Teads Holding Co (TEAD) 2024 Q3 法說會逐字稿

Good day. Ladies and gentlemen and welcome to Outbrain Inc corporated third quarter, 2024 earnings conference call at this time. All participants are in a listen-only mode question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the call over to Outbrain's Investor relations. Please go ahead.

Good morning and thank you for joining us on today's conference call to discuss Outbrain's third quarter, 2024 results. Joining me on the call today, we have Outbrain's CEO David Kostman and CFOJason Kiviat.

During this conference call management will make forward-looking statements based on current expectations and assumptions including statements regarding our business outlook and prospects as well as our pending transaction with TS. These statements are subject to risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. These risk factors are discussed in detail in our form. 10-K filed for the year ended December 31st, 2023 and in our definitive proxy statement filled with the Securities and Exchange Commission on October 31st, 2024 as updated in our subsequent reports filed with the securities and exchange commission, forward-looking statements speak only as of the call's original date and we do not undertake any duty to update such statements.

Today's presentation also includes references to Non-GAAP financial measures. You should refer to the information contained in the company's third quarter earnings release for definitional information and reconciliations of Non-GAAP measures to the comparable GAAP financial measures. Our earnings release can be found on our IR website investors dot outbrain dotcom under news and events with that. Let me turn the call over to David.

Thank you, Sarah, good morning and thank you for joining us today.

I'd like to start with a brief update on the status of the transaction. We did. We are still on track to closing Q1 2025 at plant.

We have cleared the necessary regulatory reviews in the US and in several other countries and are progressing in the remaining geographies.

We have a shareholder meeting to approve the deal set for December 5th. We are very pleased to report that the integration planning process is progressing smoothly contributing to our excitement about the opportunity and our conviction regarding the synergies.

Now let me provide an update on Q3 and progress against our 2024 growth drivers for Q3. And please to report that we delivered extra gross profit within our guidance range, we exceeded our adjusted EBITDA guidance and we generated positive free cash flow for the fifth consecutive quarter.

I want to highlight that we do extra dollars year over year for four out of the last five quarters. The other quarter was flat and XOC margin has improved year over year for six consecutive quarters. Despite the headwinds of one significant partner, we believe that these results are driven by positive trends in our core business and momentum across our growth pillars.

Our first pillar refers to expanding our share of wallet with brands and agencies as well as performance advertisers.

We are gaining traction with our cross sell solutions from branding to performance. Delivering on our full funnel value proposition, us advertisers including Disney Amazon and Betterman invested in both out bank performance solutions and Onyx burning solutions showcasing the benefit of leveraging both products to drive incremental outcomes.

On the performance side, the outbrain DSP previously known as the Manta continues to see steady adoption.

Advertisers are increasingly embracing our platform for its comprehensive tooling and ability to drive scale performance across the open internet.

This allows us to capture a larger share of wallet with a 60% year over year increase in the advertising spend on this platform year-to-date.

Moving on to our second growth pillar for 2024. We've continued to expand beyond our traditional feed opening new opportunities for advertisers to drive results.

This revenue which is generated from supply beyond our traditional feeds, we presented approximately 28% of total revenue in Q3, 2024 compared to 26%. In Q3 of last year, we have continued to grow this metric quarterly for the last six consecutive quarters. Demonstrating our focus on expanding our inventory diversity.

We believe this expanded supply is also a key enabler to power advertiser outcomes at scale across the open internet.

Our third pillar refers to our continued focus on deepening our premium media owner partnerships, a key strategic asset of our business.

These relationships ensure a steady base of premium exclusive inventory while giving our brain unique contextual and engagement insights that fuel our performance and predictive capabilities.

We've successfully renewed agreements with some of our important publishing partners including Huffington Post US and Mateo in France. We also secured new business partnerships from competitors and launched new partners including Sports Fund in Germany and Reuters and Newsweek in Japan. This again demonstrate our superior value proposition when it comes to strategic relationships with premium publishers globally.

Now I'd like to give an update on some of our recent products and technology advancements in September. We successfully launched Moments by Outgo in data on a personal level. I truly believe moments is one of the most exciting products I've seen in our space in the last few years.

Moments brings the immersive experience of social media to the open internet, transforming our feeds on traditional publishers into vertical video environments with swip navigation data, publishers like Axa Springer and Fortune use their own professional vertical video content to create entirely new audience engagement opportunities on their sites.

Brands benefit by extending the impact of the social creative assets from platforms like tiktok and real to the open internet. Creating a premium full screen video experience moment has already shown early signs of generating high audience engagement with 40% of users watching three or more videos.

An August 2024 study by media science found that vertical video ads delivered in moments and hence the performance of ads delivered on social platforms alone.

We believe this indicates a strong opportunity for brands to compound the impact of the social strategies on the open internet. Driving higher brand we call and recognition.

Now let's turn to AI.

We are accelerating a integration into our performance and creative offerings improving efficiency and outcomes with a clear focus on the segment of our sophisticated large scale advertisers.

We are doing this to our Creative Automation Suite which allows marketers to easily use AI to create new web images, tailor images and adjust headlines to deliver better results.

The Creative Automation Suite uses Albin's predictive insights to fuel the product's generative generative AI delivering more relevant highly targeted creatives optimized for consumer engagement.

We have several case studies demonstrating how performance clients have been able to meaningfully increase their campaign click through rates by using AI BASED Creative automation tools.

In addition, we recently expanded our collaboration with Microsoft Azure, integrating Azure open a solution to a range of outgoing services we believe that Azure Solutions will allow us to continue to enhance our existing Creative Solutions prioritizing creatives with predicted higher return on investment.

We also focus on deploying AI into our internal processes.

We're proud to highlight that AI has been recognized as one of the 25 most innovative UI pass customers for our advancements in business efficiency. With AI.

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

Now, I'll turn it over to Jason for a more detailed financial update.

Thanks David.

As David mentioned, we achieved our Q3 guidance for Ex-TAC gross profit and exceeded our Q3 guidance for adjusted EBITDA generating positive free cash flow for the fifth consecutive quarter.

Overall. Total ad spend on our platform grew 6% year over year faster than the growth seen in H1. We saw solid profitability and cash generation as we started to realize benefits of the changes we've been making to our revenue mix and cost structure which we expect to continue into the future revenue. In Q3 was approximately 224 million, reflecting a decrease of 3% year over year, new media partners in the quarter contributed 7% points or approximately 15 million of revenue growth year over year.

Net revenue retention of our publishers was 91% which primarily reflects downward pressure of ad impressions from one key supply partner. As noted in prior quarters, consistent with recent quarters, logo retention was 98% for all partners that generated at least $10,000.

We've seen CPMs remain stable to slightly positive improving over the course of Q3 and netting to a slight increase year over year for the quarter for the first time since early 2022.

This along with continued improvements in click through rates, drove acceleration in RPMs or yields which have now seen growth year over year for four consecutive quarters.

Ex-TAC gross profit was 59.7 million an increase of 5% year over year outpacing revenue for the sixth quarter in a row driven primarily by net favorable change in our revenue mix and improved performance from certain deals. As noted previously, the investment areas that we are focused on are largely areas that we see driving higher ex tech take rates and in turn higher profitability.

Well Ex-TAC plus profit continued year over year growth in Q3 on the strength of these accelerating growth areas and positive momentum of RPMs.

As noted in prior quarters, one of our key partners transitioned to new bidding technology and we completed the transition in early May.

This volatility impacted our overall growth in Q3 by double digit percentage.

And our overall Q3 SEC gross profit would have grown in the mid 10s percentage year over year, excluding this one isolated headwind, we remain focused on rescaling and optimizing the supply.

Moving to expenses, operating expenses increased year over year, predominantly driven by one time costs of 5.6 million related to our anticipation. Our anticipated transaction with TS as a result, we grew our adjusted EBITDA 12% year over year to $11.5 million.

Moving to liquidity free cash flow which as a reminder we define as cash from operating activities, less CapEx and capitalized software costs is approximately $9 million in the third quarter as well as a result of stronger profitability and working capital.

In September, we repurchased the remaining 118 million aggregate principal amount of our convertible notes for approximately 109.7 million in cash including accrued interest representing a discount of approximately 7.5% to the principal amount of the repurchase notes.

As a result, we ended the quarter with 131 million of cash, cash equivalents and investments in marketable securities on the balance sheet and no remaining debt outstanding.

While we maintain an authorized amount of 6.6 million under our existing share repurchase program, there were no share repurchases in Q3. Given the pending acquisition of fees, we currently do not intend to resume repurchasing shares.

Now, turning to our outlook in our guidance, we assume regular seasonality and as noted in the prior quarter, continued execution of our growth drivers. Additionally, our guidance reflects operating as a stand alone business with the assumption that the announced transaction with TS will not close before year end.

With that context, we have provided the following guidance for Q4. We expect Ex-TAC profit of 67.5 million to $72.5 million reflecting an annual range of approximately $235 million to $240 million.

And we expect adjusted EBITDA of $15 million to $18.5 million reflecting an increased annual range of approximately $35 million to $38 million. Now I'll turn it back to the operator for the Q&A.

Thank you. The lines are now open for questions. If you do have a question, please press star one on your telephone keypad at this time. If your question has been answered, you could remove yourself in the queue by pressing one again. Ladies and gentlemen, it's star one to ask a question and our first question comes from Andrew Boone from JMP securities. Sorry, go ahead.

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

Thanks. Metthew

And I'll take that one so on teams. We are progressing. What we can do at this stage is the post merger, post merger integration Planning, which we are doing in sort of across product, go to market and other things we cannot really, this is operate individually and they need to focus on each on their, on their performance. But there's a lot of planning and operationally structurally synergies and others. And we're very excited about what we see in terms of both the upside on the revenue synergy. But we provided guidance when we announced the deal, around $60 million of synergies. We are more excited by the day by what we see as an opportunity to cross sell advertisers, brand, enterprise brands, small and medium brands and agencies with our performance products into the installed base and customer base of each which has the joint business partnerships with the most premium brands of the world. And we see other cross sell opportunities. And we're also pretty confident around the ability to realize the synergies on the the traffic question. I mean, what we see in terms of our premium publisher base and we separate some of the different tiers, we see paid views relatively flat. So, we haven't seen at this point any, any negative impact from AI on, on traffic.

Thank you so much.

Maybe just to add, I mean on the timing of the deal, I said on the prepared remarks, we're still looking at Q1 of 2025.

Thank you. And our next question comes from Ygal Arounian from Citi group. Go ahead.

Hey, good morning guys. This is Max on for wonder if we could start with the four Q Ex-TAC guidance. Do you just want, I think it came in maybe a little below what we had expected. Can you just talk about maybe what you're seeing there? And then if there's any, you know, like ongoing impacts from that large supply partner impacting?

Sure. Yeah, I'm happy to take that one is Jason. Thanks for the question, Max. Yes, I mean, really Q3, what we saw was you know, strength you know, continued RP MGAS that we've seen the, the prior three quarters. Now, RPM is very high and CPM was kind of the, the nice thing, to start to see it flat to up for the first Q1 of 2022. So, you know, good demand stability, I'll go improvements mix. We've been working on and, and driving those higher yields and overall ad spend was up 6% for us. So I know gross revenue slightly down, but ad spend and which encapsulates all the dollars we see from advertisers was actually up so good indications there into Q4, you know, we do expect acceleration, you know, in our year over year growth from, you know, the 5% ex growth we saw in Q3 to about 10% at midpoint in Q4. But we are being a bit more cautious with our outlook given we experienced so much slower start to the quarter in October, particularly in the US.

We did see some advertisers and agencies being more cautious with their budgets in October really given uncertainties around the election. And macro we thought it was prudent to be more cautious and you know, reflect, reflect the rest of the quarter, jumping off of this kind of lower start that we saw. We do hope now that with, you know, with more certainty around the election results, you know, coming in, you know, pretty rapidly that there will be a more normal seasonal spike that we expect for the rest of the quarter. And yes, to your point on the one key partner, I mean, excluding, excluding that partner, the growth obviously was much higher than the reported 5% as reported exec in Q3 and it was in the mid 10s percent growth year over year. So not not a meaningful difference in Q4 for that partner. It is a slightly easier comp for us in Q4 and into Q1 as well. Before we lap you know, lap, you know, completely in the middle of Q2 next year. The challenge is assuming we, we continue to see the stability that we've been seeing there.

Next. I want to just add on Q4 a little bit. I mean from a lot of conversations with advertisers, I think the fact there is a clear outcome of the election is very helpful and I think people were holding back on budget and they were concerned about sort of this. If this gets dragged on, will people have the mindset of shopping and doing things?

Clarity is good news in terms of their you know, intention to spend more money. I mean, we haven't seen it. It's one, it's 24 hours, but I think that's what I think we were waiting in terms of the business in terms of the release of potential budget. As you know, people will get back to, you know, their normal lives.

Okay, thanks. Yeah, that's helpful. And then maybe just on moments, you know, could I know you just launching data so it's early. But, you know, I think you talk about how, you know, what improvements you're seeing this drive and, you know, maybe bigger picture. You know, it seems like it'll, you know, it'll be kind of the bottom of the feed solution. If I have that right. So you know, how do you see this fitting in with the existing solution you have? Now you see it is like being a complementary or would this kind of replace kind of the existing solution you have?

So again, it's a very exciting launch. I mean, we've been working on it for a long time and I think also in anticipation of the combination, we think this is great, great inventory for premium brands that want to have sort of a good canvass for video campaigns. But this is an offering that will bring social media experiences to the open internet, will help publishers engage more with, with their audiences. So, it's really about using the content that publishers have the vertical content and integrating into that opportunities for advertisers to do brand advertising. And we have already about almost 10 publisher partners working with it, trying it out several brands that are, that are working with it and it's it. But what we're going to be doing with it, it's going to be when the right time and the right user with the right opportunity for advertiser, we will launch this full screen immersive experience instead of our seats. So, it's going to be a decision by the Algo and by the sort of our joint work with, with some publishers around when to launch it and when it's the right time, initial indications of brand list and deep engagement of users with the videos in terms of swipe numbers, we just they just they're watching. It is great and it's a better launch and I think it's very exciting into 2025 early to talk about any financial impact, of course, but for product will be a very successful launch.

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

Again, ladies and gentlemen, it's star one. Please hold while we pull and there appear to be no further questions at this time. I would now like to turn it back to management for any closing remarks.

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

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