Taboola.com Ltd. (TBLA) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Taboola Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Jennifer Horsley, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone, and welcome to Taboola Second Quarter Earnings Conference Call. I'm here with Adam Singolda, our Founder and CEO; and Steve Walker, our CFO. We issued our Q2 earnings press release yesterday after market, and it is available along with our Q2 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 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.

Thank you, Jen, and good morning, everyone, and thank you all for joining us today. This is our very first earnings call after going public, and we're excited to share our results with you and update you on our business. Before I get to our second quarter, I want to take a moment to remind you and everyone why Taboola exist, our vision and where we fit. Taboola power recommendations for the open web, helping people discover things they may love, but never knew existed. You've all seen us before. If you visited sites you love, like CNBC, NBC News, The Independent in the U.K. or [ Sunken ] in Japan, you will discover things you might like to read powered by Taboola. The open web, as many of you know, is the term for all of the websites and publishers out there that are not Facebook, Amazon, Google, Apple or the like. The open web is really important, even essential because it's free and diverse, and it doesn't belong to any one joint company. It belongs to all of us, everyone. Think about every website you love, every game, app on a mobile device or app in your connected TV that lives outside of the walled garden, that's where Taboola fits. Taboola has established long-term partnerships with some of the top publishers and digital properties in the world. We have a proprietary deepening recommendation engine. It is able to infer what a user might be interested in based on context and not third-party cookie and knowledge of what other users have liked in a similar situation, through our publisher partners who reach 0.5 billion people every single day, and we invest $100 million a year in R&D to provide our partners with the platform and technology they need to drive revenue engagement and audience. The strength of our platform also has attracted more than 13,000 advertisers who work directly with Taboola to reach consumers in a brand-safe environment. Our size matters. As in our business, the more scale you have, yield gets better, which gives you advantages in the marketplace, creating more predictable and profitable growth that allows us to invest even more in our core and outside of core. Turning now to the quarter. This last 90 days have been very eventful and in some ways, monumental. Just before going public, we shared with the investment community that we beat our first quarter expectations, and we raised our guidance for the rest of the year. On June 30, we went public as TBLA on NASDAQ. And today, we shared that we delivered strong second quarter results that again exceeded our guidance across the board. And several weeks ago, we announced a more significant acquisition to date in our agreement to acquire Connexity for $800 million, bringing e-commerce to the open web in a big, big way. I'm really excited about this acquisition. The market is excited. Following the announcement, I've received many messages from the publisher community, expressing interest in expanding their work with us to launch shopping areas on their site and to bring e-commerce to their editorial pages. I will share a lot more of this later, but first, let me start with our listing milestone. It was June 30, Taboola went public. What a moment in time it was for all of us for 1,400 Taboolars all around the world. Taboola is now a public company, and we're honored to have great conversations and the support of so many new investors, large and small. As we embark on our public journey, I can assure you that we're focused on executing on our strategy, winning the marketplace and most importantly, delivering on both short-term and long-term commitments for the benefits of not only ourselves, but now also for our public new investors who chose Taboola and believe what we believe. I enjoy being a public company. I love the transparency it carries with it, the conversations, and I enjoy building the trust with our new investors who joined our journey. You see, I always believe in transparency, diversity and good quality conversations. Nobody cares about who does what first, but to rather only who does its best, and we want to be always the best. We want to have great conversations about the business, and we believe that's going to make us better internally and with the investment community. And this is why I hope the letter I write quarterly is helpful in giving you more access to our vision, strategy, execution and creating that bridge to what Taboola leadership is thinking. With that in mind, I would like to share with you the progress we've made in the second quarter. We're winning in the market, and we're seeing great results with revenue growth of 23% over the same quarter last year, ex-TAC gross profit growth of 18% and importantly, with strong adjusted EBITDA of nearly $41 million. All of those results exceeded our guidance, and Steve Walker, our CFO, will take you through the financial drivers in more details in a bit. Well, I'm going to talk to you about the business. I speak frequently about how Taboola is growing across 3 multibillion dollar opportunities. Areas -- our core, recommend anywhere and recommend anything. Starting with the core. We have a strong core business, where we participate in the $60 billion-plus open web market, and this is our foundation a business with a moat built on 14 years of technology and algorithm innovation, direct publisher and direct advertiser partnerships. We are a business that is not reliant on third-party cookies and which instead leverages contextual signals to deliver relevant recommendations, a business where we interact with 0.5 billion people a day, which is more than Twitter and Snap combined, and this provides us tremendous scale and feeds our flywheel, resulting in us winning more publisher partners. You see when we launch a new publisher, we reach more people, we get more data, more advertisers participate in our marketplace, which help us drive our yield up. And when our yield gets better, we become more competitive, which means more predictable growth ahead of us. It also helps that our gross revenue is over $1 billion because scale is really important in our business and industry, driving further that competitive advantage I'm speaking about. To demonstrate some of that momentum, during the second quarter, within our core business, we won new partnerships with publishers such as the BBC, Hearst, SHE Media and others. For example, as part of our new partnership with the BBC Global, we became their exclusive content recommendation providers for years to come. This is a competitive win. We were able to demonstrate a comprehensive understanding of BBC requirements, driving growth to the 3 KPIs they care about the most: revenue, engagement and audience. This is a true royal win for Taboola. We're doing all of this while keeping users at the heart of what we do, focusing on our user experience, integrity and quality. It makes me proud that companies like the BBC choose Taboola, and it justifies all the investments we're making in AI, technology and always be more than just money to our publisher partners. As well as investing so much in policies around areas like privacy, preventing misinformation, Taboola keeps the open web safe for all of us. We're also growing our teams fast, and we're building an inclusive and diverse workplace. It isn't just the right thing to do with society. We believe that multiple voices can drive better results. Like I said earlier, our culture is about transparency and collaboration, and with more diversity, we believe we can execute even better. As we look into the third quarter and the rest of 2021, our DEI projects are a focus. We have allocated $1.5 million for DEI activities for 2021 with $0.5 million already implemented in the first quarter recommend her campaign, which provides free advertising for women-owned businesses. So as you can see all around, we're seeing good momentum winning in our core business. And this is important as our core business provides the scale, capabilities and permission to pursue our anywhere and anything growth initiatives. With our second growth area, recommend anywhere strategy, we're continuing our expansion to recommend wherever people might be. Over time, we will consider becoming the recommendation engine on devices like connected TV or automobile. And in the meantime, we're seeing good progress integrating our recommendations on Android devices, for example, Taboola News or Apple-like product has continued to scale with 2 major partnerships. A long-term partnership with Sliide, a leading mobile platform that drives engagement and monetization for mobile carriers, OEMs and publishers, or Samsung in Brazil selected Taboola News as their partner to integrate relevant content from Taboola's premium publishers on mobile phone and other user touch points. Over time, I envision Taboola recommending things to people wherever they may be. We only have 24 hours a day, and that will never change. Human beings will be making some of the most important decisions in life using persons' recommendation engines, and that's where we fit. Now moving to our third growth engine, recommending anything strategy is a way for us to diversify what is it that Taboola recommend. In this area, we've seen great growth in the second quarter, where we are winning premium demand on premium new placements. We launched new placements for our recommendations in the middle of the page as well as home pages and section fronts, and brands and agencies really like it because it gives them bigger, more visible and premium placements they can participate in. We have a significant advantage here as we already power both editorial and paid recommendations for so many of the most amazing publishers in the world. This allows us to suggest expanding our recommendations in other places and replace traditional advertising units with a higher user value and higher revenue opportunities, a true 1 plus 1 equals 3. Our biggest step forward on our strategy of recommending anything is by far our pending acquisition of Connexity, focusing on bringing product and e-commerce recommendations to the open web. I'm so proud of that moment right now, bringing together Connexity and Taboola. Many of you have may heard me already speaking about e-commerce as the future of the open web, the future of the internet, the future of Taboola, but I would like to spend some time sharing with you more about the Connexity business, and why this is such a great fit and strong strategic opportunity for Taboola. Connexity is already one of the largest e-commerce media platform on the open web with over 1 million monthly transactions, supported by direct relationships with over 1,600 merchants such as Walmart, Wayfair, Skechers, Macy's, eBay and Auto. Connexity reaches more than 100 million unique shoppers per month via direct relationships with premium publishers such as Condé Nast, DotDash, Hearst, Vox Media, Meredith and News Corp Australia. A bit about Connexity's business. Connexity is a B2B company, serving merchants and advertisers on one side and enabling publishers as partners on the other. 90% of the revenue comes from merchants they have direct relationship with. Most of it is paid through CPC, and some of it is paid through CPA. They don't rely on third-party cookies, and this is really incredible. Their business is very aligned with Taboola's strategy, which is about working directly with both advertisers and publishers, serving high-quality advertising experiences that do not depend on cookies. Connexity supports publishers in 2 ways: First, their offering helps bring product recommendations to sites we all love in a familiar, native format where product listing are seamlessly embedded alongside the publishers' editorial content; second, Connexity is enabling clients to launch their own shopping sections, think better home and garden shopping site offered by Meredith, or how much you trust products were recommended when Wired recommends them. Connexity has also successfully built a way to enable advertisers to extend their reach beyond our publisher partners, similar to Facebook Audience Network, FAN, but powered by Connexity, and in the e-commerce category. For example, a merchant working with Connexity might be recommended on Meredith or Hearst, but might also be serviced on Bing Yahoo!, Google or even Instagram where influencers create content. This makes up approximately 25% of Connexity's business, and it provides a great opportunity for Connexity and its merchants to find users wherever they may be. Connexity is a great fit for our business. We believe that the future of the open web is e-commerce, bringing merchants together with trusted publishers, connecting customers with products they may like, powered by Taboola. By combining our organizations, cultures, massive data, reach of 500 million daily active users and direct access to publishers, advertisers and merchants, we're taking a huge step forward to our vision as well as expanding our market opportunity. We're excited to have Connexity join us and expand our TAM, where e-commerce is already $35 billion in the U.S. alone as well as expanding internationally where Taboola operates. After this acquisition, Taboola will now be powering millions of e-commerce recommendations to millions of people across the open web every single day. I'm convinced we can bring the power of commerce to every site or app on the free Internet. Imagine reading an article about Star Wars LEGO, and instead of having to start search or buy for that set, products like LEGO Millennium Falcon, Yoda or R2D2 will be surfaced alongside that piece of content for users to consider buying. We can't wait to call our partners and clients and bring e-commerce to them. The synergies are very clear and include: one, driving yield growth by bringing Connexity merchants to Taboola's existing relationships with publishers. This means our publishers will make more, and we will become even more competitive. The second synergy is selling to 9,000 publishers of Taboola, the existing Connexity publisher products, such as shopping sections and products alongside editorial content. Connexity is also heavily weighted in the U.S., and we see great opportunity in bringing Connexity global by leveraging Taboola's worldwide presence. And lastly, to create a super data set to drive further yield growth to both Connexity and Taboola's partners. In Taboola's execution-obsessed fashion, we have teams in place building out the plans on all of these fronts since we can hit the ground running once the acquisition closes, which we expect will happen by the end of the third quarter. As I finished my opening remarks, let me summarize saying, we're very excited to be a public company and speaking to all of you. We beat our expectation in Q2, and we're raising our guidance this year. This also gives us confidence in raising our expectation for our growth in 2022. We expect to grow over 30% on a non-pro forma basis. Additionally, we previously told you that we expected that Taboola standalone ex-TAC profit will grow 16% in 2022. With the completion of the Connexity acquisition, we're raising our expectation for next year, projecting that we will grow ex-TAC gross profit faster at 17% on a non-proforma basis, despite being a much larger base. Beyond it all, I can tell you that together with Connexity, we'll be at the forefront of power recommendation for the open web as well as e-commerce in the open web as an alternative to walled gardens. Amazon has millions of merchants, but merchants mainly have Amazon. That changes now. I would now like to pass it over to Steve to take you through in more details our financial performance and guidance.

Thanks, Adam, and good morning, everyone. As Adam indicated, we had a very strong first half of the year, and this is reflected in our financial performance. If you read our earnings release, you noticed that we beat our Q2 guidance on all measures, and we're raising our guidance going forward. But before I get into specific numbers, let me take a step back and remind everyone of how we look at and measure our business. We're focused on achieving profitable growth. The way we measure our performance against this goal is by looking at 2 measures: to measure growth, we look at ex-TAC gross profit growth rate. And just as a reminder, ex-TAC is what we keep from our revenue after we pay our publishers. To measure profitability, we look at adjusted EBITDA margin. Adjusted EBITDA margin is our adjusted EBITDA divided by our ex-TAC gross profit. Just as SaaS businesses have a Rule of 40, where they always want their growth rate plus their profit margin to exceed 40%, we too want the sum of our ex-TAC growth rate and our adjusted EBITDA margin to exceed 40%. So now let's get back to the numbers. In terms of Q2 performance, revenue was up 23%, ex-TAC gross profit was up 18% and adjusted EBITDA was up 17% versus Q2 of last year. This strong performance was driven by the good business momentum that Adam mentioned previously. We are winning new business, seeing good demand in our agency and brand offering, which we call Taboola high-impact placements, and we're maintaining strong yield overall. Of the Q2 gross revenue growth of $61 million, $23 million came from new digital property partners and $38 million came from growth of our existing digital property partners. That translates into net dollar retention, or NDR, of 114%, and primarily reflects strong improvement in our yield. So very good overall net dollar retention and the continuation of the positive momentum we saw building through the back half of 2020. Our ex-TAC gross profit was up $18 million or 18% year-over-year. It benefited from the growth in both new and existing digital property partners as well as from the continued flywheel effect in our business that drives improvements in yield and which helps us move from paying some publishers on minimum guarantees to paying on revenue share over time. These gains year-over-year were partially offset by the withholding in 2020 of $10 million in guaranteed tax payments to publishers that were subsequently paid back in the fourth quarter of 2020. Turning to expenses. I would note 3 unusual items: first, $76 million of the year-over-year increase in operating expenses was due to share-based compensation, triggered primarily from going public. Excluding share-based compensation, operating expenses were up $11.8 million or 18.5% year-over-year. Second, I would note that research and development expenses were up $0.2 million year-over-year. We increased our investment in R&D-related headcount, but that was offset by lower depreciation related to the timing of new server investments. To explain that, in 2020, as we entered the recession, we froze new server purchases, which reduced depreciation last year. But as we discussed previously, this year, we invested an extra $14.1 million in servers, even above our normal investments, to support our business. This was a growth initiative to see if we could drive further yield improvements. Finally, I would note that G&A was higher by $8 million year-over-year, which was driven by public company expenses and a partial return to more normal operations following the COVID pandemic. The strong revenue performance flowed through to profits and resulted in adjusted EBITDA of $40.8 million, up $5.9 million year-over-year and a ratio of adjusted EBITDA to ex-TAC gross profit of 34.9%, both of which were above our guidance. It is worth noting that we had net loss of $61.4 million, which was $74.3 million lower year-over-year. This was driven by higher share-based compensation triggered by going public, as we talked about previously. Given the share-based compensation-driven loss and an abnormal share count coming from our end of quarter public listing, GAAP earnings per share is not particularly meaningful. I did want to mention, though, that for future modeling purposes, we estimate the fully diluted shares outstanding at the beginning of Q3 to be approximately 256 million shares. Q2 produced operating cash flow of $23.1 million and free cash flow of $6.9 million, which included the server investments that I referenced earlier. We ended the quarter with $585 million in cash and cash equivalents, with approximately $350 million coming from our public offering. Following this strong performance in Q2, which was on the back of a strong Q1, we're now comfortable increasing our standalone expectations for Q3 as well as our full year guidance. We're now projecting that 2021 full year ex-TAC gross profit will be $468 million to $472 million, which represents growth of 22% to 23% versus 2020. That's an increase from our previous guidance, which was 19% to 22% growth. We're expecting 2021 full year adjusted EBITDA to be $150 million to $153 million, which translates into growth of 41% to 44% versus 2020. It's also worth noting that this demonstrates a very healthy adjusted EBITDA margin, meaning adjusted EBITDA divided by our ex-TAC gross profit of over 30%. Per my previous comments about always seeking to beat the Rule of 40, our growth rate of over 20% and our adjusted EBITDA margin of over 30% well exceeds that goal. And one very important note, all of these numbers are excluding our pending acquisition of Connexity, which is expected to close in the third quarter. Speaking of Connexity and looking forward to 2022, we expect to grow ex-TAC gross profit next year by 30% on an as-reported or nonpro forma basis. This assumes that we have one quarter of Connexity results in our financials in 2021. If we close sooner, that would obviously change that estimate. In terms of pro forma growth rates for 2022, previously, we had set expectations that Taboola would grow in the mid-teens as a standalone. In fact, we had projected 16% in the investor presentation we used for our roadshow. With the completion of the Connexity acquisition, we're now comfortable raising our expectations for next year, projecting that we'll grow ex-TAC gross profit at a faster rate of over 17% on a pro forma basis, despite the much larger base. I also want to update you on the pipe resale registration we filed on July 13. Due to the significance of our pending acquisition of Connexity, we need to put additional information in the pipe registration before it goes effective. We're working hard on that and expect the revised registration to be ready by early September, and we expect it to go effective by mid-September. Let me just wrap up by saying that I'm very optimistic about the future of the business. We have a great team, and we're laser focused on continuing to deliver predictable, profitable growth over the long run. We're proud of our track record of performance, which I think demonstrates our ability to execute. Our track record of success is also aided by a very strong business foundation that lends itself to consistent profitable growth. We have long-term exclusive agreements with incredible publishers. We have a large base of advertisers, 90% of whom work with us directly and even allow our AI technology called Smart Bid to optimize on their behalf. We have a business that's not relying on third-party cookies, but rather uses contextual signals for targeting. And perhaps, most importantly, we have scale, and in our industry, scale matters because it drives a network effect that leads to higher yields, which is a competitive advantage that drives higher margins. Finally, I'm optimistic because Connexity adds to all of these strengths. We are adding a large network of new publishers, 1,600-plus direct advertising relationships with great brand name merchants, new forms of data that will help us enhance our yield and importantly, more scale that will further drive the flywheel that is our competitive advantage. So we're very excited about the future with Connexity. And on that note, let's open this up for questions.

[Operator Instructions] Our first question comes from the line of Andrew Boone with JMP Securities.

One on guidance, please, and then we can go to anything. On 2022, we're looking at kind of 11% 2021 revenue -- GAAP revenue growth. So as we think about '22 and the 17% that you just outlined, can you help us understand the kind of the underlying drivers as we think about 2022, is -- do we expect revenue to reaccelerate? Or do take rates continue to expand? And then on high-impact placements, I think Steve mentioned success there. Can you talk about the potential with brands and just update us on your progress with video?

Yes. Thanks. Good questions. So this is Steve Walker, CFO. So I'll answer the first one about expectations for 2022. So we would expect that typically, our gross revenue should grow at a comparable rate to our ex-TAC, just slightly slower because we do expect some margin expansion as we go forward. So we haven't given specific guidance on it, but I would say that it will be -- the gross revenue growth rate will be much closer to that 17% than it has been this year. So I think that's -- we expect it to be kind of in line with that. And I'll let Adam answer the question about high-impact placements and brands.

Andrew, thanks for the question. So I read this also in my letter. We're seeing a great momentum and feedback from premium advertisers, specifically agencies and brand with regards to a high-impact placement strategy. Let me just quickly explain what that is. So right now, and the way I started the company was to provide editorial recommendations alongside ad recommendation, primarily at the bottom of the article page. So if you read an article on CNBC, at the bottom of it, it will say more from CNBC, powered by Taboola, and more from on the web, powered by Taboola. The advantage we've seen expanding from that sort of anchor is the opportunity to expand to other placements from the same publisher base. So we went to our publishers and we offered an opportunity to replace traditional advertising placements such as in the middle of the page, mid article, homepages, section fronts. So quite completely different, high, visible, bigger placements. And the opportunity for the publisher was to replace those traditional ad units with recommendation reels. So think of, again, a combination of editorial recommendation with, this time, bigger, higher-impact advertising experiences. And that's something that got a lot of good attention from the advertising community. Last year, you know that we've reported $90 million of video revenue, and we're seeing that growing in the right direction globally. So we're signing trading deals with agencies. We're seeing direct advertisers getting excited, and the performance is also fantastic. In this case, they measure us more in things like viewability, completion rates, things of that nature. And again, what's, to me, most exciting is almost the unfair advantage we have in that bundle, which this is the 1 plus 1 equal 3. We already have 3-, 4-, 5-year relationship with these publishers. So they're so open-minded to do more with us.

And our next question comes from the line of Shyam Patil with CIG.

Congrats on the strong results, and the Connexity deal and going public. I had a couple of questions. Now that you guys have entered the e-commerce space in a meaningful way, there were a couple of other areas that you guys talked about during the stack process, app downloads and video. I was just wondering, how you're thinking about the roadmap there? If M&A makes sense? And if there's anything kind of near term that would make sense there? And then second question, Adam, you talked about this in your prepared remarks, but with the anything and every -- sorry, anything and anywhere kind of approach strategy, can you just talk about how you're thinking about the ramp in revenue there? Is that something that you're contemplating ramping next year? Or is that more of a multiyear initiative?

Yes. So I'll start. So in general, I think that short term will be quite focused and busy. We're so excited about the e-commerce opportunity. It's a huge TAM. It's a $35 billion TAM just in the U.S. Connexity is already one of the largest companies in the world doing that e-commerce for the open web in the media space. So if you think about just snaring those 2, bringing the merchant, 1,600 direct merchants onto our 0.5 billion people active daily users a day across our global distribution of publishers, the synergies and opportunities are just so exciting to us as management and specifically, as it can contribute to things that make Taboola even more competitive as we continue to grow. So driving yield growth, more super data sets, upselling our publishers. I cannot wait to give a call to 9,000 of our publishers and tell them how about starting to launch a shopping section on your site. Everybody wants a wire cutter. Everybody wants to CNET. And this is about to happen. So I'm just waiting for that moment to happen. So there's a lot of work ahead of us, an exciting one that our team were working on building that plan, and all that we can do together. So we're going to be quite busy and focused. Saying that, we know our -- I think the fact that our core market is growing so fast, and it allows us to have exciting EBITDA margin and dollar amount, that definitely keeps our appetite going. And I think on that front, you should expect us to continue to think about more in the e-commerce space we might be interested in doing as well as other things such as gaming and app download to be discovered. We've seen Facebook doing such a great job recommending games and things of that nature for people to download and discover. And I think that's going to be a great opportunity in mobile, especially that that's a big part of our business. So that's something we're going to continue to consider organically and inorganically. And then in general, also in the future, I think we're seeing good revenue growth from those things, I would say, not only in top line growth, but also in ex-TAC and margins. So as you think about things such as video, which is in our anything bucket, every dollar in the video space, from our perspective, is not only driving growth, it drives profitable growth even more because the yield is better. So you should think about these areas, not only as growth opportunities, but also making us stronger on a profit perspective. And then beyond those things, other areas that are interesting to us are things such as connected TV, which I speak about often. Automobile. We're seeing great momentum in integrating Android devices and becoming the Apple News for the rest of the world that are not iOS. So we have this huge index of content, which just goes so much more than advertising space and that we can put this to good use as we expand to other areas beyond the browser. So all those things give us a lot of comfort, and we're already seeing them paying a good performance in revenue, such as in video.

[Operator Instructions] And our next question comes from the line of Laura Martin with Needham.