and shareholders. This concludes our prepared remarks. Zika and I are now happy to take some questions. Operator, please begin the Q&A session.

Thank you. We will now be conducting a question and answer session. 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 questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please. While we poll for questions. The first question comes from the line of Andrew Boone with CMP Securities.

Please go ahead. Thank you, guys, for taking my question. This is Matt on for Andrew. My first one is just on instant optimization. Can you just tell us and frame the opportunity for us, and then also just bring it back to the model and how can we expect it to influence results and when? And then Tony, welcome aboard. I just wanted to get your thoughts here on your philosophy between growth and profitability and what we should expect heading into 2024 here. Thank you.

Thanks, Matt. Yes, so you definitely picked on an important topic for us that we worked a lot on this year, but even so will be a major theme for 2024, and that's pushing forward on optimization. And in a way, closing a flywheel. If you zoom out, you see that we have the ad server, the core, the key delivery engine that generates massive amount of data. The input into it is creative and campaign strategy. The output is the data, but then post the acquisition and the release of Innovate XP, our measurement and outcome solution, now we can see the results. So the next step, which is the big major step, is connecting all these three platforms together, which was done this year, to allow to understand based on the output, based on the outcome, and all the data that we have that is very unique to us, I think kind of unprecedented outside of the Google universe, the data set that we have, is to impact then the campaign strategy, basically to close the loop. And that's where optimization and the heart of it, the AI models, that can constantly do that. And the release of instant optimization is not just here's some recommendation, but actually to be able to affect the creative, the messaging, and the campaign strategy in real time. And this is just the initial release. We're definitely looking forward to meet investors and analysts at the end of this month. And our investors, they were going to actually demo live some of these technologies, including some live AI demos, so it will give a better sense. So in terms of opportunity, we think there's a massive opportunity to generate value for our customers and partners. We're not talking yet about next year, but this is definitely a path to additional revenue generation the way we see it, and hence the significant investment.

Thanks, Vick. Hey, Matt, how are you? Yeah, so here's how I think about the balance between growth and profitability, and I'll tell you that's really one of the main reasons why this was such an attractive opportunity for me is the company's done a lot of work over the last year or so to expand margins, and at the same time represent some growth, even in a market that's been challenging just due to some of the macro trends. So my personal belief is really the best way to create value for shareholders and really all stakeholders is through sustainable, long-term, profitable growth. And I think we've done the hard work to really set ourselves up for that, and it's nice to see that coming through in the numbers over the last couple quarters, and even as we look to Q4 and some of the guidance that we gave there, we're kind of expanding margins, showing higher growth there. So I think as we think forward, we're very mindful of balancing those two things. I do think there's the opportunity for some breakout growth as the market turns around because of our position in the CTV space. But driving profitability, expanding margins is kind of key to developing that long-term value for shareholders. So that's kind of my personal thoughts and just views on the company in general and what I've seen here just over a relatively short time.

Great. Thank you. Thank you. Next question comes to the line of Shyam Kattelubit, SASQHANA. Please go ahead.

Hi. This is Aaron Samuels on for Shyam Patil. Thank you for taking our questions. Maybe first, just on the fourth quarter guidance, could you unpack a bit what that assumes in terms of the macro and ad environment? Are you expecting things to generally remain steady from where they were in the third quarter, or is that suggesting maybe a little bit of improvement? And also, if you have any color to share on how October looked just from an ad demand environment, that would be helpful as well. And I have a follow-up as well. Thank you.

Yeah, Aaron, I can try to take this and Zeke can certainly add some color. So yeah, I mean, I think as we look at Q4, there's some things that are encouraging to us and there's some things that, you know, there's uncertainty in the broader market. So I think the increase in the guidance certainly reflects our confidence that, you know, while we haven't turned a sharp corner and it's not up and to the right yet in terms of the macro, that we're starting to see some signs. So I would say cautiously optimistic. You know, there's some verticals that are positive. There's some verticals that haven't quite rebounded yet. You know, traditionally fourth quarter is where you see a lot of seasonality from a positive tailwinds perspective that historically the company's seen and didn't see last year. And so, you know, October kind of gives us confidence in terms of our guidance, but we haven't seen November and December really that seasonality hits yet. So trying to balance all of those things. So, you know, a number of different data points. But what I would say is we feel confident enough to be able to increase the guidance the way that we did.

Excellent. And then maybe one question for Zeke. I think in the past we've talked about sort of the big media trends right now being CTV and retail media. Obviously, Innovid has substantial CTV exposure. Can you refresh us on Innovid's exposure to retail media and how you're thinking about that opportunity more broadly? Thank you.

Sure. In terms of, you know, with retail media, what's unique, of course, it's the data sets. So we have been striking though some of the large retailers are actually customers of the ad serving data. And so we already have the relationship in place. As retail media comes in and they become data platforms and media platforms, they're now on the other side of the equation as partners, definitely using data to personalize and target better target ads that we deliver into those platforms. Measurement is a product that's being used more and more to prove ROI to their customers. And so we have already several partnership in that space. I believe if we look into the future that we're going to see much more, including the ability to do shoppable ads and really closing the loop. If you think about what we talked about the thesis and our strategy for 2024 for optimization, working with those platforms that you can actually close the loop, so better target, better target the messaging, target the audience to a specific product, be able to create a shoppable environment and then close the loop and see what's working. And based on that, not only execute on retail media, but also execute later in other areas, but use the very unique data sets that those platforms have to understand what's working and what's not working and then implement this outside of retail media. So absolutely any data rich environment and data environment that can give our customers feedback on the outcome is something that can dramatically improve the optimization, which is the key theme here for us for 2024.

Great.

Thank you very much. Appreciate the answers.

Thank you. A reminder to all the participants that you may press star 1 to ask a question. Next question comes from the line of Shweta Kajuvia with Evercore ISI. Please go ahead.

Okay. Thank you for taking my questions. Could you please comment just at a high level what you experienced and what you're hearing in terms of brand advertiser sentiment right now? You talked a little bit about October and your confidence in giving and raising the guidance for the fourth quarter, but any more granularity on certain verticals? I know in one of the prior fourth quarters you had the auto vertical headwind. So where do you stand now given the strike versus perhaps CPG or some of the other key verticals, if you could provide some comments? And then have you seen any political spend start to flow in in terms of political advertising, ad serving in the fourth quarter? Thank you.

Sure. Thanks, Shweta. So in terms of, and as Tony mentioned regarding the fourth quarter, we feel pretty comfortable in terms of the trend. We have not seen last year, we started seeing a tipping at the end of the third quarter. And of course this year, quote unquote, behaves normal. So it's a surpassed normal. It's definitely there are customers that reduce their spending on brand advertising, on TV advertising, TV advertising declined in general. But what helps with CTV is the fact that the audience continues to move from linear to CTV. So that keeps pushing the numbers up and to the right in terms of viewership. So the budget, even if a certain brand contracts, you can see increase in their CTV spend from that perspective. Now, in terms of specific verticals, we're seeing a pretty consistent behavior where some verticals like CPG and Pharma continue to invest, I would say, more aggressively compared to others. And we see nice year over year growth compared to last year, even compared to the healthy part of last year and other areas like financial services, insurance companies, technology companies. We are seeing a decrease overall. It's a positive. It's still a positive. We're obviously looking forward that all all verticals will go up and to the right. And to your comment about auto, we're not seeing anything back back those days. It was more related to supply and like vertical specific dynamics. What we're seeing now is general economy dynamics. And we're also following closely some of our largest customers earning calls. And they are giving some indication in terms of their spend and investment in marketing. So that helps us. So overall, we feel pretty comfortable about Q4 and overall for next year also, while we're not providing guidance, we're not seeing significant volatility. We're not seeing, you know, sudden extreme decisions by our customers. So that helps us plan both the top line and bottom line. And regarding political ads on that front, political ads is not an area that we're heavily focused on. It comes and goes and they tend to be more performance oriented. We work with on the measurement side, on the sales side with publishers in terms of creative tools, personalization, things like measurement. That's an area that we definitely see an uptick in political revenue. But on the brands, quote unquote, the brands itself, it's not necessarily an area that we heavily invest.

Okay. Thank you very much.

Thank you.

Thank you. Next question comes from the line of Shyam Ghatel with Sust Yohana. Please go ahead.

Thanks for taking one more question. This is for Tony. Clearly, Innovid's seen some nice margin expansion over this year. I know you're not providing guidance for 2024 at this point, but just wanted to see if there's any additional color you can share about how to think about Innovid's margin profile going forward. Thank you.

Yeah, no problem at all. Yeah, I mean, obviously it's something that we give a lot of thought to as well. I think we've said in the past that we see this business really being a 30-plus percent adjusted EBITDA margin business and continuing to march forward to that. You're right. We haven't talked about 2024 guidance yet. But this is a scalable model, and the underlying business is profitable. And as you combine the ad serving, the GTB with the measurement, that's kind of a nice combination. And as I mentioned before, once we see the market turn, I think we're going to be in a position to really grow in a nice way. And with that, you'll see a larger and larger amount of that growth kind of fall through to the bottom line. Again, it is a leverageable business model, nice healthy margins from cost of revenue as a percentage of revenue. And so there's no reason why this shouldn't be a healthy grower and a 30-plus percent margin business.

Really helpful. Thank you. And then just one last question. Live sports have become increasingly available through streaming and CTV and in more and more cases more exclusively available through those channels. Could you speak about how Inivid may benefit from these trends? And do you view this as a significant driver for CTV viewership growth and maybe an accelerant of the cord-cutting phenomenon?

Absolutely. I mean, this is a, you nailed it. Sports and live sports are a massive driver of behavior, viewership behavior. And the more rights that are being bought by some of the streaming platforms, and that includes digital, kind of digital native like Apple and Amazon, Google through YouTube, as long as these are available also on streaming and definitely exclusively on streaming, that is a major driver to get more and more people. The first thing you want to get people is not to cut cable completely or something, at least get them to start connecting to the Wi-Fi, running the app, getting comfortable with using that, like moving from an analog phone to a smartphone. Once you're in that smart environment, you're getting stolen more and more apps and really you're basically getting more users to adopt CTV as a main, connected TV as a main viewership platform. So that's one thing. Clearly sports is where a lot of brand advertising takes place. These are kind of lucrative spots, so our focus is on those large brands. So there are definitely spenders on that. So that is also helpful. And also the ability to better target in real time as you're going to an ad break, instead of showing the same ad like a Super Bowl situation to everybody, the ability to segment the audience and from a publisher perspective sell that segment for a higher CPM for the relevant, whether it's auto intenders or families with kids or toddlers at home, you can imagine how you can generate more revenue by segmenting the audience and sending the right creative to the right household, and that is impossible to do with live broadcasting. It's absolutely possible to do in streaming. And if you think about it, it requires very unique technology because you're getting like a million or 10 or 50 million hits, literally the same split second. So this is an area where we heavily invested it. We were partners in the Olympics and this is something that's extremely exciting for us moving forward.

Great. Thank you again.

Thank you. There are no further questions at this time. I would now like to turn the floor over to Speaker Neto for closing comments.

Thank you all for joining us this morning. I would like to first also thanks again our team around the world for exceeding all expectations this year and hopefully moving forward in this change. We're in a challenging environment from different reasons. I'm really excited as we just spoke about sports. I'm really excited about all the opportunities ahead as more and more inventories moving to television streaming and we can generate more value to our advertisers and the partners. I'd like to highlight and remind you all about our investor day coming up later this month on November 30th where we're going to present more of our products, more of our teams, our business strategy. And in order to get more information and register for that, you can email us at investors at innovate.com. Looking forward to see you all there. Have a great day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.