Taboola.com Ltd (TBLA) 2021 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Taboola Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions)

At this time, I would like to turn the broadcast over to Ms. Jennifer Horsley. Ma'am, you may begin.

Thank you. Good morning, everyone, and welcome to Taboola's fourth quarter and full-year 2021 earnings conference call. I'm here with Adam Singolda, our Founder and CEO; and Steve Walker, our CFO. We issued our earnings press release yesterday after market and it is available along with our Q4 Shareholder Letter 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'll 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, Jen. Good morning, everyone, and thank you for joining us for our fourth quarter call. I'm excited to say we finished the year with a record Q4 and a record 2021. Taboola is growing fast, our EBITDA margin is over 30%, and we're generating cash, and there's a meaningful momentum in the market.

Let me share some of our 2021 numbers. Q4 revenues were $408 million, ex-TAC gross profit, which is what's left for us after we share revenue with our publishers, the main metric we measure as management was $169 million, which represents 54% growth rates over Q4 of 2020 on a reported basis. This ex-TAC growth rate in Q4 on a pro forma basis, which means if we had owned Connexity in Q4 of 2020, then our Q4 growth rate in 2021 versus 2020 would have been 22%.

We also generated adjusted EBITDA of $65 million in Q4 at an adjusted EBITDA margin of 38.6%. When looking at 2021, we exceeded our full year guidance, growing ex-TAC gross profit to $519 million, growth rates of 36% over 2020 on a reported basis. With Connexity pro forma, our ex-TAC growth rate in 2021 was 25%. To put this in perspective, when going public in 2021, we guided for 16% ex-TAC growth over 2020.

We also delivered strong adjusted EBITDA of $179 million in 2021 at a margin of 34.6%. As you can see, 2021 was a strong year financially for us, but it was really a milestone year for us in many ways. We went public on June 30, completed our largest acquisition in our history, Connexity, making us a leader in e-commerce, brought new products into the market and won meaningful partnerships all around the world, we demonstrated our differentiation while we win, as well as establish our predictability of the business with long-term exclusive publisher partnerships, all of this while delivering beat and raise each quarter. I'm very proud of the team for all of that we've accomplished in 2021 and these results providing us confidence to increase our guidance for 2022. Steve will share more details, but I would like to provide some highlights.

We expect revenues of $1.67 billion, ex-TAC gross profit of $665 million and adjusted EBITDA of $204 million, each at the midpoint of our guidance. This guidance represents an ex-TAC growth rate of 28% over last year and 16% on a pro forma basis with 30% to 32% adjusted EBITDA margin. I could not be more excited about our future, and I feel we're exactly where we need to be. There are only 24 hours in a day, and the average person makes north of 30,000 decisions a day and recommendation engines like Taboola are needed to help people make decisions that can impact their lives, what to read, what to listen to, what to buy. Our mission is to power recommendations for the open web anywhere outside of the walled gardens. Over time, we aim to ensure anything and everything will be personalized, powered by Taboola. Think Amazon's people who buy this also buy but powered by Taboola for content, products and services and everywhere in the open web outside of the walled garden. The open web is a $64 billion market, and we have differentiated offerings that help us win business fast and profitably.

You've all used this before. If you've ever been on a website or an app that you love, like CNBC or ESPN or BBC or The Independent or El Mundo, Taboola recommends more content from the site you're already on, as well as from elsewhere around the web. People click on Taboola 30 billion times a year, half of it is to read and watch more editorial content, and the other half is sponsored by advertisers. Now more than 15,000 advertisers work with Taboola already to reach users in the open web in the right context, when they're reading about something they care about. We reach about 0.5 billion people every day.

It's safe to advertise with us and we're effective.

Following the acquisition of Connexity, we're also a leader in powering e-commerce recommendations, driving more than 1 million monthly transactions. Leading brands, including Walmart, Macy's, Wayfair, Skechers and eBay are among some of our key customers.

This is a good time to also update about where we are in Connexity and our integration. We made progress on all 3 fronts that I talked about in the past. People, there's a lot of excitement and good energy. We're merging our sales and comms system, and it's starting to feel like we're one. My goal here is that soon enough, people who are joining Taboola will not know who came from Taboola or Connexity. On the advertising front, there's a good momentum in selling Connexity by Taboola sales team starting in China and soon in the U.S. On the publisher front, we're cross-selling Connexity offering to Taboola publishers in EMEA and APAC, and we're getting good demand for it from all of our partners. You may have seen us highlight Connexity as part of our solution in recent press releases in win announcements. So you already know that the market cares about it.

Taking a step back, over the past year, the open web has begun to transition from its addiction to tracking user data and is shifting to contextual targeting. I'm encouraged by where the industry is going. It's safer for users and contextual advertising is the source of Taboola's strength. Advertisers can reach users on Taboola based on the reading preferences, what makes them curious, what interests them, what they're watched and read, not just what they told social network about themselves. This is the future of our industry, especially in the back all of the changes we're seeing with Apple, Google and more.

As I reflect on 2021, there are 3 important things on my mind as it relates to our business, I'll share highlights of each: our differentiation and how that makes us win; our significant growth opportunities in our $64 billion market; and our strong predictable financial model. We win business because we're differentiated in the marketplace. Many companies in the advertising space offer ads to publishers, but the truth is that nobody is looking forward to seeing an ad. Taboola, though, who doesn't just offer ad. Publishers working with us gets more than just revenue. Chief editors choose Taboola, product leadership chooses Taboola, audience development team choose Taboola and now e-commerce people choose Taboola, and thanks to that, we're able to win long-term exclusive partnerships with some of the most amazing publishers in the world. This is what comes from having a product-led approach and investing $100 million a year in a unique platform offering that differentiates us.

Here are a few of those investments that took place in 2021 and how our clients and partners chose Taboola, thanks to them. Advertisers chose Taboola because our technology in AI works, SmartBid is our AI. It helps advertisers to succeed with Taboola. Similar to how if you're buying an ad from Google or Amazon, your technology is optimizing on your behalf, at Taboola it's called SmartBid. In's Q3, we announced SmartBid's newest innovation, Dimensions, which factors in 40 different signals or dimensions as we call them, at scale to drive strong campaign performance. Most companies will provide advertising solutions to publishers rely on programmatic channels to bring dollars and they're trying to be less dependent on it. They call it supply path optimization, and it means that they want less companies between them and the advertiser or a client. It means they are not the ones optimizing for the advertisers, and they're not sure if the advertiser will keep buying from them. With Taboola, on the other hand, we behave a lot more like Google, Amazon or Meta, where the vast majority of our revenue, about 90% of it, comes from advertisers who work with us directly. Those advertisers use SmartBid AI to optimize their campaigns, they use our self-serve tools, best practices, new ad formats, data to succeed, and we know who they are. We onboard them, we grow their business, it just works.

On the supply side, when you compare Taboola to companies that are mainly demand-oriented and are programmatic, our main advantage is that we don't buy inventory and hope that the inventory we have now will be here tomorrow. We work with publishers, exclusively and long-term. And that means that as an advertiser working with Taboola, you're one step away from the publisher, and there's consistency in the people you get to reach. And in many ways, Taboola to the advertiser community is much more like a consumer company. You can think of us as one big global publisher. We have guaranteed supply and reach 0.5 billion people every single day. All of those dynamics help advertisers succeed with us repeatedly.

We also invested in 2021 in our High Impact Placements product, launched to capture new mid-article inventory to drive greater branded agencies' growth. Partners like NBC Sports, Future, Reach, Sinclair are choosing us for those reasons and brands just love it. In further support of our brand and agencies' growth, we cemented in 2021 important relationships with brand protection groups like DoubleVerify, Oracle Moat and others. Another significant differentiator for us are editorial products like Newsroom and newly launched Homepage For You. We've been investing in these for the past 5 years, and it's paying off. AI technology that empowers editors to get unique insights about their decisions. And as for last month, with the Homepage For You, making homepage as personalized and engaging as world top social apps. These new offerings has been showing us that we can drive over 30% increase in click through rates on the homepage and that's been adopted already by leading publishers. Our competitors don't offer products like this, and they miss an opportunity to engage one of the most important audience on the publisher side, the editors. It's been a decision point in Q4 wins like McClatchy, and NDTV is valued it so much. They signed a 10-year partnership with us, 10 years.

Another star within Taboola is Taboola News. Think Apple News, but for Android devices. In 2021, we signed groundbreaking partnerships with Samsung Brazil, Xiaomi all around the world, 2 of the largest Android OEM manufacturers in the world to integrate a feed of news on their devices. Taboola News is getting scale and now drives an average of more than 400 million monthly engagement on editorial content through mobile devices and OEM partnerships. This represents an increase of more than 125% year-over-year.

And last but not least, our leadership in content moderation. We want to make sure the open web stays safe, and I'm convinced that our processes, policies and approach are some of the best in our space. We have a dedicated moderation team of 50 employees that review every new advertisement. We were first to moderate COVID-19 when it happened to make sure people are safe and we don't recommend things that can hurt people. Our policies are public, anyone can read them, they are local and relevant to the market they're enforced in, and we interact with local reporters and authorities to constantly learn and improve, and our clients and partners appreciate all of those efforts. Our product-led approach and providing more than just revenue, as well as investing in policies in safe open web, help us win publishers and advertisers.

As I look at the last year, we've had tremendous amount of momentum, winning partnerships like BBC, Hearst, Penske Media, LINE Today in Hong Kong, Le Figaro. We've also announced exciting news as we signed a new agreement with Microsoft, lasting to July 2024, allowing both Microsoft and Taboola to look for even faster growth as part of a new bidder technology, which Microsoft has supported us in the design of.

As I finish my remarks, I want to spend a few moments on our significant growth opportunities. Think of it in 3 phases. The first one is, how we win within the open web $64 billion core market. The second one is, how do we expand to recommend even more things, so our platform is more valuable to users, our clients and our yield goes up. We're making good progress here. E-commerce is already 15% of our business and brands and agency gives already 15% of our business as well. And lastly, the third one, how can we bring our partners, clients and technology to recommend anywhere people spend their time. In our core markets, the open web is still monetizes in traditional ads, which provides limited value to users. Nobody opens their browser looking for a great banner, it just never going to happen, while people do actually interact with Google ads or Amazon ads, which do a great job, honestly, to recommend whatever people want. On Amazon and some of the product recommendations are organic and some are sponsored, but they're all relevant. Taboola's advertising experience are very similar to Amazon or Google in the sense that they offer both editorial recommendation, as well as paid advertising. I think a lot of the $64 billion market should look like Amazon and Taboola, we can power it. Taboola offers more than just traditional advertising products. We offer users the mix of editorial recommendations, bundled with paid recommendations, all natively rendered. When you go to a search in Google, some of the results are organic and some are paid, but they're all related to what you want to do next.

We're not stopping here. Over the next 10 to 20 years, Taboola will recommend anything and be anywhere. Our aspirations are to be on every connected TV, every mobile device, in every car, much like how some cars now arrive with Spotify for music in them, cars should be shipped with Taboola inside for local and national news, or for podcast recommendations. We see tremendous opportunities to grow in new ways, to take our contextual signals, our AI and our data superpower to new places, to disrupt the traditional advertising ecosystem and capture a larger share of the $64 billion plus open web market.

As we think about the future beyond the core, we want to keep diversifying what we recommend, as well as make sure we're integrated anywhere people spend their time. This is the foundation of our Recommend Anything and Recommend Anywhere strategy.

And before I pass it to Steve, our CFO, let me just say what a good time it is to be in our space and at Taboola. We're kicking off 2022 on the back of a very strong 2021. We're executing, we're energized to keep innovating on the product front, and we're excited to work with incredible partners all over the world. We're growing fast. We generated over 30% EBITDA margin. We generate cash, which allow us to invest in recruiting, in M&A and other things. And in 2022, we intend to grow over 20% our employee base around the world. We have the liberty to keep innovating and redefine our dreams.

Lastly, when you look at where we sit in the broader market, we're driven by contextual signals, which help us navigate well the privacy dynamics, and we're among the biggest companies in open web, in e-commerce already. And on the back of a pandemic, we're all buying more things online, and we'll never go back to how we used to be in 2019. We are already in the future and Taboola is ready for it.

I will now hand it over to Steve, who will dive into deeper details on our financial performance and guidance. Thank you.

Thanks, Adam, and Good morning, everyone. As Adam shared, we had a strong fourth quarter to end 2021. As you'll see in our earnings release, we beat our Q4 guidance on all measures. And as Adam referenced, we're raising 2022.

Since we are still relatively newly public, I will remind everyone of how we look at and measure our business. We're focused on achieving profitable growth. We measure our performance against this goal by looking at 2 measures. To measure growth, we look at ex-TAC gross profit growth rates. Ex-TAC is what we keep from our revenues after we pay our publisher partners. To measure profitability, we look at our adjusted EBITDA margin. Adjusted EBITDA margin is our adjusted EBITDA divided by our ex-TAC gross profit. Similar to how SaaS businesses have a Rule of 40, where they always want growth rate plus their profit margin to exceed 40%, we want the sum of our ex-TAC growth rate and our adjusted EBITDA margin to exceed 40%.

So now on to our Q4 and full-year 2021 results. Revenue in Q4 was $408 million, ex-TAC gross profit was $169 million and adjusted EBITDA was $65 million. This represented ex-TAC growth of 54% year-over-year or 22% on a pro forma basis with Connexity and a 38.6% ratio of adjusted EBITDA to ex-TAC gross profit or what we often refer to as adjusted EBITDA margin. All of the measures I highlighted are record levels. This performance propelled us to full-year 2021 revenue of $1.4 billion, ex-TAC gross profit of $519 million and adjusted EBITDA of $179 million. This represented ex-TAC growth of 36% year-over-year on a reported basis and 25% on a pro forma basis and an adjusted EBITDA margin of 34.6%. The 25% pro forma growth rate and over 34% margin puts us well above our Rule of 40 company target. I'll also note that our 25% pro forma growth rate is significantly better than our original 2021 PIPE deck projections, which would have had us growing ex-TAC at around 16% in 2021. The same goes for our adjusted EBITDA margin of 34.6%, which was well above our PIPE deck projection of 28.6%.

As Adam has shared, we are seeing continued good progress in the business, winning new customers, growing our existing customer relationships at a good pace, primarily by growing yield and executing on our Recommend Anything and Recommend Anywhere growth initiatives. Of the Q4 gross revenue growth of $56 million, $21 million came from new digital property partners and $35 million came from growth of our existing digital property partners. Our Q4 ex-TAC gross profit was $169 million and was up $59 million or 54% year-over-year. This growth came from 3 sources: the addition of new digital property partners to our network; growth of our existing digital property partners; and the addition of Connexity to our business. The 54% growth rate also benefited from a soft comparable quarter due to $17 million in guaranteed TAC payments withheld in Q2 and Q3 of 2020 and repaid in Q4 of 2020. As I've mentioned on multiple occasions, looking at our single quarter growth rates is somewhat deceiving in 2021 because of the withholding of the guarantees in Q2 and Q3 of 2020 and subsequent repayment in Q4. To better understand our growth rate, I have consistently pointed to the full-year ex-TAC growth, which was 36% reported and 25% on a pro forma basis.

For the full-year, our ex-TAC net dollar retention for our publishers was extremely strong at 116% for Taboola on a stand-alone basis.

Looking now at operating expenses, they were up $38 million year-over-year, driven by growth and investments in our business, the inclusion of Connexity, higher depreciation and amortization from intangibles coming from the Connexity acquisition and expenses related to being a public company. We generated adjusted EBITDA of $65 million in Q4, an increase of $32 million year-over-year. Margins remained very strong as our adjusted EBITDA margin was 38.6% in Q4, which exceeded guidance. Fourth quarter is our seasonally highest margin quarter given the higher revenues, which is why it's good to also look at the full-year from a margin standpoint, where adjusted EBITDA margin was 34.6%, above our long-term target of 30% and also an increase from 2020, which was 27.8%.

It is worth noting that we had net income of $600,000 in Q4, which compared to net income of $2.8 million in 2020. You can look at the net income to adjusted EBITDA reconciliation to see that the 2 biggest factors year-over-year that contributed to offsetting their profit growth were higher depreciation and amortization of $15.9 million, driven by the intangibles from the Connexity acquisition and higher tax expense of $15.4 million in 2021 due primarily to the fact we exhausted certain tax credits.

In terms of cash generation, we have been consistent in saying that we expect our ratio of free cash flow to adjusted EBITDA to be around 60% over any reasonably long period of time. In 2021, we generated $24 million of free cash flow. If you look back at the last 24 months, our free cash flow was $146 million or 51% of our adjusted EBITDA over that period. Excluding M&A costs and one-time costs of going public, that ratio would have been 61%. So, in line with our expectations. We continue to expect free cash flow to be approximately 60% of our adjusted EBITDA over any reasonably long period of time. We ended 2021 with a strong balance sheet position with a positive net cash position. Our cash balance of $319 million was above our debt balance of $285 million. So a good position that provides us ample financial flexibility.

Following our strong Q4 in 2021, we are raising our expectations for 2022, as highlighted earlier. I won't go through the Q1 guidance, which we are issuing for the first time, though, I will note that Q1 is seasonally the lowest revenue quarter for us. In addition, Q1 2022 is a challenging comparable quarter because ex-TAC gross profit grew 54% year-over-year in Q1 2021, which was an exceptionally strong performance. However, as you can see from our guidance, we still expect strong growth for 2022 on the whole.

I also wanted to provide a rough breakdown for seasonality given we are still new to some investors and now have Connexity in our results, which will change our seasonality profile. We expect ex-TAC for the year to break down approximately as follows: 20% in Q1; 23% in Q2; 25% in Q3; and 32% in Q4. Adjusted EBITDA breakdown, we expect to be approximately: 16% in Q1; 20% in Q2; 22% in Q3; and 42% in Q4. Note that there is a higher seasonality for adjusted EBITDA, given that costs are relatively stable, but revenue and ex-TAC increases considerably in Q4.

For the full-year of 2022, we are now projecting ex-TAC gross profit will be $661 million to $669 million, which represents growth of 27% to 29% versus 2021 or 15% to 17% on a pro forma basis. That is an increase from our previous guidance of $645 million to $665 million. We're expecting 2022 full-year adjusted EBITDA to be $195 million to $213 million. This demonstrates a very healthy adjusted EBITDA margin, meaning adjusted EBITDA divided by ex-TAC gross profit of over 30%. As I stated previously, we expect margin to be closer to our model target of 30% as we ramp-up investments in our core business, as well as our growth initiatives. We are planning on growing headcount 23% over the course of the year with a heavy emphasis on increasing our R&D capacity. 2022 operating expenses are also proportionately higher than 2021 as we factor in a full-year of public company costs and a return to more normal operating expenses post COVID.

We are also introducing, beginning with Q1 2022 earnings, a non-GAAP net income reporting metric. We believe this can be helpful in modeling our business, as well as for providing comparability to peers. As you can see in our release, we are guiding that 2022 non-GAAP net income will be between 111 and $129 million. We will be filing with our 20-F annual report historical results for this new measure.

To wrap up, we are focused on continuing to execute and to build on the significant progress we made in 2021. We see tremendous opportunities to grow our core business by bringing on more digital properties and by growing the revenue from our existing partners, both by continuing to grow our yield and by continuing to offer additional products and services. And we have a strong foundation for new growth from our Recommend Anywhere and Recommend Anything growth strategies. E-commerce now makes up over 15% of our ex-TAC gross profit, brands and agencies are also over 15% and Taboola News is gaining scale.

With that, let's open it up for questions.

(Operator Instructions) Our first question or comment comes from the line of Justin Patterson from KeyBanc.

Two, if I can. Adam, you made a lot of progress with Taboola News this past year. What are the next big initiatives to expand reach? And what are the factors you're looking at to determine the right monetization model?

And then for Steve, good progress with high-value segments, about 30% of ex-TAC gross profit growth or ex-TAC gross profit. As we look toward 2022, how are you ramping up these segments? And how is that contemplated in guidance?

So we're seeing -- in Taboola News, we've seen a lot of good momentum. You've seen some of the announcements last year with Samsung in Brazil and Xiaomi all around the world. And we've also, in my letter, I wrote about our monthly engagement that is growing 125% year-over-year. So we're seeing consumers interacting with Taboola News in a growing way, which is exciting. The reason, by the way, it's important to us, not only because it can be a revenue generator, which I'll speak about in a second, but also because strategically, every time the consumer opens their Samsung and clicks on a piece of content, we open the browser and we send that person straight to the publisher, which is a different experience than Apple News, which keeps you within the Apple ecosystem. And that means that we're slowly becoming a more significant source of traffic to publishers in the open web, which is very powerful if you compare us to SCO or social traffic, that's something publishers are perceived as very important in terms of growing their monthly readership. So that's why that is not only financially exciting but also strategically important for us.

Now, what's interesting is that, Taboola News, it's a multiyear startup. So it's a start within Taboola, but it's trying to be also financially interesting for us. In fact, some of what we're seeing in 2022 model is actually including some growth engines dollars that we're seeing. It's already in the tens of millions of dollars Taboola News, and I expect this to continue to grow.

The way we generate revenue from Taboola News is in 1 of 2 ways: one, at times when you swipe right to see a feed of news, much like when you have on Twitter or other social networks, that feed incorporates paid advertising from our advertising community. So you might see 3 or 4 recommendations from news that you like and then the fifth one will be paid. If you click on that, we generate revenue, and we share that revenue with the OEM. That's one way we generate revenue. And the second one is, every time you click on a piece of content, you land on an article or a video that has Taboola feed on it, which we monetize very well. As you know, that's our core business. So those 2 ways generates revenue for Taboola, which we share, in this case, with the OEM that is our partner.

And then in terms of the high-value segments that you asked about, so I think, first of all, we're very excited about the progress we've made there. So you noted, Justin, that each of those is now over 15% of our ex-TAC, which is great to see.

In terms of going forward, so we're -- the Connexity or the e-commerce portion of our business is over 15% already. And we're excited about where we're going with that. So we're seeing good progress in terms of capitalizing on the synergies. And that's one area that you're going to see that in our forward-looking guidance as we, obviously, projected about $6 million of synergies from Connexity this year, and we expect to continue to grow those over time. We've said that we think that can be $100 million of ex-TAC in 4 years. So that's the biggest impact that you're going to see on the e-commerce side.

For brands and agencies, you've seen a lot of announcements from us recently about becoming certified as a brand-safe channel for brands and agencies. I think you'll see more announcements in the near future about partnerships that we're building with agencies and with brands to bring them on. And I think where both Connexity, e-commerce and the brands and agencies kind of impact our business in terms of our guidance is, in terms of growing our existing base. So there are great upsell opportunities with our existing base for High Impact Placements, for our Homepage For You, which also gives us High Impact Placements and will help us work with brands and agencies. So it's an upsell opportunity. You'll see it in that 60% of our growth that we expect to come from growing our existing base. And like I said, Connexity, you'll also see in terms of, as we ramp-up the synergies there, that will impact our financials as well.

I'll also kind of mention one other thing, which is that we're also excited by Taboola News, our other growth initiative with Taboola recommending anywhere. So Adam just talked a little bit about that, but I think the -- we're very excited that that's actually -- we're seeing it in the financials now. So it was part of our beat in Q4, and we're seeing that it's going to become a more material part of our business over time.

Our next question comes from the line of Andrew Boone from JMP Securities.

Two, please. The first on Dimensions. Can you talk about any early results there that you're seeing from advertisers? And just how is the conversation going as advertisers are adopting the product?

And then secondly, going back to Connexity, I think you talked about the sales that are in EMEA and APAC. I believe that there were just 2 U.S. salespeople that Connexity had in the U.S. Can you just talk about the domestic kind of go-to-market and where you guys are in terms of integrating your own sales force in Connexity's products?

Andrew, love SmartBid. So let's start with that. So what we've seen in Q4, if you remember, we announced Dimensions, I know you know it. And what was interesting, if you recall quickly as a reminder for everyone, Dimensions basically allowed SmartBid to bid in a more granular way when we thought that it made sense. So as an example, if before SmartBid, entertainment website, would not get insurance ads or high-intent ads because SmartBid could think that it doesn't make sense to bid in that environment. From -- once Dimensions was introduced, SmartBid would look in a more granular way and even one article on entertainment website that spoke about insurance, suddenly would receive high bids from those types of advertisers. And that was new. What happened is that -- and that's the power of AI and deep learning. We started to receive new types of conversions from those environments in a more granular way and SmartBid essentially start teaching itself something new, which is again, the beautiful part about AI, and we saw that in Q4. Essentially, SmartBid starts collecting new types of conversions that we never got before. And so, we're able to correlate short-term intent. So SmartBid starts seeing that because of those conversions, people that read about a certain type of things tend to buy something in a short term. It's kind of almost like a semi-retargeting, but using what I read. And that was something that SmartBid was teaching itself, which is very powerful. We start seeing early performance of advertisers that are doing really well. We have some numbers, but we haven't released them yet, but we're seeing good results of advertisers that our conversion rates are at a much better way in terms of CPA, in cost per acquisition. And that's something that will scale in 2022, I expect.

But what's interesting is that, SmartBid is teaching itself things based on new type of data that it's collecting, which is really the power of our investment in AI. And again, we are seeing yield improvement. So as you saw, we beat our yield in Q4 and some of that was, thanks to Dimensions. And I'm very excited to see how we can scale that learning of this semi-retargeting, using the context of the page, which is especially relevant in a cookieless world. So SmartBid is teaching itself and preparing itself, I guess, for a cookieless future. So that's about SmartBid. And you should stay tuned for a few things. One, a blog post about it. 2, if you can, you should join our Investor Day, our Head of AI is going to join us on stage, whether you can be there in person or on Zoom, we're going to show some of these examples. It's really fun because it's almost like a SmartBid up until now, I spoke English. Now, it's teaching itself to speak Spanish using those conversions. So it's really cool and you'll see some examples in a blog post in Investor Day. So that was about SmartBid.

About Connexity, we started, indeed, in China, EMEA and APAC in general in terms of the synergies. And then soon we intend to get on the advertiser side in terms of the ad salespeople you mentioned to start in the U.S. So stay tuned for that, but that's coming up soon, and we did start internationally where we saw an easier way to begin.

Yes. By the way, on the international piece, we've actually had multiple wins now in China, for instance, that was the synergy that we highlighted last quarter that we didn't actually expect, but we've had multiple merchants now sign up for e-commerce services through Connexity in China. So it's -- we're seeing progress on that.

our next question or comment comes from the line of John Blackledge from Cowen.

Two questions. Could you discuss the publisher extensions like the new Microsoft deal and any other new publishers added in the quarter? And then, are there any big publisher deals up for renewal this year?

And then on the iOS changes, any shift in spend towards Taboola or more open platforms given the recent iOS changes?

So Microsoft, we're still aiming to -- as you saw in our announcement, we're excited about the bidder technology that we're working with Microsoft in supporting designing that to launch on Microsoft by the end of the quarter, which we're excited about because we believe that is going to enable growth avenues for both of us. As it relates to sources of inventory, we did not get exposed to beforehand. So that is exciting. We have great momentum in partnership with Microsoft and which have been our friend since 2015 or so. So I'm excited about that and still on track to launch by the end of the quarter, and I'm excited about what's to come on the other side in years to come. We've extended that relationship to 2024. So we have a lot of time to keep working together on growing. So that's on that front.

And just as a reminder, much like Google did with GDN as an extension of their network, my expectation is that, this will not only be an opportunity with Microsoft, but also we could take that into other sources of inventory that historically we did not tapped into social networks, display inventory and other things. So we do have, as you know, 90% of our revenue comes from advertisers who work with us direct. So we have a huge advantage in the sense that we're not just programmatic in a sense that we hope for the best that advertisers will come our way. We control our [states] by having advertisers working with us directly, which will enable us to extend our reach to other sources of inventory. So that's just on the bidder one.

And we are seeing, in our early signs, I think we've updated the amount of advertisers now working with us, that's growing nicely. And a lot of that is performance advertiser, which means that they find Taboola to be a successful channel that is repeatedly driving the cost per acquisition they're looking to achieve. And then with SmartBid Dimension, a lot of it is autonomous. So they just need to come to us and upsell their creative and their goals and we do the work for them. So we do see early signs of advertisers that succeed with us. My expectation is that, we're just at the beginning of what's to come in terms of a future that is mainly contextual, such a good time to be a contextual company, a company that's not driven by user addicted, tracking and all those things. From our perspective, the fact we drive growth based on what people are reading, not based on what they say by themselves is such a beautiful place to be, and we're excited about it. So we are seeing good times from advertisers. SmartBid is working really well. Our yield is beating our or what we thought it was going to do in Q4, and you saw that raising our guidance for 2022. So all of those are good signs.

Our next question or comment comes from the line of Laura Martin from Needham.

Great numbers. Congratulations. My first question is on OpenPath. So Trade Desk said they're integrating this new product, OpenPath, which is designed to get rid of some of the bad players in the middle of the adtech ecosystem. And could you remind us how much of your demand -- I know you're a 2-sided platform, but how much of your demand comes from third parties like the Trade Desk and other DSPs? And is this bad for you this OpenPath, where they're going directly to publishers? Or is it good for you somehow? That's my first one.

Okay. Let me start with this one. In general, and I wrote about that in the letter. I think it's great to see that supply-side companies are talking about supply path optimization, which means that they want to have more direct relationship with advertisers so that most of the revenue is direct versus programmatic. And now we're seeing demand-side companies hoping to work with publishers direct. So what we're seeing is that, supply-side companies want to become Taboola and demand-side companies want to become Taboola because Taboola right now, all of our publishers are direct, exclusive and long-term. And 90% of our revenue, so about 10% is programmatic and third-party companies who buy Taboola in that way, and about 90% is direct, which means they use SmartBid to optimize on the Taboola network, which makes us much more like a Google or an Amazon in the sense that we're almost like a big consumer company, right? We have -- on the one side, we have publishers direct with us, and that's a long-term agreement. So we see people today, we'll see them tomorrow. And on the advertisers side, 90% is direct. So, one, I think these are good dynamics because it shows that other companies appreciate Taboola's current configuration and I think driving towards the same future, which is publishers direct, advertisers direct with some programmatic.

In terms of the Trade Desk, they are a friend and a partner. We work with them, we work with Google, we work with many great demand-side companies, and that mainly is good for us because they can participate in our auction and it can drive better yield when that happens. In terms of that specific strategy, I don't think specifically, at least short-term, it affects us because I'm not sure they haven't disclosed what type of inventory exactly they're going to go after. So I don't really know what is their strategy. But overall, I think that based on what we now do with the Trade Desk, I think we're more friends and it can drive growth for publishers, the way I see it as of now.

Okay. And then my second was on China. So I thought it was interesting in your note that when you were talking about Connexity, you said the momentum of selling Connexity in Taboola by starting in China and soon in the U.S. So I was curious, you now have 15% of your revenue from Connexity, how much of that is sitting in China? And do you feel any qualms about the rising geopolitical tensions between us and China?

Yes. So right now, a very small percentage of our revenue from Connexity is in China. We're in the early stages of selling to the Chinese market to basically the Chinese merchants as we call the e-commerce advertisers. So we've won a few deals, but we're very early. So it's a de minimis part of their revenue today. We do think it can be substantial in the future.

I guess, in terms of the rising geopolitical kind of challenges, I think we're obviously going to watch it closely and make sure that nothing comes up. But I think as of now, our perception is that, China is such an important part of kind of our overall economics system in the U.S. that I don't see -- I don't foresee a time when a good Chinese merchant who happens to sell into the U.S. is going to be blackball because of that or because of the tensions. So I'm not sure that we see a short-term impact, but we obviously have to watch that closely as we go forward.

Our next question or comment comes from the line of Jason Helfstein from Oppenheimer.

Just trying to think about how we all think about a multiyear growth story here, whether it's thinking about a number of advertisers, number of publishers. In the release, you talked about new digital revenue partners were $21 million of growth and existing were $35 million. And so, should we think about maybe trying to model like the existing property partners and just thinking about a retention rate? You said it was $110 million in the quarter. I don't know it's kind of how you're thinking about for the year, but if that's the right way to kind of do a multiyear model to get to the long-term targets that you guys have discussed?

And then the second, will you be providing kind of the historical pro formas with Connexity for all of 2021, so we can think about '22 quarters organic versus pro forma growth? Just trying to think about how we all think about a multiyear growth story here, whether it's thinking about a number of advertisers, number of publishers. In the release, you talked about new digital revenue partners were $21 million of growth and existing were $35 million. And so, should we think about maybe trying to model like the existing property partners and just thinking about a retention rate? You said it was $110 million in the quarter. I don't know it's kind of how you're thinking about for the year, but if that's the right way to kind of do a multiyear model to get to the long-term targets that you guys have discussed?

And then the second, will you be providing kind of the historical pro formas with Connexity for all of 2021, so we can think about '22 quarters organic versus pro forma growth?

Yes. So in terms of the multiyear model, I think the way we've spoken about this and the way we think about this is that, we expect about 40% of our growth coming -- going forward to come from new publishers that we bring on, or new digital property partners and about 60% to come from growing the existing partners. So when we model our business internally, the way we do it is, we basically look at it as a run rate business where next quarter equals this quarter plus new revenue we bring on, plus kind of our NDR from our existing publisher base. So -- and that obviously takes into account any sort of churn. And basically, since we're saying 40% of it comes from new publisher partners and 60% of it comes from the growth of existing, you can kind of back into what the -- what those numbers look like. But that's the way we model our business, and that's the way we think about our business. You bring on new supply, but you also grow your existing supply.

And I think the only other factor to factor into that is seasonality, which is obviously something that has changed a bit with acquiring Connexity, which is a more heavily fourth quarter oriented business than Taboola, although Taboola is also weighted to Q4. So that's the only other thing you have to take into account when you model the business is when you're doing sequential quarters, you have to think in terms of what's the seasonality impact. But generally speaking, that's the way we model the business.

In terms of pro formas, for now, what we will definitely commit to is, each quarter will tell you what the pro forma growth rate was. We focused on ex-TAC because Connexity will be reported on and they're going to be using net revenue or will be using net revenue accounting for them. So growth revenue doesn't mean anything for them. So we will give you the pro forma growth rates on ex-TAC every quarter so you can understand how much of the growth came from Taboola versus Connexity just by looking at the pro forma. So we'll provide that. We will consider doing full pro forma financials quarterly for 2021 at some point. But the challenge with it, just to be blunt about it, is they're not audited. And so, we have to understand what we're allowed to do given that it's not -- they haven't done a full audit on a quarterly basis for them. So that's the only challenge there. But in the meantime, we'll give you the pro forma growth rate so you can at least see what's organic and what's from the acquisition in terms of our growth.

And then just a follow-up. I think when everyone was thinking through the impact of IDFA, I think there was a pretty minimal impact on Taboola and maybe even positive from -- benefiting from the inflation in Android pricing. Now that Google has committed to doing something comparable, but probably more palatable in that they're still going to allow some forms of measurement and targeting. But with new rules, just granted, it is 2 years away. But just how are you thinking about that and the impact on Taboola?

I can take this one. Overall, I mean, if I look at Apple blocking cookies and then with IDFA starting from, I think, 2017, our yield going up specifically for Safari. And in Q1, we beat our yield expectation and we feel comfortable raising our guidance. All of those decisions and results are based on the fact that: one, 90% of our revenue comes from advertisers who buy from us direct. So they don't use tracking that is being deprecated and things of that nature to use our own data and our own AI. So that's a large portion of our revenue. And then specifically with SmartBid Dimension, we're able to imitate retargeting and things that are sort of intent look-alikes using what I read and people like me that treat similar things. So all of those dynamics are good for us. And I think that the more the future is privacy-driven and context-driven, especially with Connexity, we stand to rise on the back of those dynamics out for me. And for us, Google changes are good for the industry. They're good for consumers, and they're good for Taboola.

Next question or comment comes from the line of Stephen Ju from Credit Suisse.

Okay. So Adam, now that you've spent some more time with Connexity, can you talk about the typical sales cycle there versus Taboola as you talk to advertisers? Typically, how long do you think it will take for an average advertiser to test, refine and get comfortable with Connexity and before you start seeing sort of major budget shifts going in that direction?

And, Steve, you've been doing this before. But I think you're still one of the few CFOs out there offering a full-year outlook. And you touched on this for the longer-term. But can you talk about the various inputs that are informing the projection for 2022?

So with regards to Connexity, similar to Taboola, it's a 2-sided marketplace, when you think about publishers and advertisers, I'll start for the publishers, there's a short-term and long-term wait, it's pacing. The short-term is whatever content already exists on the publisher side, Connexity is able to -- the publisher solution is able to tap into those high-intent signals and those articles that have high-intent and monetize those quite immediately. And then the midterm and long-term on the publisher side is how do you expand and we spoke about that on Connexity Investor Day, how do you expand the amount of content a publisher may have so that is relevant to them so that a bigger portion of their site has high-intent and as such high or a portion of e-commerce revenue. So if you look at websites like USA Today with Reviewed.com, Reviewed.com is a whole world of e-commerce content and high-intent content, which they worked on for years creating. Same goes for Meredith and Hearst and Conde and other great publishers. And -- but that's still a smallest subset of the universe of publishers.

So what I'm seeing is, there's a short-term gains with just whatever people already have written that has high-intent, and then over time, they're going to use Connexity publisher solutions to -- and our data to know what's right about that makes sense for them and how to monetize that with us. So that's on the publisher side. So there's a short-term, long-term. And then you have our synergies. So all of what I'm saying can be digested and included into our synergies forecast that you have.

On the advertiser side, it is a slow ramp. So 2/3 or so of the business is CPC. And those big retailers try for a while to see that it works for them. And then I can tell you, just looking at the past of Connexity, once someone find success with Connexity, they tend to stay for a very long time. I think the tenure -- the average tenure is over 10 years for those retailers, and they have some of the best ones. So it is a slow ramp, and they take their time, they're paying very high CPCs. But once it works, it sticks for over a decade. So we're still new with this in terms of seeing new sales cycles. But that's the dynamics I expect to see based on the past.

And then in terms of your second question, Stephen, about kind of how we project growth and give guidance going forward, so I think one of the things that we really love about our business is that, it's very predictable, especially relative to other advertising-based businesses. And that's because we've got committed supply. So we have long-term agreements, average tenure of our contracts is over 3 years in terms of -- on a revenue-weighted basis. So we have committed supply. And then we've got demand that basically scales with us. So it's all performance-oriented. As long as we're performing for these advertisers, they continue advertising with us. What that does is, it makes our model very predictable. And so, we've -- as you mentioned, and kind of related to what we were talking about with Jason just a moment ago, it gives us the ability to forecast our business on a sequential basis as we go forward. And the way to think about our business is as a run rate. So next quarter, again, equals last quarter plus the new business we'll bring on plus the change in the existing business. And generally speaking, that's all very predictable. So if you look back at our historical sequential quarterly rates, it's actually -- you can see that it's fairly consistent. So you typically expect about a 16% decline in Q1 because of seasonality, you'd expect some slight growth in Q2 and Q3, you expect a big bump in Q4. Like if you just look at those historical numbers, it's very predictable, and we feel very comfortable because of that history being able to predict what our future quarters will look like.

What's interesting, by the way, is if you do that math and you look back at historical quarters, there's one quarter historically that really stands out sequentially, and it's Q1 2020. So Q1 2020 -- or sorry, Q1 2021 actually had a much lower decline from Q4 2020 than you would expect. It was only down about 4%, which is why it was just a historically a very strong quarter and a bit of a tough comparison for us this year. But generally speaking, we feel very good about being able to predict our business because of the fact that we have that history. We understand where the growth comes from, and we've got committed supply and demand that scales with us. So, it's a very predictable model, and we feel good about being able to project that out.

Our final question or comment comes from the line of Shyam Patil from SIG.

This is Jared on for Shyam. One for you just on the seasonality that you touched on a little bit there, as well as provided earlier in the call. Looking into the second half acceleration that you're seeing there, this is definitely more material than especially pre-pandemic. Has that changed entirely due to Connexity? Or are there other tailwinds that you're anticipating as you look out to the second half?

So I think if you -- as I just mentioned, if you look at our historical quarters, the acceleration as you're talking about in the second half is really not an acceleration in the second half. The only change is that, Q1 2021 was exceptionally strong. The dip from Q4 2020 to Q1 2021 was only 4%. Historically, our dip from Q4 to Q1 is around 17%. So it's not really an acceleration of growth as you go throughout the year. It's really just an unusual comparison quarter last year. So, we can share more numbers on that, but that's -- if you look at the sequential growth rates historically, it's really not an acceleration of growth throughout the year. It's kind of our normal pattern.

There is about a few percentage point changes as to what we've shared. If you listen to my opening remarks, I gave quarterly splits for what we expect this year on ex-TAC quarter-by-quarter. If you do the math on that, you'll see that, that -- those quarterly splits align fairly closely with our historical average, with a slight -- and by slight, I mean, 5% or 6% shift towards Q4, and that is basically -- that's the Connexity effect. So Connexity is a more heavily Q4 seasonal business than ours. So there's a slight shift there, but mostly the numbers are consistent with our history.

I think this wraps it up. Adam, do you have any closing remarks?

Yes. Thanks, everyone, again, for joining us, and I hope to see many of you on our Investor Day.

I'm really excited about our vision and mission to help people discover things they may like, and never knew existed. I'm convinced we have an opportunity to, over time, become a personalization engine used by billions of people and be integrated wherever people spend their time, every phone, every TV, every audio device, every car. And being a public company only for a few quarters, we had a record quarter, a record 2021. We grew 36% on ex-TAC in 2021 and 25% pro forma. Our EBITDA margins are north of 30%, and it gives me and us confidence to raise our guidance in 2022, which is such a good start for us as a new public company.

Also, I think the world is getting tired from user-tracking dynamics. And again, it's a great time to be a company that is driven by contextual signals that are safe for people and works for advertiser. We were exactly where we need to be.

So I'm looking forward to meeting and engagement with many of you over the next few weeks. And don't forget to tune into our Investor Day on March 29, we're going to have our management team, clients, partners. It's going to be awesome. Thanks, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.