Good day, and welcome to the Taboola Third Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I'll now like to turn the call over to Jennifer Horsley, Head of Investor Relations. You may begin.

Thank you. Good morning, everyone, and welcome to Taboola's third quarter earnings conference call. I'm here with Adam Singolda, our Founder and CEO; and Steve Walker, our CFO. We issued our Q3 earnings press release yesterday aftermarket and it is available, along with our Q3 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.

Thanks, Jen. Good morning, everyone, and thank you all for joining us for our third quarter call. I'm excited to share the progress we've made. We again delivered incredible performance in the third quarter. We beat our Q3 guidance. We are raising Q4 and as a result, 2021 overall. We also closed this quarter on Connexity, our largest acquisition to-date. As a reminder, our Q3 results and our guidance include one month, September, of Connexity's performance. A few numbers that highlights our Q3 performance, revenue were $339 million in the quarter, up 17% year-over-year. Ex-TAC gross profit, which is what's left for us after we show revenue with publishers, the main metric we measure as management, was $127 million, up 22% year-over-year, above our guidance range of $122 million to $124 million. We also delivered strong adjusted EBITDA of $40 million, above our range of $36 million to $37 million. While adjusted EBITDA is a good proxy for profitability, Taboola generates good cash flow. Over the last two years, about 60% of our adjusted EBITDA converted to free cash flow. I'm very happy with the team's execution, and these results give us confidence to raise our Q4 and full-year 2021 guidance. A couple of highlights on 2021, and Steve, our CFO, will provide more information later. Ex-TAC gross profit of $512 million to $515 million, which translates to growth of 34% to 35% for the year, this is dramatically faster than the advertising market worldwide. This is above our previous guidance of $503 million to $509 million that we shared at our e-commerce with Connexity Information Session. And to provide additional context, our original projection of ex-TAC at the beginning of the year when we were on the road raising money for our public offering, was $445 million and 70%…

Thanks, Adam, and good morning, everyone. As Adam shared, we had a very good third quarter and have expectations for a strong close to the year. If you read our earnings release, you notice that we beat our Q3 guidance on all measures and we're raising our guidance going forward. Before I get into specific numbers, I have a couple of items to highlight now that we have completed the Connexity acquisition. First, we closed the Connexity acquisition on September 1. And as a result, we have one month of Connexity results in our reported Q3 financials. This is consistent with the guidance that we gave during our e-commerce with Connexity Information Session on September 28, which also included one month of Connexity results in our Q3 guidance. Second, we have determined that going forward, we will account for Connexity's business on a net revenue basis. Previously, Connexity has accounted for a portion of their business on a gross revenue basis and a portion of it on a net revenue basis. This change only impacts the top line revenues. Going forward, Connexity's revenues will be what we keep after we pay our publisher partners, equivalent to ex-TAC gross profit for the rest of the Taboola business. To have our comparisons on an apples-to-apples basis, we adjusted our Q3 and full-year guidance to reflect this net revenue recognition treatment for Connexity. In our e-commerce with Connexity Information Session, we guided to gross revenues of $338 million to $342 million in Q3 and $1.39 billion to $1.4 billion for the full year. With this change in accounting, the adjusted guidance for revenues in Q3 is $331 million to $335 million and would have been $1.35 billion to $1.36 billion for the full year. With our outperformance in Q3 and our higher expectations…

[Operator Instructions] Our first question comes from Stephen Ju with Credit Suisse. Your line is open.

So, Adam, I think you announced yesterday SmartBid Dimensions. We understand this product correctly. Seems like other companies who have released conceptually similar solutions have talked about this being a catalyst to the hopefully onboard more of long tail marketers because this helps to simplify advertising in general. So, we're wondering if this will help you expand the advertiser base from the current, above 14,000 or so to hopefully something much bigger. And also, you've also expanded relationships with publishers like NBC, but onboarding, I think you mentioned LINE earlier as well as Xiaomi. So conceptually, how will your products be deployed on LINE Today? And you have about 500 million users right now. Like what can these two partnerships do in terms of, hopefully, unduplicated potential user growth?

Good morning, everyone, and thanks for the question, Stephen. So let's start with the first one. SmartBid Dimension is a big deal in the sense that it's going to do two things. One of them you touched on, which is help advertisers - smaller advertisers who may not have the know-how of sophisticated advertisers to be successful. And that's basically - it's very much like a hands-off or really autonomous experience for advertisers who Taboola can succeed. So, that's going to be one thing that we expect to happen. The second one is actually even for existing advertising base, it's up until now they had to log into Taboola multiple times a day, create multiple campaigns to find further optimization beyond the way we used to do it. Now, they're going to have to actually do that much less, which will free up their time on to work more with Taboola, to increase budgets and to be successful with us. As a recap of what exactly dimension is, up until now, 85% of our revenue that is controlled by SmartBid, which is our AI software that helps advertisers to be successful, optimize at the publisher level, which means if one site did really well for a certain type of advertiser, SmartBid will increase the CPC to get more traffic from that site. And if it was not performing, it will decrease the CPC. The gap it created is that SmartBid did not take into account as an example, one example I'd like to give is that, let's say, this publisher had one article that was actually great for the advertiser but the publisher as a whole was not that great, SmartBid would decrease the CPC, even though one article was really doing well for that advertiser. As of now, it…

Our next question comes from Andrew Boone with JMP Securities. Your line is open.

I'd like to hit on SmartBid Dimensions as well. Can you just help us understand the ad performance? And you guys started kind of your machine learning, deep learning efforts five years ago. How do we think about this developing over time as you guys kind of add more data and publishers adopt it more and advertisers adopt more? Can you just talk about what's the benefit today, as well as kind of how that develops over time?

Yeah. So first of all, in terms of a bit more information about that, we've added - the dimension adds about 40 dimensions that SmartBid will start looking into, which we did not do up until now. So that includes day of week, time of day, location, platform. So again, just to give this follow-up and the same example I've given before. Let's say, publishers did really well and SmartBid wanted to increase the price because of that, SmartBid did not take into account the location. So it could be that some geographies are really good and some geographies are not as good. So now that will be broken down automatically by SmartBid. So the advertisers work in SmartBid once, SmartBid might break that campaign to 40 pieces based on what works and what's not behind the scenes. So the advertiser wouldn't have to do anything. And up until now - and by the way, it is very common for other companies in our space and that's a differentiation and an advantage. A lot of times these advertisers have to build know-how of how to optimize in the platform they work with. So they have to kind of figure out, is it working in this geography, is it working for that time of day, should you create something for the morning, something for the evening? All of those efforts on the advertisers side, a lot of times prevent them from even working with certain platforms. So that's just to give you some more color on the types of dimensions. And then again, the expectation I have is that they will be able to be even more successful, which means that they will get more budget with us and they'll drive better conversion rates. So the CPA will be even more attractive, and then it would be easier for them to work with us, increase the budget and more advertisers to come along. And then again, I'm happy to give more examples. Over time what we do is we - especially now with Connexity, we have about $1 million purchases a month that Connexity is getting. I think we talked about that on the Information Session as we're emerging the data sets of Connexity and the data set, the leadership of Taboola, SmartBid will be able to know even more and then further optimize for advertiser success. Our goal is for advertisers to have lowest conversion, lowest CPA, acquisition cost, so they can scale with us. And for that, data helps us, AI helps us, getting more publishers helps us. So that's a continuous and forever kind of effort. If I had to kind of guess from 1 to 10 where we are, we are still early. I mean, I think there's so much work for us to do. This is, of course, a big announcement, Andrew. But there is so much more for us to do and it's a big effort of our R&D.

Yeah. Let me just jump in and put it in kind of a broader context. I think we've talked about, as Adam just kind of alluded to, we've talked about the fact that we're very early in our yield growth journey we believe. So, we think that we could grow our business over time, almost exclusively just by growing yield if we wanted to. And I think this is a really important step along that journey. So, we've talked in the past about how yield grows from algo improvements. It grows from bringing on more advertisers to increase kind of density and it grows with bringing on more data. This is kind of the sense of all three of those, right, that is bringing in more data, getting more granular with it, making more advertisers successful so we can bring on more advertisers over time. So, this is a really important step in that journey, but kind of just demonstrates how early we are in that journey and how we can continue to grow the business through yield.

Also just one last note that I think it's worth sharing and I wrote about that. I have even put a screenshot of the car dashboard but SmartBid job is to, on the one side, help advertisers be successful and that's measured usually with the conversion measurement, so how, what's the price of an acquisition and how much we're able to scale and on the publisher side it's measured by optimizing for yield, which is RPM, revenue per thousand impressions. As a reminder, SmartBid does not care about click-through rates independently, does not care about CPC independently, does not care about conversion rates independently. In fact, anyone of them is completely dangerous to monitor and track. So SmartBid was just looking at optimizing for Q3, it was - it would have prioritized enticing creative, it would have prioritized perhaps even advertisers that don't succeed on Taboola necessarily and then over time CPCs would go down and yield would go down. So actually it's quite dangerous to look at just one metric. SmartBid is looking at all 3. And on the advertisers side, making sure conversions are exciting and meeting our thresholds. That's a lot of hard work and that's why we invest so much in deep learning to make sure they are successful.

Thanks for the question, Andrew. Hopefully, that addressed it.

That was great. Can I follow up with the second in terms of just Connexity? As we think about e-commerce demand just coming onto the platform more broadly, can you talk about bringing e-commerce demand specifically onto more core Taboola, right? So how are you guys incorporating, especially when you think about 4Q, e-commerce onto the core Taboola platform?

Yeah, definitely. And thanks for the question. So, I would say that the most immediate thing which we're working on is to bring Connexity demand on to Taboola's core experiences or Taboola Feeds all around the world on 9,000 publishers. We've mentioned that we believe a single-digit percent of our traffic has high intent already and is able to basically absorb those high paying and premium retailers that are looking to convert in the open web. So that's something that we expect to happen. It's one of the synergies. And then if you remember, we talked about it over time, one of the biggest goals we have is to increase the portion of traffic the open web has and the publishers have with intent from single digit to much more than that. And that's going to be a lot of great work that we've started doing and I'm seeing good momentum for publishers. So the first - the immediate thing is we're working on basically having Connexity advertisers bidding in the Taboola ecosystem. And my expectation is that about a single percent of traffic will be able to win that demand and the yields will be much higher when that happens. If you saw what I mentioned, 15 minutes of Facebook in terms of revenue is about one minute in Google. So intent can create algorithmically higher RPM and yield. So, that's going to happen. We're working on having them bid on, on our network. And when they win, it's going to be higher yields with more revenue to publishers, more margin and all those good things.

Our next question comes from Laura Martin with Needham. Your line is open.

I just want to build on that last question you just answered. I want to talk about content quality. So when you look at your core business, you have very high-quality content publishers like USA Today, CBS Interactive, NBC News, Bloomberg. It feels like this Connexity stuff is about lead gen, where you're writing content to drive intent to sell something, which feels very low quality. So tell me why I'm wrong about that? And why the Connexity acquisition doesn't sort of turn you into more of a lead-gen company and a wave of this very high premium news representation that you've done historically?

Yeah, good question, and good morning, Laura. Good chatting. So first of all, before even Connexity and taking Taboola's side, if you just look at the market, take a market view, you're seeing the following dynamics. You're seeing companies like The New York Times, which is definitely a high-quality publisher acquiring Wirecutter and investing in reviews and high-intent content that sits side by side of The New York Times but owned by The New York Times. You're looking at USA Today, they own Reviewed.com, which is a nine digit revenue business, big business as an extension of them. If you look at Conde Nast, Hearst, Meredith, Meredith is generating $0.5 billion a year from high intent piece of content and of course, there are also very high-quality journalistic organization. I can go on and on. CNET, obviously in Red Ventures, in general, mega successful. So the way I see it, there is going to be two types of integrations. And by the way, I believe all publishers will do it. And in fact, I believe, a third of the revenue of the open web will be like that. So, there's going to be two ways it's going to happen. One, some publishers will say, we'll take a CNET strategy, where CBSI will have CBS News, CBS Sports and CNET. That was before it was acquired by Red Ventures or will be like The New York Times. We'll have the nytimes.com. And we'll have Wirecutter that carries the cloud and trust of The New York Times in a stepper domain, Reviewed.com of USA Today and so forth. And then you have publishers that will say, well, we will build a sub domain. We will have a section on our site called sharp or reviews or something like that. So, I think…

Our next question comes from Shyam Patil with SIG. Your line is open.

This is Jared on for Shyam. I know that you aren't updating your '22 outlook at this point, other than providing for the Connexity accounting changes. But given the '21 raise, how are you thinking about the set up into '22? May we see further upside at this point?

Hi, Jared. Yeah, good question. So, I think the reason that we're not raising 2022 at this point is, we basically just released that guidance roughly a month ago. So, we are - at this point, we're still standing by that. We still feel very good about 2022 and we think we have good strength going into the year, but we'll update that guidance as we release our Q4 results in February. So, we will give an update then. I think, generally speaking, to your broader question, I think what you're asking about is how do we feel going into the year and how is - how are we doing? I think generally speaking, we're feeling very good. We obviously raised Q4 because we had a great Q3. We see good strength going into Q4 here. The Connexity is doing very well. We're actually ahead of our expectations for where they were going to be at this point. They are part of the reason that we're raising Q4. So, we feel good about their numbers as well. So, I think we have very good strength going into 2022 and we're looking forward to talking to you in February about our Q4 results and then probably revising expectations for 2022 at that point.

And then just one more if you don't mind, following up on your Connexity commentary there. Do you mind helping us unpack your progress towards that $100 million in synergies that you were speaking to? And when might that $400 million be realized?

Yeah. So in terms of just where we are, we're making good progress, I would say, on the people front. In London, the teams are already together. In New York, I expect the first half of the year, we'll have the folks being together. Financials are great. Connexity keeps signing great advertisers and publishers. So, I would say the business is continuing to have great momentum. Merriam-Webster has signed, Dell U.K. signed. So that's just independently is exciting to me, more synergies ad sales, which was one of the synergies. As a reminder, Connexity has built an amazing business with two ad sales people. We obviously have many sales people all around the world. We've started the global expansion essentially via our international ad sales people that includes China and Brazil to start, but more to come. And by the way, in fact, it was a nice surprise there because we saw that, as our ad sales people in China reached out to retailers, many of them wanted to actually buy in the U.S. as well, so not only in China Mainland. That's great because that basically means demand from China being exported into the U.S., which is great for yield here in the U.S. and continuous growth here as well. So ad sales from a synergy perspective has started. China and Brazil, to start publishers. We started upselling to publishers just the standalone service of Skimlinks and Connexity, which is related to what Laura has asked before. I will tell you, we're thinking also at the leadership level, given Taboola is a bigger company and we have more resources, how do we build sort of a batch of publishers that get even a more resource heavy implementation where we can grow even faster? So growth is something on our mind. We want to really double-down and make this a huge success. And I already said publicly that I believe in four years that's going to be a third of our business. So, we're very much believers. So, we started upselling. That also has happened on the integration front since the close. And these are the high-level things that have started and that's only been amongst plus into it. So that's very encouraging to me. And personally I can tell you, I'm spending time with our team, I'm spending time with publishers and I'm getting really exciting feedback and people are basically telling us it also affects renewals and signatures. So, I'm seeing good signs from the market that they want an e-commerce and affiliate strategy and they look for us to help them get there.

Our next question comes from John Blackledge with Cowen. Your line is open.

Two questions. Could you discuss video advertising progress in third quarter? And more broadly, how do you view video as a growth driver in the coming years? And second question on the iOS, the Apple changes, just given the measurement and targeting issues caused by the Apple changes, do you think Taboola might see higher ad demand in the coming quarters as the platforms affected and kind of deal with the changes? Thank you.

Hi, and good questions. So let's start with video. Video is - represents about - brands and agencies in general, which is primarily video is very important for us. It's about 50% of our business. So that's great. Every percent of traffic that gets a video, very similar to e-commerce generates higher yield. It's high quality. It's higher yield. So, it's great for the consumer. It's great for the publishers. It's great for the advertiser. So in general, we love to increase portions of our business where we can bring premium demand. It pays more and creates this wheel and flywheel affect for our business. So in general, we care about it. And it's about 50% of our business. At our size, that means it's significant. We announced this quarter that Dentsu signed with us. It's a big agency. It's going to start in India, where basically all of their clients will have access to Taboola in the region. So that was a big, big progress. And in general, we're seeing good momentum with brands and agencies, especially as we sign more and more what you call High Impact Placements. So High Impact Placements is the main way we expand our recommendation into video. The way it works is up until now or a few quarters ago, the vast majority of our footprint in the open web was bottom of article. And that's fantastic for our performance advertisers and e-commerce. But for video, they want - the brands and agencies want something else. They want much more visible. They want to be in the middle of the page. They want to be on the homepage. They want to be on the section front. So like I said, one of the biggest advantages of Taboola is that we are a publisher…

Our last question comes from [Sean Ross] with Oppenheimer. Your line is open.

This is Jason. I'm going to take the question. So maybe just help us understand the timing. I guess the trough mechanical timing. So right now, are you assuming in your kind of 2022 guidance kind of the positive impact of bringing Connexity to the "legacy" Taboola real estate? That would be like a question more like, is it in there and is it kind of when maybe? And then you had a September 1 close. I mean, can you help us understand, to the extent, you want to kind of get to organic growth, the impact of Connexity on third quarter and kind of what's factored in the fourth quarter guidance? And then, I guess, lastly, was there any one-time items in G&A that you want to call out because it seems a little high?

Thanks, Jason. Good questions. So first of all, on Connexity in 2022. So, I think you know us well enough at this point to know that we tend to try and be fairly conservative with items that we - that are less certain. So the Connexity synergies are something that I consider to be - it's a little bit like our growth initiatives, great big opportunities that we're going to be conservative with, until we start to see them showing up in our numbers. So, we've been pretty conservative with how we're factoring Connexity synergies into 2022. So when we did the Connexity Information Session, we raised our 2022 growth guidance by about 1%. That translates into about $6 million of ex-TAC. That's about what we have factored into the 2022 plan for Connexity synergies at this point. So, we think that's conservative. But that's our intent. It is to be conservative with it. So, that gives you an idea of how we're thinking about that. In terms of organic growth, I guess the way to think about organic growth in our business right now is that for 2020 - let me talk about Q3 first. So in Q3, we had one month of Connexity in there. We grew roughly 22% year-over-year in that quarter. If we didn't have the guarantee hold backs last year, if we had paid out those guarantees that would have been $7 million more of TAC last year and we would have actually grown 29%. So on an as-reported basis, we reported 22%. It would have been 29% without those - that unusual item last year. In terms of, on a pro forma basis, without the unusual item last year of those guarantee repayments, it would have been 22% growth. And as reported, it would…

There are no further questions. I'd like to turn the call back over to Adam for any closing remarks.

Thank you, [Anam]. So thanks, everyone, for joining. And I feel energized by our progress. Financially, we're beating 34% growth year-over-year faster than the entire industry. Over the last two years, 60% of our adjusted EBITDA converts to free cash flow, which obviously matters. And I think unique to Taboola, we're well positioned in a strong market dynamics that are taking place with privacy and supply chain. We're doing really well and growing. Connexity is building financials. We're integrating. We're just getting started, $100 million of synergies. I'm seeing good growth in our core business with yield bidding our expectations, SmartBid Dimensions. LINE and others are taking our technologies. And also the growth engines that we love, Recommending Anything and Anywhere, Taboola News, Xiaomi, NBC Sports with video, Dentsu. So, there's a lot of good momentum. We're having a good time. I look forward to talking to many of you over the next few weeks. Thanks for listening in and asking us good questions, and also looking forward to our Q4 and 2022. It's just the beginning. Thanks, everyone.

Thank you for participating. This does conclude the conference. You may now disconnect. Everyone have a great day.