Good day and thank you for standing by. Welcome to the Taboola Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jennifer Horsley. Please go ahead.

Thank you and good morning, everyone and welcome to Taboola's second quarter 2022 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 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.

Thanks, Jen. Good morning, everyone and thank you all for joining us for our second quarter call. Q2 was another good quarter. We delivered $143 million of ex-TAC, a growth of 22.5% and adjusted EBITDA of $34 million. Both beat the high end of our guidance which gives us confidence to hold our 2022 full year guidance. While we have seen softness in advertising in the U.S. since the last quarter, over the last few weeks, the effects of the war in Europe as well as the softness in the U.S. has been stabilizing. We're also seeing the benefit from diversity in our business. For instance, we're seeing strength in our e-commerce business a bit better than we expected, as well as we continue to see exponential growth in Taboola News which for the first time, we're showing the run rate to generate north of $50 million in revenue this year. At the same time, given the challenging macro environment, we're taking measures to control our operating expenses, prioritizing things that are key and spending less than others. On the business front, we're seeing good momentum. We've spoken this year about the strength of our publisher pipeline and that is translating into many new publisher partnerships. In fact, to forecast that in 2022, we will sign almost as much new business as we did in a record-setting year in 2019. For context, that equates to nearly double the monthly new business we signed in 2021. So this is a big year for us. This summer has been busy and we recently won incredible partnerships such as PMC, Gray, Fox Sports, Time.com and many others. Gray, the largest owner of top-rated local television stations and digital assets in the U.S. was a competitive win, a new 5-year partnership that includes Taboola…

Thanks, Adam and good morning, everyone. As Adam shared, we had a solid second quarter. We met or exceeded our Q2 guidance on all measures despite some macro headwinds. Revenue in Q2 was $342.7 million, ex-TAC gross profit was $143.2 million and adjusted EBITDA was $34.2 million. This represented ex-TAC growth of 22.5% year-over-year or 4.7% on a pro forma basis with Connexity. On a constant currency basis, the pro forma growth would have been 7.1%. Our adjusted EBITDA margin or the ratio of adjusted EBITDA to ex-TAC gross profit was 23.9%. In -- of the Q2 gross revenue growth of $14 million, $22 million came from new digital properties, while existing digital property partners decreased $8 million. This is obviously a very unusual event to see our existing partners shrink year-over-year. This was driven by the weak macroeconomic situation that started in Europe in Q1 and spread to the U.S. and much of the rest of the world around the middle of June. In our business, this translated to a pullback by advertisers which resulted in weaker yields and a decline in revenue on those existing property partners. Our Q2 ex-TAC gross profit was $143.2 million and was up $26.3 million or 22.5% year-over-year. Adding Connexity to our business obviously had a positive impact but we are also seeing the benefits from our diverse revenue base as our growth came from three sources. The addition of new digital property partners to our network, growth from new offerings such as Taboola News and the growth from Connexity. This growth more than offset the impact of the lower yield as well as the anticipated declines in our Microsoft contract as we transition to the new bidder. Our ex-TAC net dollar retention for our publishers was 99% for Taboola on a stand-alone…

[Operator Instructions] Our first question comes from the line of James Kopelman from Cowen.

First one for Adam. On Taboola News, congrats on hitting the $50 million run rate. Given the rapid growth, if we look out maybe one to two years, how should we frame the size of the opportunity there versus the overall Taboola business? And in terms of growth drivers at Taboola News, is it largely adding more device manufacturers and more regions? Or are you focused on scaling user penetration and engagement in your existing footprint? And then I have a follow-up for Steve.

So Taboola News, just before I get into the details, I think it's exciting because it shows that we can organically build significant businesses that have financial contribution to our existing base and future base at Taboola. So I'm excited about that. That's an organic effort. It's not an M&A. So that -- to me, that shows we have the culture and infrastructure to build successful, diverse business under the Taboola infrastructure. So I like it. It's right now, just to give you some further color on the business, it's trending to be over $50 million this year, for the first time we're sharing that number. It's live in about 200 million active users a month. And actually, it's now about 30% of our entire Taboola clicks a year. So if you remember, I spoke previously about annual clicks of about 30 billion clicks a year. Taboola News is about 30% of our overall clicks now just to show the level of engagement. So that's where we're getting. Also, if you remember, at our Investors' Day, we spoke about -- and Tom, our VP Strategy, spoke about how do we get more time with consumers, how do we get more engagement with consumers. This is definitely one of our biggest vehicles to be more valuable to people in the open web beyond this website. So all of those trends are very good trends. In terms of how we intend to make that a bigger business financially, all of the above in terms of your question. So one, more touch points. So right now, we have OEMs use us either in the wake screen which means you're swiping right, the average consumer looks at their screen about 80 to 100 times a day. So they have their picture of their family…

And then a quick follow-up for Steve. Just in terms of ad verticals, we’ve heard from other companies reporting that the U.S. consumer remains relatively strong, while there’s been more of an ad spend pullback or perhaps just caution on the enterprise side. Is that aligned with what you’re seeing among your advertiser clients? Any color there would be helpful.

Yes. So that's roughly consistent with what we're seeing. So generally speaking, what you're seeing is that from an advertiser perspective, the pullback has been more on branding advertising and things that they can't measure the ROI on as easily. So the further up the funnel you go, the more we're seeing kind of conservatism from our advertisers. Lower funnel performance has been more robust. So that's one reason that Connexity has been an area of strength for us because they're at the very bottom of the funnel, there are Google equivalent at the bottom of the funnel. So we're seeing kind of more from an advertiser perspective, you're seeing more conservatism the further up you go from the funnel. But as you pointed out, I think also the consumer has been fairly strong, so our advertisers that are more directed towards consumer tend to hold up a bit better. Anything that's more directed towards enterprise is a little bit softer. For us, though, our enterprise business is fairly small. So most of what we do is kind of targeted to consumers. So that's another reason we've probably held up a little bit better in some ways.

Thanks, James. Operator next question.

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

Matt on for Andrew. So my first one is just you mentioned publisher or performance advertisers success is a key priority in the letter. Can you just help me understand the key drivers of improving ROI there? And anything that you’re excited on the road map? And then two, just on new publisher share gains, they seem pretty significant. How should we think about this impacting 2022? And is there potential tailwinds in 2023 as your publishers mature?

Thanks for the question. So on the performance advertising, I will say that's by far our biggest investment. That's the North Star. That's the liberation into Taboola becoming even more successful over time. We have about 15,000 direct advertisers who work with us -- but what's interesting is that even any recession time or like macroeconomic dynamics, you don't really see performance advertisers churn. They may lower budgets but they don't churn so much which is, again, another source of strength for companies who have direct relationship with performance advertisers. We're spending a lot of time on a variety of things when it relates to smart bid and performance advertising. One of them which is worth mentioning, is sort of a multi-touchpoint optimization. So for a long time, smart bid was optimizing for a single conversion, so whether that was a click or subscription or time on site or something like that. And now smart bid, a lot of our effort is to be able to capture multiple touch points and optimize for all of them. So advertisers get again, an easier job getting to that quick conversion, getting many conversions and make it easy for them to work with us. So that's been a lot of our recent work trying to go beyond a single kind of conversion optimization point. The second thing that has been taken our time over the last quarter has been header bidding. So header bidding is used in smart bid tech stack. We're seeing really encouraging signs. I mean you all know that Microsoft was a successful launch. We talked about that a quarter ago and that was basically one publisher using a bidder technology. So that technology went from 0 to 9 digits overnight. But over the last 90 days, we've been implementing the same technology called header bidder across a handful of publishers and that's already generating millions of dollars in revenue. And that's incremental and we have 9,000 publishers. So that's been using smart bid tech stack which again helps advertisers get the right users at a lower CPA. So just to give you a bit of color on that. If we're seeing you on CNBC reading about furniture but then we might see you later on a home page and there's a display inventory there or header bidder might bid on you even though we don't have a java script on page, we might bid on that display trying to show you a furniture ad. So that helps us to see you multiple times, not only at the bottom of the article and effectively get advertisers more opportunities to get conversion and pay less to Taboola from a CPA perspective. So that's -- those things have been keeping us busy over the last quarter and that's our biggest effort performance advertising.

And then to your second question about new publisher gains and their impact on 2022 and 2023 even -- so first of all, I want to say we're extremely excited. Adam mentioned that in his prepared remarks. It's our second-best year on record in terms of new publisher business which is amazing. It's double the monthly rate of last year. So that's -- it's a very impressive gain and we're very excited about that. In terms of its impact going forward, so you have to kind of understand how publishers usually ramp with us. So usually, initially, we start off smaller with them and we grow over the first couple to few quarters as we launch more properties, more of the positions that we had agreed on doing -- and they also get more profitable over that time period. So usually, we start off a little bit lower on our margins and it grows over time as we bring on the right demand to put on those publishers. So that's kind of the typical ramping period. So a lot of those launched in the last quarter or two. Some of them are launching -- have even launched in Q3. So what I would expect is -- and this is factored into our forecast, we'll expect improved performance in Q4, improved revenue gains from those publishers in Q4. And then it will really impact 2023 because that's where you'll start to see them at their fully ramped level as well as margins probably at what will be the sustainable margin level. So we expect kind of growth of those in Q4 and then even more growth from them in 2023. I'll just note that it's a good question about how that impacts us because if you look at our overall business, we're actually in a very strong position. That new publisher business is one aspect of that but Adam also talked about Taboola News. It growing and ramping is really going to have a positive impact on our business. I think Adam mentioned this in his either prepared remarks or letter but we have in some markets now, we have publishers calling us saying we want to do a partnership with you because we see the traffic from Taboola News going to other sites and we want to be part of that. So it's really going to impact our business in multiple ways. So we think we're between that, between Connexity being an area of strength and the new publisher business we bring on, we think we're going to be very, very well positioned now once ad rates recover and we get out of this period of kind of macro weakness.

Thanks, Matt. Operator, next question.

Our next question comes from Laura Martin from Needham.

Good numbers, guys. So let’s step up a couple of levels. And at the 30,000-foot level, I have two questions but let’s do one at a time, Microsoft first. So Microsoft now has Xandr’s on the Netflix business. I’m interested in your point of view about whether you think that after they get Netflix sorted out on the CTV market, they become a new competitor in the open Internet, thereby sort of disadvantaging incumbents over the next three years. Do you have a point of view on that, Adam?

One, I'm happy for them. I think that's an exciting deal with Netflix. And obviously, there's a lot going on. I think what will they do in the future? It's hard for me to say. I mean, when it comes to using that demand, they might develop for Netflix and utilizing that in other channels, that sounds like a good opportunity. Again, I don't know what they'll do. So maybe that more is relevant for DSPs and companies that funnel demand into other channels like The Trade Desk and others. So maybe they'll get into that business more. I think when it comes to OpenLab and Open Internet, if you're thinking about building a network of publishers and a network of advertisers and doing all the things we do, that takes a lot of effort that goes even beyond revenue, right? So publishers now when they sign with you for three, four, five years, they expect you to do so much more than just CPM. They want you to help them engage consumers, drive new audiences to their side, help them with subscription, give them analytics. It takes a decade to build all those things and a lot of R&D efforts so that we're differentiated in a marketplace and win those good publishers' relationships for a long time. So it's hard for me to say what they'll do over a long time. But I do think whoever and whichever direction they take, if -- to build an open web kind of publisher-oriented company, that takes, I think, a decade. But they might want to use that demand in other channels and that sounds like a good idea if that's where you're going.

Okay. My second macro question, staying up at that level is, we had -- you guys reported like numbers 5% pro forma growth versus Innoven [ph] just reported right on top of you, 17% and that’s because CTV is growing so fast. So that is my question. Do you feel that the mobile universe -- Meta, as you know, had revenues. They had year-over-year for the first time in history. Do you feel that the mobile open Internet is losing share to connected television and the next big growth driver over the next three years is going to be the connected television and it’s going to be taking share from the mobile digital ad market. Could you give us your opinion on that, please?

Yes. I think there are different buckets, right? So I think CTV is mainly competing with linear TV. And that is -- the question is where is TV which is $100 billion budget, I think, in the U.S., where are they going? And that's a lot of -- if you think about traditional linear video ads that are before the show, during the show, after the show, how are they transitioning into a digital measurable world? I think that's CTV, right? So I think that's where that's going. And then there's a whole streamers versus not and how is that going to pan out. The Open Web and in general, if you look at Google, Facebook, Taboola, right, that's hundreds of billions of dollars market that are mainly performance advertising, like most of Google's revenues performance, most of Facebook's revenues performance, most of Amazon's digital advertising revenues performance, most of Taboola's revenues performance. Those performance budgets which basically fuel the advertising space, like that's the vast majority of the advertising market. I don't think those translate easily into a TV environment. So if you think about converting to buying products and subscriptions and affiliate marketing and e-commerce, I think that's way more down funnel and more lean-in, lean forward type environment which is like a computer or mobile web, maybe an app. So I think that these are two big, by the way, two big markets. And right now, I think we're seeing some headwinds with the recession and everything in the U.S. and we've seen the effect in the war in Europe. But over time, performance advertising is a very strong market and I'm encouraged by where it can be in the future. We just have to weather the storm as it is now. But I do think these are different markets and the future is bright.

Thank you, Laura. Operator next question.

Our next question is come from the line of Jason Helfstein from Oppenheimer.

It's Rizwan [ph] on for Jason. So just two quick questions. Building off of the bidder questions from earlier, when do you fully expect the bidder product to be incremental to revenue? What are your like long-term expectations for, let's say, 2023 and 2024? And the second question is, how are you planning to like restrain operating expenses in the back half of this year? And can we give some additional color on each segment?

Sure. So with regards to header bidding, we haven't given guidance. I can tell you, one is a proxy. We did share publicly on my letter that a handful of publishers generate millions of dollars and we have 9,000 publishers. So again, I'm not suggesting you should multiple the number I just gave you by 1,000. But I will tell you for Taboola Top 3 priorities, I mentioned that last quarter and I mentioned it again, the number one is performance advertising. The second thing is header bidding which is taking advantage of our CPC budget, first part of data across the inventory of display in the Open Web and the third one is e-commerce. Those are the three things that are a must win biggest investment sources for Taboola and I think they will drive the most amount of competitive advantage. So one, we mean it and we're staffing to be very successful in that world. And I think we have a differentiated offering in the header bidding space because no one has so much first-party data like we do because of our recommendation widgets that are hard-coated on the page and no one has so many direct CPC advertisers like we do. So it's we're going to enter the display inventory but which I expect it will happen. We're able to win enough inventory that it's not brand and advertising and it's not search advertising. There's an area there that is just for us to grab. So, I do think this will become hundreds of millions of dollars for the company. I’m not giving you a time line because we’re not ready to do that. But I’m very encouraged by 90 days into Microsoft launching, us generating millions of dollars from just a test on a bunch of small publishers. That to me is a good sign and I intend to continue to invest in that. And the second thing I would tell you is that every publisher that’s launching header bidding by Taboola means that our share of wallet goes up. So if you’re a publisher working with us and you’re generating $20 million a year and with header bidding you’re generating $20-something million a year, it’s just a little bit harder to replace Taboola now because we’re just a bigger portion of your overall revenue which is another level of note as we’re thinking about protecting our Open Web and publisher relationships. So again, it’s very synergetic. And I think it’s very incremental to our finance. It will be hundreds of millions of dollars, I believe, over the midterm, long term but we’re not ready to give a specific time line.

In terms of the operating expense question, I think that's a very good question and we are definitely taking actions right now to bring our operating expenses more in line with where revenues are right now given the macroeconomic weakness. So we've already taken some actions. We've already reduced dramatically our hiring plans. We've looked at all of our discretionary expense spending and we've already cut budgets on that. We're taking an ongoing look at that and we'll probably take additional actions. I will say most of those will probably impact Q4 more than they'll impact Q3. Things like hiring plans, obviously, that impacts outer quarters more than they impact the near quarters. So generally speaking, we've already taken actions we're bringing our operating expenses down and we expect to see that impact in Q4. We'll also see bottom line margin improvements in Q4 as we ramp up those new publishers that I talked about and their margins improve and we expect to see that in Q4. We also think that Q4 revenue will be a bit stronger than Q3 with some of the tailwinds there in terms of U.S. elections and World Cup. So we think that will help improve bottom line margins as well. But we're very conscious of our operating expenses and we are bringing those more in line. As Adam mentioned at the beginning, we in times like this, cash flow matters more than anything else. So we are working to make sure that we maximize that for this year.

Thank you, Rizwan [ph]. Operator, next question.

Our next question comes from the line of Stephen Ju from Credit Suisse.

Adam, so as you talk to more of the Connexity advertisers, have you been able to get any feedback or a sense in terms of how much better or worse the ROI may be relative to some of the other channels they may be buying traffic from? It seems like thus far it's very, I guess, principle, it should be delivering what should be highly qualified, higher-intent traffic, so the ROI should be superior versus most other channels out there. And -- yes, go ahead.

Yes. No, go ahead. What's the second question?

Second question, I mean you talked about dropping revenue yield for all the obvious reasons, macro, et cetera. What are you hearing from your publisher partners as their revenue generation drops? And I suppose they probably will not be doing any better with somebody else and it seems like Taboola continues to win new partners regardless. And theoretically, as your revenue yields hold up better versus the next guy, are you receiving any new inquiries from folks who are currently not partners?

Yes. Sure, Stephen. So one about connected. So a few interesting things that have happened over the last quarter. And as you saw in my letter, it was a source of strength in times where macroeconomic sort of softened the base in the U.S. By the way, they stabilized over the last few weeks as Q3 started. But nevertheless, it was it was impacting our thinking about the rest of the year, even though we're holding the year, what connected was a source of strength. What was interesting is that retailers came to us and said that organic traffic to their sites was lower and they were looking for connected to sort of bridge the gap because they knew it essentially meant guaranteed ROI for them. They know that Connected is a performance advertising channel. They know what the type of ROI they can get and they increase the budget with Connexity when they saw a decrease in organic traffic. So that was interesting to see. And by the way, they buy either a CPC or sort of a commission base but essentially, it's a guarantee that right to them. And again, especially in times of weakness, a channel like Connexity becomes even more important because it's a bottom of the funnel and it's sort of a guaranteed value of the consumer and the price they pay. So that's one thing that we saw. They don't tell us probably no one ever tells us really how better we are than others. We do know that if they increase the budget or they stay with us, it means that we meet their margin threshold. If you talk to Google and Facebook and I can tell talking to our sales team, we always want to know how we're doing versus other companies.…

Steven, do you have another question? Thanks, operator. Do we have any other questions in the queue?

No, you can now wrap up the call.

Okay. So thanks, everyone, for joining us. I’m happy that like I wrote on my letter and you can hear Steve and I here, we’re happy but the fundamentals being strong. Despite some challenging macroeconomic factors, we beat the second quarter, we’re holding 2022. We’re generating north of $150 million in adjusted EBITDA with a strong cash flow for the year. And most importantly, I know the business has a special momentum to it. The pipeline of our publishers is the strongest we’ve seen in a very long time. We have good wins with Fox Sports and Gray and P&C and other good friends and partners that have joined Taboola for the next three, four, five years and hopefully forever. The amounts we’re growing our supply is 2x which is significant. E-commerce, so happy with Connexity part of our family, especially right now, we’re seeing the effect of having a diverse business and especially -- in different buckets of advertising budgets that come into play. So that was the source of strength in 2022. And to Taboola News which to me as the founder, to just being able to found, to start and cofound another company within Taboola that is getting to over $50 million of business organically is awesome. It means we have the right culture to invest in ourselves and build organically, things that can mean a lot to us. Most importantly, our people are energized. We’re working hard. This is a good time to do the work and we’re well positioned for the rest of ‘22 in the future. So thanks, everyone and we’re looking forward to engage with you later today and this week.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.