Taboola.com Ltd (TBLA) 2022 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Taboola Fourth Quarter 202 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. (Operator Instructions). Please note that today's conference is being recorded.

I will now hand the conference over to your speaker host, Rick Hoss, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone, and welcome to Taboola's Fourth Quarter 2022 Earnings Conference Call. I'm here with Adam Singolda, our Founder and CEO; and Steve Walker, our CFO. We issued our earnings materials today before the market, and they are available in the Investors section of our website. Now I'll quickly cover the safe harbor.

Certain statements today, including our expectations for future periods are forward-looking statements. They are not facts and are subject to material risks and uncertainties described in our SEC filings. These statements are based on currently available information, and we undertake no duty to update them, except as required by law.

Today's discussion is also subject to the forward-looking statement limitations in the earnings press release. Future events could differ materially and adversely from those anticipated. During this call, we will use terms defined in the earnings release and refer to non-GAAP financial measures.

For definitions and reconciliations to GAAP, please refer to the non-GAAP tables in the earnings release posted on our website. With that, I'll turn the call over to Adam.

Thanks, Rick. Good morning, everyone, and thank you all for joining us for our fourth quarter call. We delivered solid financial performance in Q4, we came in, in the middle of our guidance on all metrics, while adjusted EBITDA was slightly ahead.

For the full year 2022, we achieved $569.6 million of ex-TAC, $156.7 million of adjusted EBITDA and positive free cash flow. Overall, 2022 was a challenging year, but also a year of significant accomplishments.

I'm very proud of our team at Taboola and the way we're able to manage through the macro environment, keep our heads down and execute. 2022 was the second best year we've had for selling new publisher partnerships with over 90% higher new revenue per month than 2020 and 2021.

We won a lot. Great new publisher partners joined us such as Condense Baske, Japan, African Post, Paris Grupo Gouda, networking team, United Internet Media and Dumont. We won back publishers that had previously left us, such as Slate, Kicker, West fans and more. We send key renewals such as CBSi, TEGNA, Fox Sports and -- but feed Brazil.

As you recall, our strategy is twofold. We're going to be recommending anything users may like, content, commerce, overtime apps, TV shows and more. We call that Taboola Anything. The second part of our strategy is called Taboola Anywhere, which is taking our publisher content, technology and advertisers anywhere people spend their time on OEM devices like Samsung and Xiaomi as an example. But over time, we want to bring our content to automobiles, home audio devices and more.

On the Taboola Anywhere Front. 2022 was a year when Taboola News, our version of Apple News, but for Android devices exceeded $50 million in annual revenue and its growing triple digits. We like that type of growth as well as the strategic value it has to our overall core business as publishers are getting more and more traffic from Taboola News.

As part of our Taboola editing strategy, e-commerce gained meaningful momentum with dynamic creative optimization, DCO, rolling out, which is the main advertiser success stories for companies like Snap and Meta. Additionally, we recently announced that time.com will be launching a new Taboola Turnkey Commerce Solution, which I will talk about later.

We finished the year with an incredible 30-year partnership with Yahoo. This is a 3-way partnership. It includes Yahoo advertisers buying Taboola Network. It includes building new contextual segments; and lastly, powering native advertising exclusively for nearly 900 million users a month. This is really big.

2023 is assumed to be pre Yahoo -- rollout, while 2024 will have partial Yahoo contribution and meaningful gains. In 2023, we're guiding for 6% lower ex-TAC compared to 2022, adjusted EBITDA of $70 million and positive free cash flow. The 4 reasons for the weaker year-over-year results.

First, Q1 and H1 of 2022 were uniquely strong as compared to how we ended 2022 due to the war in Europe and macroeconomics hitting the U.S. As part of that, we're entering 2023 with $50 million less ex-TAC on a run rate basis than 2022. We expect to return to year-over-year growth in Q3 and Q4 as we lap hard comparables from 202 to H1.

Second, we're investing in successful Yahoo transition, which will cost us roughly $30 million this year, and it includes people servers and infrastructure. Third, we're investing in performance advertising, e-commerce and header bidding. We believe these 3 growth investments will help us double and triple table revenue when Yahoo! -- launches.

And fourth, winning market share over time includes a net publisher prepayment estimate of $50 million this year. Like I mentioned last quarter, we've seen net prepayments to publishers being insignificant to none over time as we continue to become even more and more strategic to the entire publisher organization. So you should assume this is not a permanent part of our financial model.

Let me say that while it's hard to accept declines this year, it's very rare that management teams know what the future will look like and are willing to guide for it. 2024 will be a step change in revenue with Yahoo -- ramping. We expect to generate at least in adjusted EBITDA and at least $100 million of free cash flow in 2024. And to be conservative, this assumes Yahoo is only being live by June of 2024 and no revenue in 2023.

Obviously, we're working very hard to beat those assumptions we're showing with you right now. That's how we refer to 2023 as an investment tier. We're putting in meaningful resources this year for gains. We feel strong year coming next year and beyond. Taking a step back, especially with Google and Mena now being less than 50% of the ad market and privacy concerns on the rise, advertisers will be looking for contextual advertising partners with scale with the Yahoo partnership were one step further towards our long-term goal of becoming the largest open web advertising company in the world by revenue.

We estimate that we will have roughly $2.5 billion of revenue in 2022, if Yahoo has been live on our network throughout the year, and we were fully integrated. That's will put us side-by-side to companies that TitterSnap, interest and -- the Trade Desk with many Google and Meta and Amazon much bigger than us.

And Taboola is the only company, to my knowledge, at our size that is fully dedicated to the Open Web serving both publishers and advertisers directly. I'm convinced that the Open Web will have a walled garden strong company that is going after our estimated $70 billion TAM, and we believe we're making meaningful steps towards becoming that vision with Yahoo launching as well as our growth engines materializing.

Now let me provide a brief update on those growth engines, performance advertising, e-commerce and headed. These are where we have the most to gain as a company to further drive growth in years to come.

Our goal with our investment in performance advertising is to make Taboola the first and best choice for any performance advertisers that want to reach consumers in the open web. We're currently focusing our investments in 4 key areas.

First, we're working on our bidding strategies that will help advertisers with different goals to be successful on our network. Previously, we had shared our smart bid automates the bidding process for our advertising partners.

Now we're working on enhancement to Smartbad that will allow advertisers to do things like set a target CPA and a lot of algorithms to even set the initial bid rather than just adjust the beta across the network as Smart Bid did previously or to maximize conversion even at the expense of CPA targets.

Now second, we're working on a new way of finding high-intent nuggets of very specific audiences in our supply. Third, we're investing in new ways to help advertisers drive clicks and conversions such as the new creative formats and enhanced landing pages.

For instance, we're currently working on generative artificial intelligence that will help advertisers write more creative and appealing headlines and even generate new images from scratch. If you can, please come to see our demo of this amazing general AI technology at our Yahoo Deal information session on March 1. It's really cool stuff.

Fourth, we're investing in technologies that will be smaller about how to match ads with users and especially how we ensure that advertisers see results as quickly as possible. I just came back from a trip to Israel during which I spent time with our R&D teams working on this. And I have to tell you, I was blown away about how passionate our 200-person tech team strong is and about the future of Taboola advertising platform. We have so much more that we can do.

We continue to see good progress with our investment in e-commerce as well. I mentioned the momentum we're seeing with DCO, essentially connected retailers automatically place their products libraries on our network. It has allowed us to significantly grow the amount of e-commerce demand that shows up in our traditional Taboola placements such as in the bottom of article feeds.

We recently launched e-commerce circulation widgets to help drive users to commerce pages, which helps our publishers drive traffic from general news pages to high-intent commerce pages. We also just announced an exciting new initiative in e-commerce that we call Taboola turnkey e-commerce. This was the missing link to take our e-commerce business to the next level, every publisher that wants to get into e-commerce but has little or no content attractive to retailers can now do that with Taboola.

Taboola does all of the work for the publisher from using our data to know which content makes sense for us to write on behalf of the publisher. We write the content, we drive traffic to it. We monetize it with the relationships we have with the merchants and service providers. And I got to tell you, we're very, very excited to have announced our 2 publisher partners with this initiative, time and advanced publications through their NJ.com site.

I don't know if any other full stack e-commerce solution that can do any of what I just talked about. Now while it's all new for us, I can tell you, publishers are calling us about this left and right. Look, everyone wants a New York Times water cutter service on their website, and we will enable it.

Last but not least, we're investing heavily in header bidding. This is important to our future because this is one of the ways that we will expand beyond our traditional bottom vertical placement and continue to grow our share of the Open Web, which is still dominated by display ads. Heading allows us to compete for this supply using our first-party data, our unique CPC demand and our proprietary technology that is able to predict which ads are likely to perform well, generate a profitable CPM-based bid.

We launched this technology with our first partner, Microsoft in April of 2022, and we're generating hundreds of millions of dollars of revenue from this partnership. Since then, we have started better testing this technology with an additional 50-plus publisher partners, and we're starting to see traction. For the first time, we're starting to see a few publishers generating a few millions of dollars a year from it on top of our core Taboola partnership, which increases our share of wallet and our moat as we look to win new partnerships and expand existing partnerships.

2023 will be the year of investment in our 30-year partnership to be an exclusive native advertising partner for Yahoo! This is big for us, big for Yahoo, and I think big for the advertising community. It will be very creative for our financials. As I shared publicly, if this was live in 2022, it would have multiplied our free cash flow 5x to north of $100 million of free cash flow and add $150 million of adjusted EBITDA.

We are full on in planning mode and 2023 will require a lot of work and investment to make it a successful transition. Just think about thousands of advertisers transitioning many page types, infrastructure and more. We expect the transition to occur in 3 phases: currently Phase 0, we are designing the technology migration plan. You can think of this phase as designing the plumbing system between the 2 platforms. So when completed, advertisers and -- no platform can spend in Taboola supply and advertisers on Taboola platform can span on Yahoo supply.

Soon, we will move to Phase 1 of the migration in which we will build the plumbing system and test the pipes by starting to flow small amounts of demand between the platforms, move some of supply and transition a small number of advertisers to test their experience. We expect Phase 1 to be completed in the second half of 2023.

Once we validate the pipe and our transition plans, Phase 2 will begin and will involve transitioning the advertisers and supply from Yahoo -- to Taboola. At that point, the migration will mostly be blocking and tackling, but we will need to be thoughtful in the process because we want every advertiser making a transition to have a great experience and to thrive and grow on the Taboola platform.

We do not want to trade long-term gains for short-term revenue. We expect Phase 2 to begin in the second half of 2023 and be completed mid-2024. At which point, we will be fully ramped and we'll be able to focus on additional growth opportunities from our partnership with Yahoo. We're building our rocket this year and 2024, where we have leased off. We will become bigger and more competitive, and I was never as excited about where we are as a company and our future.

I'll now pass it over to Steve, our CFO, to talk more about our financials.

Thanks, Adam, and good morning, everyone. As Adam noted, our Q4 and full year 2022 results were within our guidance ranges. All metrics were above the midpoint of our guidance, except ex-TAC gross profit, which came in just below our midpoint.

For the full year, we finished 2022 with approximately $1.4 billion in revenue, $570 million in ex-TAC gross profit and $157 million in adjusted EBITDA. We had a net loss of $12 million and non-GAAP net income of $91.4 million.

We also generated positive free cash flow for the year, generating $18.6 million of cash despite the challenging macroeconomic conditions. I would note that 2022 was a banner year for us on the supply side of our business. On average, in 2022, we brought in over 90% more new digital property partner revenue per month than we averaged in 2020 and 2021.

Our churn rates for our digital property partners were also at historically low levels. In addition, we gained valuable new supply from Taboola News as we grew that business to over $50 million in revenue in 2022.

For the quarter, our Q4 revenues were approximately $371 million. Our ex-TAC gross profit $159 million, our net income $15.2 million and our non-GAAP net income, $43.3 million. Ex-TAC gross profit declined approximately 6% year-over-year, which included a drag of almost 5% from foreign currency exchange rate headwinds. Revenues were aided by the addition of approximately $35 million of new digital property partners, but were decreased by approximately $71 million decline in our existing digital property partners.

The decline in our existing digital property partners, which is a very unusual occurrence for us was caused by the global macroeconomic weakness and the resulting reductions in advertising budgets by many of our advertising partners.

Operating expenses were down around $17 million year-over-year. This decrease was primarily the result of our focus on cost reductions that started with decreased discretionary spending around midyear and continue with our cost restructuring program announced in Q3. We generated adjusted EBITDA of $63.5 million in the quarter and approximately $157 million for the full year, both of which were in line with our expectations.

GAAP net income for the quarter of $15.2 million for Q4 and our GAAP net loss of $12 million for the full year included intangibles of $16 million for the quarter and $64 million for the year. Share-based compensation expenses, excluding the holdback related to the Connect acquisition were $13 million for the quarter and $64 million for the full year and restructuring charges of $3 million for the full year, which were excluded from non-GAAP net income.

Our non-GAAP net income of approximately $43 million for the quarter and approximately $91 million for the full year were both above the high end of our guidance ranges. In terms of cash generation, we had approximately $20 million in operating cash flow in Q4 and approximately $53 million for the full year, with free cash flow of around $14 million for the quarter and $19 million for the full year.

That free cash flow was after net publisher prepayments of $3 million in Q4 and $15 million for the full year as well as $6 million of interest payments on our long-term debt in the quarter and $21 million for the full year.

I would also note that the combined balance of our cash and cash equivalents plus our short-term investments declined from approximately $319 million at the end of 2021 to approximately $263 million at the end of 2022. The decline is more than fully explained by our decision to repay approximately $61 million of our long-term debt.

We decided to do this in Q4 because of rising interest rates. We have historically kept a relatively large amount of cash on our balance sheet in order to maintain operating flexibility in case certain opportunities came along that required large amounts of cash on short notice. For instance, the acquisition of a distressed asset or a large publisher win that would necessitate a large upfront prepayment.

You could think of the upside of this policy as maintaining option value. However, as the cost of maintaining this option has risen with rising interest rates and given the fact that we now have a revolving credit facility to draw upon as well, we decided to pay down some of our long-term debt. We expect to retire $30 million to $40 million more of the debt in 2024.

Now let me shift to our forward-looking guidance. I should note that our guidance assumes continued weakness in the macro environment at current levels for the rest of 2023, but not a significant worsening of the macro environment. As I mentioned earlier, the decline in our year-over-year revenues and ex-TAC was the result of macroeconomic softness that started in Europe at the end of Q1 and spread to the U.S. and most of the rest of the world at the end of Q2.

We had relatively normal seasonality in Q4, so that softness did not worsen -- but it does mean that we entered 2023 at a much lower run rate than we had starting 2022. The way to see this is to look at our Q3 2022 numbers.

Historically, Q3 contributes almost exactly 25% of our ex-TAC in a given calendar year. So if you multiply our Q3 ex TAC by 4, that's a good estimate of our run rate entering the subsequent year. In Q3 2022, we had $129.3 million of ex TAC, which means we entered 2023 with a run rate of around $517 million, over $50 million lower than our 2022 full year numbers. This lower run rate of $517 million was the starting point for our 2023 projections.

After applying our expected growth, we are guiding to full year revenues of $1.42 billion to $1.47 billion and ex-TAC of $526 million to $546 million. This guidance does not currently include revenues or ex-TAC from Yahoo. We have chosen not to include Yahoo -- revenues or ex TAC in our guidance because we have not finalized our planning process, and therefore, it is too early to accurately forecast when we should start seeing the revenue from that partnership. We will update as we progress through the year and have better visibility into that.

To that point, this year will be a significant investment year for us. We did factor in almost $30 million of costs related to Yahoo into our guidance. These expenditures will be required to support the transition of the Yahoo supply and advertiser relationships onto our platform. In addition, we recently announced an initiative called Taboola Turnkey Commerce with time as our initial partner.

We believe this initiative will generate significant returns over time and meaningfully increase the growth rate of our e-commerce initiatives. We will invest $5 million to $10 million in this initiative in 2023. These investments in Yahoo -- and Turnkey commerce are on top of the investments that we are making in our other top company priorities of performance advertising, header bidding and other e-commerce initiatives.

After the impact of these investments, we are guiding to $60 million to $80 million of adjusted EBITDA and a non-GAAP net income range of negative $10 million to positive $10 million. Let me finish by saying that we are very confident that all of these investments will begin to pay off in 2024 and will continue to drive growth beyond next year.

Adam has said many times internally that we are in a very unique position right now because it is rare for a company to have such a clear picture of what the future looks like, and I agree with them. It is because of that confidence that we are comfortable guiding to adjusted EBITDA in 2024 of over $200 million and free cash flow of over $100 million.

It is also important to note that 2024 will still only be a partial year for Yahoo! -- as that business will not be fully transitioned until mid-2024. Please come to our Yahoo Deal information session on March 1 to hear more about what you can expect from that partnership. You can register on our investor website under the Events tab or by sending an e-mail to investors@tabula.com.

And with that, let's open it up to questions.

(Operator Instructions) -- And our first question coming from the line of Andrew Boone with JMP Securities.

I want to touch on the 2023 guide. The Yahoo Deal is closed and they've announced the closure of Gemini. Can you help us understand what Yahoo is doing currently and how we think about the guide for 2023 and the incorporation of the Yahoo and then, Adam, what do you need to do to get advertising demand going again?

What are you most excited about that can push yield in 2023? And then just one last clarification question for Steve. Just can you talk about the timing of the pay down of debt? And anything else to highlight there?

Yes. So let me start with the 2023 guide. So I think the way to think about our 2023 guidance is that we're entering the year with a lower run rate than we had even entering 2022. And that's basically the macroeconomic effect and the decrease in yield. So our Q3 and Q4 were softer than they were in 2022.

We also had some supply shock in that we added so much supply this year that with the softness of demand on the macro, that also affected our run rate entering the new year. So I think those things basically starts us off at a lower base.

We do expect to grow off of that base this year, but it's going to be lower growth overall due to the lower starting point. On the cost side, I would say it's an investment year for us. So we are going to invest in performance advertising, e-commerce and header bidding, which we've been investing in up until this point.

We decided to continue investing there because we think those are investments that will pay off in the short term. And then obviously, there's Yahoo, which for now, what we've assumed in our guidance for Yahoo -- is that we will -- we've put the cost in. So we've assumed that we'll have to hire the people that we need to support that, to build the pipes, connect the systems and everything else.

But because we don't have good visibility yet into exactly when we'll start migrating advertisers and bringing the supply over, we chose to just exclude the revenue from our guide. So it's about a $30 million cost hit, but with no associated revenue just because we're trying to be conservative and trying to avoid adding guidance for something that we don't have clear visibility to.

So that's how to think about our guidance for this year. What we will say is, and it's obviously very unusual that a company would guide for 2024, we're confident enough in these investments that we believe we were confident to guide to 2024 for $200 million plus of adjusted EBITDA and over $100 million of free cash flow. So we expect them to be -- we're not talking about investments that will pay off 5 years from now. These are things that we'll see returns starting in 2024, which is right around the corner.

And by the way, thank you for the clarification question on the debt. I realized as I was listening to that, that I said 2020 that we would repay $30 million to $40 million of debt in 2024. I meant 2023. See, I'm already in 2024. So -- but yes, so we'll actually be looking to repay $30 million to $40 million of debt this year, not next year.

And I can jump Andrew, and thanks for the question about smart bed and what excites us on the advertising front. I just had come back from Israel, and I spent a week with an engineering team. We have about 200 people now working on advertiser success, specifically on the performance side. And I came back uniquely excited just to see in all the good work that our people are doing. I would say what -- if I were to summarize 2023 kind of one theme that you should expect and just this last week, we launched something to GA to about 80% of our advertisers.

It's about building strategies. So up until now, SmartBid was more of a, we call it, like autonomous car in the sense that advertisers could go to Smart bid to kind of put an initial CPC and smart bit will change the CPC based on conversion.

As of now, advertisers can go to Taboola and actually also lean in and say what is the objective to try to achieve as an example with the target CPA.

So just this past week, we brought it to market that advertisers can say, or CPI is $50 or $30, that's how much my product is cost. And SmartBid will optimize using AI to that specific CPA. And that's a big deal. That's been a lot of hard work for us. And later this year, you should expect us to roll out things like target throw us, maximize revenue. So advertisers can really work with much closely as it relates to their goals, and we'll use AI to do it for them. So that's going to be a lot of our efforts this year...

And our next question coming from the line of James Kopelman with Cowen...

Could you provide some additional color on ad market trends into February and particularly what you're seeing on a region-by-region basis? Also, can you talk about how much conservatism is baked into your outlook in case we end up with any soft landing in the economy? And finally, maybe any color you could provide on which ad verticals were weaker versus stronger in 4Q and into 2023. And then I have a quick follow-up for Adam.

So let me start with the advertising market trends and the conservatism in the guide. So first of all, in terms of the advertising market, what we saw, and I heard a lot of companies talk about this. So I think what we saw is similar. We saw a relatively normal fourth quarter in terms of seasonality for us, which is, I think, why we were kind of right in the middle of our guidance range, but with a bit of a soft December.

So the year, it almost seemed like advertisers kind of made their goals and then they started pairing things back in December. It's actually similar to what we saw last year. Interestingly for us, Connexity was the exception to that. So e-commerce revenues continue to be strong through the end of the year.

So that's generally what we saw at the end of last year. Heading into this year, it's kind of -- again, it's been relatively normal seasonality as we've started. So we haven't seen any acceleration of the softness or any sort of significant changes there.

Regionally, it's same thing. Like we haven't seen EMEA or Europe or the U.S. or any other particular region be particularly different than the others. Everything is looking kind of like normal seasonality to us. But again, off of a lower base that was set up by cuts in budgets earlier last year.

So that's kind of what we're seeing. In terms of our guide and conservatism in the guide, what we're assuming right now is that continued trend. So things don't get significantly worse, but we also don't see a recovery. I think the bull case for us is definitely that a recovery happens. And we believe that because of the great supply that we brought on in 2022 that in a recovery, we'll see an outsized period of growth as we're able to kind of overcome the -- what I referenced earlier as supply shock, bringing on too much supply, not having enough demand for it, we should see a faster than normal growth rate as we -- as the demand catches up with the supply in a recovery.

Obviously, the bear case would be -- the macro economy gets significantly worse and advertising budgets are cut again. But I think generally for now, we've assumed that things stay as is, which is still soft, but not what it's been. And I apologize, we kind of missed your third question. Can you repeat that?

Yes, sure. I was just curious if you had any advertising verticals that you would call out as being either weaker versus stronger in 4Q and into 2023?

I think one vertical that was stronger was on e-commerce. So I think Stephen mentioned that towards the end of the year and even December specifically, we've seen e-commerce being stronger than usual, specifically with Connexity DCO, which is -- which has been a good momentum throughout the year was retailers that we're able to find success on our core Taboola supply.

That means that their products were able to find good conversion on traditional publishers' news and other types of content on a typical network. So that's been a source of strength. -- and then more recent with the launch of turnkey e-commerce as we're rolling out high-intent content and product review for publishers we announced with time.com and Anje.com, which was in my letter, that content actually increases the quality supply that retailers want. So this has been another source of strength.

And I expect this to be a growing momentum for Taboola as we continue to grow the content that publishers have that retailers want to be attached to.

Great. And then just a follow-up, if that's all right. I wonder, Adam, if you could just talk about the progress at Taboola News. Will there be any new partners to call out? Is it still growing at 100%? And how should we think about the size of the business 12 to 18 months from now?

quarterly business reviews in Q4 where publishers showed us that Taboola News is becoming 5% to 10% of their traffic in different regions, which is unbelievable if you think about the power of ASCO and social traffic and how much publishers rely on that. So that was a great synergy between Taboola News to our core business.

So that's great news. We have great partnership with Xiaomi and Samsung and others, you should stay tuned for some new formats that we're launching. You can imagine video and commerce and other things that we do on our traditional publishers that we've yet to be doing with OEMs. So I suspect there's a lot of vertical growth with our existing OEMs that we can do more with them and increase the ARPU that we generate for consumer.

So I'm excited also, it's still a small business overall, right? We announced that while it's a start-up, organic startup, we started at Taboola, it cost the $50 million in revenue last year, similar margins to our overall business and expect this to be a triple-digit business.

We haven't given specific numbers, but I did actually comfortable saying that this will become north of $100 million visits within the foreseen future.

And our next question coming from the line of Laura Martin with Neha Company.

A couple of things. Could you give us an update on what's going on with your video ad units and revenue? And also you've been trying to move upmarket, like up the page because you talk about high impact ad units and how that's going. And then in terms of spending, I'm just -- Adam, I'm really struck by the fact that we just keep adding sort of new tests and new cost centers.

So e-commerce, we had e-commerce, and we're doing news and now we're doing Yahoo -- and now we're adding. So I just feel like we keep adding sort of engineers and costs, and there's just a lot of complexity. Over the last 24 months, I feel like complexity has doubled or tripled in terms of all the things you're trying to accomplish because you talk about managing that all of those various initiatives and how you think about return on invested capital? Because it sort of things it feels like some of these will be better allocated more and maybe cutting off some of these. So can you just talk about that for us?

Laura, -- these are 2 very good questions. So let me start with the video one. What we've been doing over the last 3 to 6 months as part of kind of like lifetime value approach with publishers to help them drive the maximum amount of value from consumers coming to their site because some consumers love videos, some don't, some like e-commerce, some don't.

So more and more, we're trying to think holistically about our publisher partnerships as like in amazon.com, where by different people have different lifetime value and optimize for the long relationships publishers have with users. And video plays a big part in that because some people really like it, but while others don't. So what we've done is we've kind of consolidated our recommendation units to sort of, we call it recommendation reels, which could include videos in them.

So many of our publishers now on their homepages and mid-article, especially with the growth of the home pitch for you, which gained a lot of momentum. I mean it's such an amazing product to put AI on your homepage. It comes with video recommendations. So it has been a very good source of strength for us.

I think, obviously, with brand advertising being softer in performance advertising in 2022, it's more of a supply opportunity into the future where that's going to come back. But we do see publishers integrate our video units more and more, specifically on homepages, mid-article and our traditional feeds. So I like it. But what I like the most is how we're consolidating all of these formats into a single recommendation unit that could, to some users appear as a video and to other people that appears the e-commerce recommendation.

And that's what publishers buy from Taboola. -- they buy sort of a holistic lifetime value personalization engine versus the widget or placement. So video is becoming more and more just a holistic part of our recommendation vision. And we have seen a lot of growth, specifically with HomeBridge for you, which is it comes with a high impact placement like you mentioned.

About the second question, when it relates to just our investment policy, let me say a few things. So one, I think now it's healthy for companies and for Taboola to be free cash flow -- positive free cash flow, which is very important to us.

So whether that's in a dawmarket or upmarket, it's something we, as a management team and as a Board, pay a lot of attention to. So that's -- as you can see in 2023, while investing significantly in Yahoo -- and other things, which will pay a huge dividend for investor community and ourselves in 2024, we're free cash flow positive with a healthy EBITDA.

Now specifically, the way we think about our investments, this is a great opportunity for us. We have an amazing publisher network and a lot of momentum that has grown in 2022. I see an amazing upside. I mean I can't express what I think will happen if we get performance advertising to be stronger or e-commerce to succeed even more or head butting each one of them can turn into hundreds of millions of dollars or over $1 billion in revenue for Taboola and will make us stronger.

So I think we're working on the right stuff, 3 things that I mentioned again and again, and obviously, Yahoo!, which is very accretive to investors and going to make us even stronger. So specifically about turnkey, which we're adding this year, I feel that this was the missing piece to make e-commerce everything we wish it is or will become because many publisher partners came to us and said, "We love to become bigger in retail and e-commerce revenue, but they don't have the content. So they look at the New York Times with (inaudible), they look at USA today with review.com, but they don't have the deter team, they don't have the data and they don't have the ability to get in the business.

So there's chasm they want to cross, but they can't do it. So we said, we have the data, let's build the team, create the content for them, enjoy the authority they have with SEO and consumers and make this a big, big business. I can tell you, by the way, from what I'm seeing so far, publishers, I mentioned time.com, that are getting into turnkey e-commerce. The model for that business in e-commerce overall for publishers very relevant for them is 5 to 10x our core to boiler business.

So if I look at how I started Taboola, bottom of article feeds and of advertising, and I compare that to publishers who will get into the e-commerce business, we can grow that relationship very, very significantly.

And then it's a bigger share of wallet. It will be much harder to fight with Taboola, better margins over time, even better margins. So I think it's worth it. And on the other side of between 24, you saw what we feel comfortable to guide. And I think we're being fairly conservative. So hopefully, we'll be able to bid this and grow it.

And our next question coming from the line of Steven Ju with Credit Suisse.

Okay. So Adam, on your prepared remarks, I think you talked about what sounds like an improved matching algorithm to stick the right ad in front of the right user at the right time. So I guess it's early, but is there any color you can share in terms of the greater accuracy you may be driving in some of the testing there?

Yes. So I mentioned about 4 tracks in my letter. That has been one of them. And I mentioned earlier on this call, our bidding strategy. So we're spending a lot of our time between creative being strategies, matching AI to increase the advertisers' success and make it easier for advertisers to get the first conversion faster around the target that we're trying to achieve. -- specifically with AI, you may have seen also that we've announced generated II, whereby our advertisers are now able -- it's in beta are now able to get creatives that are driven by past performance of our advertisers, and that can help us basically better match consumers with creative, lending pages, images and things that can help consumers see as it are predisposed to what they may try to achieve.

So that's what that is all about. And like I mentioned, we have -- it's the biggest investment we have in the company. If I could do one thing in other, that's the one thing I would do, performance advertising because I think if I compare it to Bula, which has about 15,000 advertisers or so to bigger walled gardens that have hundreds of thousands or millions.

The upside here is just massive. So here, we're investing a lot in AI, generate to make sure that we have also the right landing pages and storytelling for advertisers. And also, there's a benefit of being the biggest, right? -- poles now, especially with Yahoo, right? When you're looking at around $2.5 billion revenue company side-by-side to companies in revenue to Twitter, Snap, Pinterest and others.

At that size, we have so much data that we can really help our advertisers kind of leapfrog the coal start they have with advertising companies, specifically even when you think about smaller companies. So I'm excited about the scale that we're about to have as we launch Yahoo -- and make advertisers even more successful.

Our next question coming from the line of Jason Helfstein with Oppenheimer. –

Did we lose Jason?

-- And our next question is coming from the line of Justin Patterson with KeyBanc.

Great... We're starting to see more stories of large publishers shutting down internal ad tech divisions or at least materially cutting the headcount there and leaning more on third parties. The Yahoo relationship is a great example of that. How would you characterize the opportunity set to add new publishers and expand with existing ones versus what you've seen in the past?

And then secondarily, Adam, you talked a bit about generative AI within the prepared remarks in the letter. I would love to hear how you think about that just impacting the publisher landscape is this more opportunity or threat? And how do we think about that potentially rolling into the business over the next few years?

Sure. Thanks for the question. So I can start. So in terms of publisher shutting down internal units, I think Yahoo is very unique because it's a very big company, and they have a rotor different things that they can do from their perspective. I think as an industry, there's a huge opportunity for publishers to partner with, I think, fewer partners.

So I think what you'll see over the next few years is that publishers want to have less vendors and more partners and maybe less partners. -- Right? So they can go deep with them. The opportunity I see is more about diversity of revenue. I'm hearing that a lot from publishers. Publishers want to have some review in e-commerce, some revenue in video, some revenue, native advertising, and some header bidding. They want to have diverse some subscription perhaps, right?

So they want to be less exposed in a single bucket of advertising revenue. And I think that's also what Taboola needs to and wants to provide, right? So we -- that's why we invest so much in e-commerce and AI to help job subscription, which is the value we give at no cost to our publishers with home patch for you. So all of those things, I think that's the trend.

Publishers will have less companies they work with. They're going to sign longer-term agreements, so they can truly innovate and low each other. And companies that are more single kind of product, I think, will be over time or challenged because it will be very hard for them to kind of fight for the bundle of the different types of advertising mix. So that's the trend I'm seeing. I think we'll see more of that, especially right now when everyone is looking for growth, right?

So that's -- I'm excited about that. And I think we're investing in the right stuff also going back to Laura's question, that's why investing in my opinion right now in becoming that partner for publishers is a good thing. The second thing on (inaudible) and GPT and all of those things. One, I think it's going to be fantastic for advertisers because like I said, there's an interesting kind of CASM or a gap for advertisers, a cold start, if you will, whereby they don't know how to begin, if I'm an insurance advertiser, what should be the right title, -- how should I think about my lending pages, -- what should be my buttons.

All those questions, over time, that becomes a huge actually kind of IP for advertisers as they know how to advertise. But those who just start, they don't know how to begin. So especially if you're a small advertiser, if you're a self-service advertiser. So I think that's going to be really great for companies who have scale and data to prompt that into a GPT type engine to then come up with new creatives that can help advertisers to be successful. And that's going to be interesting. I think for the publisher side, I suspect we'll see growth in journalism and riders because now publishers will have a chance to see what content is missing that users want to read that can create engagement and subscription and different revenue mix.

So they'll in my opinion, they'll invest in high-quality, trusted content driven by AI. So they'll use the kind of the insights of GPT type engines to know what's missing and what's missing not only to engage consumers, but also to drive revenue. So that's -- I think we'll see growth. And of course, as we all know, we'll see growth, I think, in productivity and all that stuff. But for advertising and publishers, I think this is a good thing.

One on these for our next question -- and our final question coming from the line of Chad Larkin of…

Guys, its Jason. Can you hear me?

Yes. Yes.

I had some cash issues because in, I don't know why. So totally apologize. Okay. So first, I want to understand, you originally thinking Yahoo! -- would have an impact in the second half, and obviously, that's been pushed a little forward. So maybe just talk about kind of why that is?

And then can you talk some more about DR, how fast did it grow? What percent of the kind of mix is it on a maybe a revenue post-tax. And then just lastly, the comments about moving away from published prepayments. Just -- obviously, that doesn't affect the income statement because of the prepayment, but just maybe just talk about what that says about the competitive environment.

So let me start by addressing the Yahoo and the impact of Yahoo on guidance, and I'll also talk about the publisher prepayments. So I think the Yahoo!, we still expect Yahoo! -- to start to show some revenue in the second half. But the problem is that I don't know how to forecast it yet, so I don't know the degree of the revenue. I don't know exactly when to forecast that it will start because we're kind of deep in the planning stages right now.

So for conservative reasons, we just decided to exclude it from our guidance for now, and we'll update on that as we get -- go through the year, and we'll obviously have a much better view of that by the next time we have our next earnings call. So I think it was mostly just the fact that we didn't know how to forecast it is the reason that we excluded it. It's not so much that anything has changed on our time lines.

And in a shameless plug, I would invite everyone to come to our Yahoo Deal information session next Wednesday, where we'll talk a little bit more about timing and why we're guiding the way we are, and you'll get some ideas of what we have to do, the work we have to do to get to the point where we're generating the revenue. So that will probably help.

On your question about publisher prepayments. So the -- I don't think -- publisher prepayments has been part of our business model for years. So it's not something that's new or different.

In fact, I would say, if anything, publisher prepayments are less important to us from a competitive perspective, like just straight up win rate and retention rate of employee of publishers than it was historically. But we do use it very specifically in 2 specific situations.

One, we do use it when it's a publisher that we don't have a history with who we kind of need to put our money where our mouth is to make them believe that we can do what we tell them we're going to do. So we do use it in that situation to win new publishers. And that's becoming, frankly, rarer and rarer because not rare and rare in terms of using it in general, but rare and rare to use that tool to prove anything to them because they can now talk to other publishers in their market, and they hear from those publishers what we can do.

But we still do use it in that case where it's a sign of confidence. I think where we're starting to use it more is also to get longer duration deals or other things that we want like to get publishers to do more with us faster. So we'll sometimes put an upfront cash to get them to sign a 5-year deal instead of a 3-year deal. -- or to sign a 10-year deal instead of a 5-year deal or to do full feed and mid article from the outset rather than do something more conservative initially and then look to expand later.

So we use it to get things we want as well. And it is an advantage that we do have the balance sheet to do that, especially relative to some of our much smaller competitors. So I think that's the way we think about publisher prepayments. Your last question was around -- I think you said DR and whether or not we're seeing progress on that. Can you give us a little bit more about what it is that you're wondering about there?

Yes. I just want to imagine you're -- the DR-related ads are growing much faster than the brand. So just if you can give us a sense of how much faster? And then what percent of the mix it is on a post revenue post-tax basis today?

Yes. So interestingly, I don't think the overall mix has changed that much. I think, generally speaking, we're doing a good job of growing our brand advertising business because a lot of our new supply, especially upsells with new publishers is placements that actually do well for brand advertisers.

So our mid article, high-impact placements, homepage units that we're now getting with homepage for you, these things are actually driving a lot of supply, a lot of inventory that works well for brand. So that's making that part of the business grow faster due to the supply side.

I think that our DR our direct response performance advertising business is definitely performing well and growing, but it's really at a more similar rate. I think as Adam said earlier, our optimism with VR and performance advertising is that if you asked us what inning we're on right now in terms of that whole ball game, we're in the second inning, like there's so much more we can do. And some of the things that Adam talked about in terms of the new features we're releasing new targeting technologies, we think that's going to accelerate that business going forward.

So as of now, they're growing at similar rates, but I think we feel that performance advertising is still a big part of our future.

I would just add that in 2024, as we are fully live with Yahoo, the biggest thing that excites me is that advertisers right now find it very frustrating to work with small companies in the open web. It's very fragmented. Every company is a different technology, different dashboard versus easily buying Google, easily buying Facebook.

So there needs to be a company that generates billions of dollars in revenue in the Open Web that can make it easy for advertisers to rely on, contextual, safe, not cookie risk, all those things. So we're a year away from getting to the point that the scale is so significant that advertisers to control say we have a Google strategy, Facebook strategy, to brother strategy.

And that's going to be, in my opinion, the biggest needle mover for both performance advertisers as well as agencies and brand advertisers.

I will now turn the call back over to management for any closing remarks.

All right. So thanks, everyone, for joining us today, and we look forward to spending a lot of time with all of you. So I'm very excited about the momentum and the future of Taboola like I said, I'm excited about winning incredible publishers who choose to and trust us, even ones that have left us and came back.

As you know, I have this T-shirt that's always come back, and I'm proud of that. to our growth engines that can double Taboola. On the other side of it, for new launches, and we become $2.5 billion revenue that you mentioned on a full year basis like last year, we have e-commerce performance advertising in the header bidding. Each one of them can double the company because these are huge markets. And it's going to make us also more competitive as we continue to win new supply and new advertising business. I'm very, very excited about Yahoo and becoming a must buy for advertisers like I just mentioned, and working on the Yahoo! -- team for the next 30 years.

And like I said, it's uniquely where that management companies have seen the future. We're investing this year and 2024, it feels like just one big care bear shunning light on our journey. So I'm super excited. My team is excited. And please join us, if you can, next Wednesday, New York for Yahoo Information Session. We're going to host Monica, our new Board member and New CFO; Jim Lanzone, Yahoo's CEO and our executive team is going to be great, and thanks again.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.