Outbrain Q3 2024 Earnings Call Transcript

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November 7, 2024

There are 7 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to Outbrain Incorporated Third 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 now like to turn the call over to Outbrain's Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning and thank you for joining us on today's conference call to discuss Outbrain's Q3 2024 results. Joining me on the call today, we have Outbrain's CEO, David Kossman and CFO, Jason Kivier. During this conference call, management will make forward looking statements based on current expectations and assumptions, including statements regarding our business outlook and prospects as well as our pending transaction with Teeth. These statements are subject to risks and uncertainties that may cause actual results to differ materially from our forward looking statements. These risk factors are discussed in detail in our Form 10 ks filed for the year ended December 31, 2023, and in our definitive proxy statement filled with the Securities and Exchange Commission on October 31, 2024, as updated in our subsequent reports filed with the Securities and Exchange Commission.

Speaker 1

Forward looking statements speak only as of the call's original day 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 Q3 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.

Speaker 1

With that, let me turn the call over to David.

Speaker 2

Thank you, Sarah. Good morning and thank you for joining us today. I'd like to start with a brief update on the status of the transaction we did. We are still on track to close in Q1 2020 5x plant. We have cleared the necessary regulatory reviews in the U.

Speaker 2

S. And in several other countries and are progressing in the remaining geographies. We have a shareholder meeting to approve the deal set for December 5. We're very pleased to report that the integration planning process is progressing smoothly, contributing to our excitement about the opportunity and our conviction regarding the synergies. Now let me provide an update on Q3 and progress against our 2024 growth drivers.

Speaker 2

For Q3, I'm pleased to report that we delivered extra gross profit within our guidance range. We exceeded our adjusted EBITDA guidance and we generated positive free cash flow for the 5th consecutive quarter. I want to highlight that we do extra dollars year over year for 4 out of the last 5 quarters. The other quarter was flat. And ex TAC margin has improved year over year for 6 consecutive quarters despite the headwinds of 1 significant partner.

Speaker 2

We believe that these results are driven by positive trends in our core business and momentum across our growth pillars. Our first pillar refers to expanding our share of wallet with brands and agencies as well as performance advertisers. We are gaining traction with our cross sell solutions from branding to performance, delivering on our full funnel value proposition. U. S.

Speaker 2

Advertisers including Disney, Amazon and Betterment invested in both outbound performance solutions and Onex burning solutions showcasing the benefit of leveraging both products to drive incremental outcomes. On the performance side, the Outbrain DSP, previously known as the Manta, continues to see steady adoption. Advertisers are increasingly embracing our platform for its comprehensive tooling and ability to drive scale performance across the open Internet. This allows us to capture a larger share of wallet with a 60% year over year increase in the advertising spend on this platform year to date. Moving on to our second growth pillar for 2024, we've continued to expand beyond our traditional feed, opening new opportunities for advertisers to drive results.

Speaker 2

This revenue, which is generated from supply beyond our traditional feed, represented approximately 28% of total revenue in Q3 2024 compared to 26% in Q3 of last year. We have continued to grow this metric quarterly for the last 6 consecutive quarters, demonstrating our focus on expanding our inventory diversity. We believe this expanded supply is also a key enabler to power advertiser outcomes at scale across the open Internet. Our 3rd pillar refers to our continued focus on deepening our premium media owner partnerships, a key strategic asset of our business. These relationships ensure a steady base of premium exclusive inventory, while giving Outbrain unique contextual and engagement insights that fuel our performance and predictive capabilities.

Speaker 2

We successfully renewed agreements with some of our important publishing partners, including Huffington Post and Meteo in France. We also secured new business partnerships from competitors and launched new partners including Sportsman in Germany and Reuters and Newsweek in Japan. This again demonstrate our superior value proposition when it comes to strategic relationships with premium publishers globally. Now I'd like to give an update on some of our recent product and technology advancements. In September, we successfully launched Moments by our brand in beta.

Speaker 2

On a personal level, I truly believe Moments is one of the most exciting products I've seen in our space in the last few years. Moments brings the immersive experience of social media to the open Internet, transforming our feeds on traditional publishers into vertical video environments with swipeable navigation. Data publishers like Akzo Springer and Fortune use their to the open to the open Internet, training a premium full screen video experience. Moments has already shown early signs of generating high audience engagement with 40% of users watching 3 or more videos. And August 2024 study by Media Science found that vertical video ad delivered in moments and hence the performance of ads delivered on social platforms alone.

Speaker 2

We believe this indicates a strong opportunity for brands to compound the impact of the social strategies on the open Internet, driving higher brand recall and recognition. Now let's turn to AI. We are accelerating AI integration into our performance and creative offerings, improving efficiency and outcomes with a clear focus on the segment of our sophisticated large scale advertisers. We are doing this through our creative automation suite, which allows marketers to easily use AI to create new ad images, tailor images and adjust headlines to deliver better results. The Creative Automation Suite uses Outbrain's predictive insights to fuel the product generative AI, delivering more relevant, highly targeted creative optimized for consumer engagement.

Speaker 2

We have several case studies demonstrating how performance clients have been able to meaningfully increase their campaign click through rates by using AI based creative automation tools. In addition, we recently expanded our collaboration with Microsoft Azure, integrating Azure Open AI solution to a range of ongoing services. We believe that Azure solutions will allow us to continue to enhance our existing creative solutions, prioritizing ad creatives with predicted higher return on investment. We're also focused on deploying AI into our internal processes. We're proud to highlight that Alberink has been recognized as one of the 25 most innovative UiPath customers for our advancements in business efficiency with AI.

Speaker 2

Our team stood out among global applicants for its ability to use AI and automation to redefine the way teams work. By automating key workflows, particularly within our small medium publishers and ad operations divisions, we've reduced manual workloads by some 40%, enabling our account managers to focus on revenue generation and their clients. To wrap up, we are pleased with our continued year over year ex TAC and profit margin improvements and we are confident that our focus on innovation and our growth drivers will continue to drive success into 2025 and will be highly relevant to the success of our integration we did. Now I'll turn it over to Jason for a more detailed financial update.

Speaker 3

Thanks David. As David mentioned, we achieved our Q3 guidance for expec gross profit and exceeded our Q3 guidance for adjusted EBITDA, generating positive free cash flow for the 5th consecutive quarter. Overall, total ad spend on our platform grew 6% year over year, faster than the growth seen in H1. We saw solid profitability and cash generation as we started to realize benefits of the changes we've been making to our revenue mix and cost structure, which we expect to continue into the future. Revenue in Q3 was approximately $224,000,000 reflecting a decrease of 3% year over year.

Speaker 3

New Media Partners in the quarter contributed 7 percentage points or approximately $15,000,000 of revenue growth year over year. Net revenue retention of our publishers was 91%, which primarily reflects downward pressure of ad impressions from one key supply partner as noted in prior quarters. Consistent with recent quarters, logo retention was 98% for all partners that generated at least $10,000 We've seen CPCs remain stable to slightly positive, improving over the course of Q3 and netting to a slight increase year over year for the quarter for the first time since early 2022. This along with continued improvements in click through rates drove acceleration in RPMs or yields, which have now seen growth year over year for 4 consecutive quarters. Ex tech gross profit was 59,700,000 dollars an increase of 5% year over year outpacing revenue for the 6th quarter in a row, driven primarily by net favorable change in our revenue mix and improved performance from certain deals.

Speaker 3

As noted previously, the investment areas that we are focused on are largely areas that we see driving higher ex tech take rates and in turn higher profitability. While ex tech gross profit continued year over year growth in Q3 on the strength of these accelerating growth areas and positive momentum of RPMs, As noted in prior quarters, one of our key partners transitioned to new bidding technology and we completed the transition in early May. This volatility impacted our overall growth in Q3 by double digit percentage. And our overall Q3 ex tech gross profit would have grown in the mid teens percentage year over year excluding this one isolated headwind. We remain focused on rescaling and optimizing the supply.

Speaker 3

Moving to expenses. Operating expenses increased year over year, predominantly driven by one time costs of $5,600,000 related to our anticipated transaction with Teads. As a result, we grew our adjusted EBITDA 12% year over year to $11,500,000 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 $9,000,000 in the 3rd quarter as a result of stronger profitability and working capital. In September, we repurchased the remaining $118,000,000 aggregate principal amount of our convertible notes for approximately $109,700,000 in cash, including accrued interest, representing a discount of approximately 7.5% to the principal amount of the repurchase notes.

Speaker 3

As a result, we ended the quarter with $131,000,000 of cash, cash equivalents and investments in marketable securities on the balance sheet and no remaining debt outstanding. While we maintain an authorized amount of $6,600,000 under our existing share repurchase program, there were no share repurchases in Q3. Given the pending acquisition of FEEDS, we currently do not intend to resume repurchasing shares. Now turning to our outlook. In our guidance, we assume regular seasonality and as noted in the prior quarter, continued execution of our growth drivers.

Speaker 3

Additionally, our guidance reflects operating as a standalone business with the assumption that the announced transaction with Tees will not close before year end. With that context, we have provided the following guidance. For Q4, we expect ex TEC gross profit of $67,500,000 to $72,500,000 reflecting an annual range of approximately $235,000,000 to $240,000,000 And we expect adjusted EBITDA of $15,000,000 to $18,500,000 reflecting an increased annual range of approximately $35,000,000 to $38,000,000 Now, I'll turn it back to the operator for Q and A.

Operator

Thank you. The lines are now open for questions. And our first question comes from Andrew Boone from Citizens JMP. Sorry, go ahead.

Speaker 4

Thank you so much for taking my questions. This is Matt on for Andrew. My first one is just wanted an update on integration with Tees and maybe what can you do today to accelerate your integration roadmap? And then my second question, we've just heard from a couple of publishers, specifically The New York Times, has called out AI as a headwind to traffic growth. And just as Google is rolling out AI overviews to more people, just any thoughts or anything that you're seeing as far as traffic to some of your publisher partners?

Speaker 4

Thank you so much.

Speaker 5

Thanks, Matt. Hi. I'll take that one. So on Teams, we are progressing what we can do at this stage is post merger integration planning, which we are doing in sort of across products, go to market and other things. We cannot really in the businesses operate individually and need to focus on each on their performance, but there's a lot of planning and operationally, structurally synergies and others.

Speaker 5

And we're very excited about what we see in terms of both the upside on the revenue synergies. We provided guidance when we announced the deal around $62,000,000 of synergies. We are more excited by the day by what we see as an opportunity to cross sell advertisers, brand, enterprise brands, small and medium brands and agencies with our performance products into the installed base and customer base of Teed, which has the joint business partnerships with the most premium brands of the world and we see other cross sell opportunities and we're also pretty confident around the ability to realize the synergies. On the traffic question, I mean, what we see in terms of our premium publisher base and we separate sort of the different tiers, we see paid dues relatively flat. So we haven't seen at this point any negative impact from AI on traffic.

Speaker 5

Thank you so much.

Speaker 4

Maybe just to add, I mean,

Speaker 5

on the timing of the deal, I said it on the prepared remarks, we're still looking at Q1 of 2025.

Operator

Thank you. And our next question comes from Yigal Aronian from Citigroup. Go ahead.

Speaker 6

Hey, good morning guys. It's Max on for Yigal. Wondered for you to start with the 4Q FXTAC guidance. Can you just walk, I think it came in maybe a little below what we had expected? Can you just talk about maybe what you're seeing there?

Speaker 6

And then if there's any ongoing impacts from that large supply partner impacting?

Speaker 3

Sure. I'm happy to take that one. This is Jason. Thanks for the question, Max. Yes, I mean, really Q3, what we saw was strength, continued RPM gains that we've seen the prior three quarters now.

Speaker 3

CTR is very high and CPC was kind of the nice thing to start to see it flat to slightly up for the first time since Q1 of 2022. So good demand stability, algo improvements, mix we've been working on and driving those higher yields. And overall ad spend was up 6% for us. So I know gross revenue slightly down, but ad spend which encapsulates all the dollars we see from advertisers was actually up. So good indications there.

Speaker 3

Into Q4, we do expect acceleration in our year over year growth from the 5% ex tech growth we saw in Q3 to about 10% at midpoint in Q4. But we are being a bit more cautious with our outlook given we experienced a somewhat slower start to the quarter in October, particularly in the U. S. We did see some advertisers and agencies being more cautious with their budgets in October, really given uncertainties around the election and macro. We thought it was prudent to be more cautious and reflect the rest of the quarter jumping off of this kind of lower start that we saw.

Speaker 3

We do hope now that with more certainty around the election results coming in pretty rapidly that there will be a more normal seasonal spike that we expect for the rest of the quarter. And yes, to your point on the one key partner, I mean excluding that partner, the growth obviously was much higher than the reported 5% as reported ex tech in Q3 and it was in the mid teens percent growth year over year. So not a meaningful difference in Q4 for that partner. It is a slightly easier comp for us in Q4 and into Q1 as well before we lap completely in the middle of Q2 next year the challenges assuming we continue to see the stability that we've been seeing there.

Speaker 5

Nick, I want to just add on Q4 a little bit. I mean, from a lot of conversations with advertisers, I think the fact that there is a clear outcome of the election is very helpful. I think people were holding back on budgets and they were concerned about sort of if this gets dragged on, will people have the mindset of shopping and doing things? Clarity is good news in terms of their intention to spend more money. I mean, we haven't seen it yet.

Speaker 5

Obviously, it's 1, it's 24 hours. But I think that's what I think we were waiting in terms of the business in terms of the release of potential budget as people will get back to their normal life.

Speaker 3

Okay. Thanks. Yes, that's helpful.

Speaker 6

And then maybe just on Moments, I know you just launched some data, so it's early, but I think you can talk about how what improvements you're seeing this drive and maybe bigger picture, it seems like it'll be kind of the bottom of the feed solution, if I have that right. So how do you see this fitting in with the existing solution you have now? Do you see it as like being complementary or would this kind of replace kind of the existing solution you have?

Speaker 5

So again, it's a very exciting launch. I mean, we've been working on it for a long time. And I think also in anticipation of the combination, we think this is great, great inventory for premium brands that want to have sort of good canvases for video campaigns. But this is an offering that will bring social media experiences to the open Internet, will help publishers engage more with their audiences. So it's really about using the content that publishers have, that vertical content and integrating into that the opportunities for advertisers to do brand advertising.

Speaker 5

And we have already about almost 10 publisher partners working with it, trying it out, several brands that are working with it. And what we're going to be doing with it is going to be when the right time and the right user with the right opportunity for an advertiser, we will launch this full screen immersive experience instead of our feed. So it's going to be a decision by the algo and by the sort of our joint work with certain publishers around when to launch it and when it's the right time. Initial indications of brand lift, deep engagement of users with those videos in terms of swipe numbers with the biggest they're watching is great. And it's a better launch, and I think it's very exciting into 2025.

Speaker 5

Early to talk about any financial impact, of course, but from a product point, it will be a very successful launch.

Speaker 3

Okay, great. That's helpful. Thanks, guys.

Operator

And there appear to be no further questions at this time. I would now like to turn it back to management for any closing remarks.

Speaker 5

Hi. Thank you all for joining us. We are excited by the financial performance, the consecutive quarters that we see an improvement in the performance, both in terms of ex stock dollars, margin, cash flow. Innovation is critical and moments and what we're doing with AI excites me a lot. And then obviously looking at the combination we see early next year, I think we're looking into great, great opportunities ahead of us.

Speaker 5

Thank you.

Operator

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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Outbrain Q3 2024
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