Good day and thank you for standing by. Welcome to the Taboola Quarter One 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today's conference is being recorded. I will now like to hand the conference over to your speaker today, Rick Hoss, Head of Investor Relations of Taboola. Please go ahead.

Thank you, and good morning, everyone. And welcome to Taboola's first quarter 2023 earnings conference call. I'm here with Adam Singolda, our Founder and CEO; and Steve Walker, our CFO. We issued our earnings materials today before the market and they are available 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 Rick. Good morning everyone and thank you all for joining us for our first quarter call. We had strong performance in Q1, beating the high end of our guidance across all metrics. We achieved $116 million in ex-TAC gross profit, $10 million in adjusted EBITDA and $11 million in free cash flow. We’re also excited to raise the midpoint of our full year 2023 guidance. Now, while we are not fully guiding for 2024, we expect a step change in our financial performance, with over $200 million in adjusted EBITDA and over $100 million in free cash flow. I have said in the past that it is rare for a company to have this level of clarity and confidence a full year in advance. We have such confidence in those numbers that today we announced a share buyback program of up to $40 million in 2023, and also our intention to continue paying down debt up to $50 million this year. Our strong performance in Q1 was driven by a few things. In our core business, we keep seeing meaningful publisher wins such as Conde Nast, Univision, The Blaze, and Kicker in Germany. I’m spending a lot of time with publishers, existing and those who are yet to work with us and it’s incredible for me to see the quality of the conversation around how Taboola can empower the editorial teams, how we can help publishers diversify their revenue and how we can help publishers drive new audiences through Taboola News. Additional drivers for our Q1 strong performance was eCommerce business and Taboola News, both of which performed better than expected in the first quarter. While we don’t plan on reporting this quarterly, when looking at 2022, you can see our revenue is diverse; about 15% of our ex-TAC…

Thanks Adam and good morning everyone. As Adam noted, our Q1 results beat the high end of our guidance on all metrics. We are also raising the midpoint of our full year 2023 guidance and reiterating our 2024 expectations of over $200 million in adjusted EBITDA and over $100 million in free cash flow. As Adam explained, we are very confident in those forecasts and therefore announced today both a share buyback program of up to $40 million in 2023 and also our intention to continue to paydown our long-term debt. We repaid $30 million of our long-term debt in April, which means that we have repaid a total of $91 million since Q4, 2022, and we intend to repay up to another $50 million this year, likely in the third quarter after certain cash balances become available. Let me talk now about our Q1 results, which exceeded the high end of our guidance on all metrics. For Q1, revenues were $327.7 million versus the midpoint of our guidance of $312 million; gross profit of $89.6 million versus the midpoint of $82 million; ex-TAC gross profit of $115.7 million versus the midpoint of $109 million; adjusted EBITDA of $10.1 million versus the midpoint of zero or breakeven; and non-GAAP net income of negative $4.1 million versus the midpoint of negative $17 million. We generated positive free cash flow of $11.2 million. I will note that Q1 and Q2 growth rates suffer from difficult comparables in 2022 before the digital advertising market weakness. We expect to return to positive growth in the second half of 2023. Relative to our guidance, we saw overperformance particularly in the U.S. and LATAM. eCommerce continues to impress, taking the momentum of the last several quarters of 2022 into this year. We’re seeing strong spend from…

Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from Jason Helfstein of Oppenheimer. Your line is now open.

Hey, thanks. Hi, everybody. Two questions. First, has the pace of the Yahoo integration changed since the Analyst Day? Any color there. And then number two, on the buyback, just want to know kind of why now. And is there a formula investors should think about in terms of repurchasing a certain amount of free cash over EBITDA on a go forward basis? Or is this more just being opportunistic? Thanks.

Hey, Jason. Good morning. So, on the Yahoo front, since the event we have transitioned into phase one, so back then it was phase zero, which means that we're building the functionality to start moving revenue into our systems. We still expect phase two to end back half of this year and gradually start growing revenue. What I will share, that's another piece of information that's seen, is that our teams wonder having great momentum and spending a lot of time together. But we're also looking to have an accelerated plan of capturing revenue even faster. So on that one, we'll keep updating, but overall good momentum. And we're trying to see if we can get this even faster.

Hey, Jason. So to your second question about the share buyback. So I think, first of all, in terms of why now, so we feel very good about our Q1 numbers and especially about our 2024 projections of $200 million plus of EBITDA and $100 million plus of free cash flow. So that gives us good confidence to do a share buyback at this time. I'll note that our core is strong. We've got good publisher wins. Our investment in performance advertising is looking promising. And our growth engines are strong. eCommerce we mentioned is particularly strong right now. Taboola News is beating our projections. And as Adam just mentioned, we feel good about Yahoo and where we're at with that. So that's the why now. In terms of kind of how to think about what we're doing and how investors should think about it. So we want shareholders to be focused on free cash flow per share, and in particular free cash flow per share in 2024, because that's what we're focused on. So the goal of buying back shares is to offset dilution from employee shares so that investors can hold the expectation of kind of maintaining current shares outstanding levels. So that's the -- I think that's the expectation that should be set, is that we'll maintain our current share levels. I will say obviously things happen and you aren't always able to achieve that, but that's the goal, stable share account. And I'll also note that the other reason for why now is kind of given our share price right now, and frankly, the cost of debt, we just think it's a good ROI for shareholders to both be buying back shares and paying back debt at this point.

Yep.

I think we're ready for the next question.

Thank you. One moment, please. Our next question comes from the line of James Kopelman of TD Cowen. Your line is now open.

Good morning, and thanks for taking the question. First for Adam, what do you view as the differentiating factors that are continuing to attract all these 8,000 publishers? And then, can you remind us roughly what the prepayment trend is for the remainder of the year relative to last year? I think after having one of your best years for publisher wins, and then I have a quick follow up for Steve.

Sure. I can start. So one, I think we're -- our core is very strong, and you can see that both in terms of publisher wins and as well as advertisers working with us directly, 18,000 advertisers and 8,000 publishers. On the publisher front, and I mentioned that on the letter, I'm personally having really incredible conversations with existing publishers and publishers or yet to be working with us. And the quality of the conversation is so much about our full platform offering, as it relates to homepage personalization. We call that Homepage For You, Newsroom for editors. We have now 3,500 writers and editors using our Newsroom product, which is -- it's a company on its own. And that's so valuable because it means when the publishers work with Taboola, think of the workflows and how many people on the organization is using Taboola to make decision as to which content they should write, what helps them drive subscription, how do they move traffic around from a journey perspective. Then we have the eCommerce and Turnkey, Time.com launched recently, nj.com have advanced launched earlier this year. Then is Taboola News which we help them drive traffic to their site. So when you think of a publisher point of view, especially in today's world, they want to have less vendors and more partners, and they want partners who can do a lot of different things with them and for them. And as part of that, I think, over time we'll see more and more of kind of this trend of publishers making decisions to work with less companies, but do a deeper integration, longer term partnerships, and honestly more quality conversations. So when it comes to that, I think it's -- I made a joke that when I was younger, people used to say, nobody gets fired for not buying IBM. And I feel more and more publishers, it's a safe bet for publishers at all levels to choose Taboola.

To your second part of that question about prepayment expectations, our expect -- so I mentioned in my prepared remarks that the -- it was first quarter publisher prepayments were actually a source of cash. Because the prepayments that we did in this quarter were lower than the amortization of previous prepayments, that we do expect them to be a use of cash for the full year, though probably on the order of sub $10 million. So that we think that it'll be going down from last year and towards zero. As Adam has said, he thinks these go to zero over time, so this will be a lower year for that we think. I will only caveat that with if the right publisher deal came along, obviously we would use that as a tool to win the right publishers, but our expectation right now is that there'll be sub $10 million in terms of the use of cash for the year.

Great. And then a quick follow up for Steve. How should we think about ex-TAC seasonality for the 2023 quarters? I know we sometimes think of 2Q and 3Q as being similar in terms of percentage of the full year's ex-TAC, and then 4Q is higher. Is that how we should think about 2023? And are there any additional seasonality factors that you'd like to call out to help us with the modeling this year? Thank you.

Sure. So we expect, right now, Q2 is actually going to be similar on an ex-TAC basis to Q1. So it's a -- it's -- the seasonality over the last several years has kind of shifted a bit and you kind of see an upward trend as you go through the year, but we actually expect Q2 to be similar to Q1. And then we expect the second half to improve, especially if you're looking on a year-over-year basis. By the way, I mentioned this in my prepared remarks. Q1 and Q2 are particularly tough comps, Q3 and Q4 become easier comps. We also -- our expectation is that at some point we'll start seeing Yahoo revenue, which will help us in the back half as well. So I think that's our expectation is Q2 will be similar to Q1, and then we will see an upward trend from there.

Great. Thank you very much.

Thank you. One moment, please. Our next question comes from the line of Andrew Boone with JMP Securities. Your line is now open.

Good morning and thanks for taking my questions. I wanted to go to two more product oriented questions. Adam, can you talk a little bit about performance advertising and your learnings as you spent more time in Israel with engineers? Talk about the product roadmap there, and then what are the key drivers for yield today and the rest of 2023? And then on header bidding, your publisher display integrations, can you talk about what needs to happen for that to become the next billion dollar business? Where are you guys in testing and what are publishers telling you? Thanks so much.

Sure. And hey, thanks for joining. So I was in Israel. I spent a month there and I joined -- it was so fun for me to join every day to different tracks, being with engineers and product managers, see what they see and share my point of view. And we met clients, we had with all hands. It was really energizing. I came back even more energized. And for me, that's not always that easy, but I was, and I am. We're laser focused on kind of two buckets to simplify our thinking on the engineering side. One is new advertisers who come into Taboola. What is their experience, and how do we make them successful? We're focusing on the time for first conversions, how many conversions can they see so they get good momentum and a variety of different metrics that we believe are living indicators to get new advertisers to want to stay and then grow. So that's one bucket, and I'll speak to that in a second. The second bucket is existing advertisers. We have now 18,000, which I'm proud of. That's a growing number, which is great. And then here the question is predictability. How they can rely on us and how they can increase their spend while at least sustaining good performance or even improving performance? So think of those are like two buckets, right? New clients and existing clients. And then the biggest track -- we have multiple tracks that are focused on helping those two buckets be successful. The things I'm mostly excited about are probably threefold. The first one is measurement and how we continue to improve the way we measure our business on the advertiser journey. The second is, on the matching front. So this is more of an AI…

Thank you.

One moment, please. Our next call comes from the line of Laura Martin from Needham. Your line is now open.

Hey, there. Let's just follow up on that answer right there. So Adam, how do you allocate engineering resources beside -- between like this public -- improving the performance advertising compared to onboarding Yahoo? How do you figure out how to allocate resources to those two enormous tasks?

So first of all, no, we allocate resources mainly to the top four priorities, right? So there are many things Taboola is doing. But we spend -- management energy and resources, just as a high level on our top four priorities. Performance advertising, Yahoo, eCommerce and bidding. And then within those, we do prioritize Yahoo and performance advertising at a higher level because we think there is a short-term, midterm and long-term, big upside for us, both in terms of making our business stronger in improving our moat and like I said, increasing the yield, which will -- as you know, increasing yield for Taboola, improves not only revenue, but also ex-TAC margin and EBITDA margin and things of that nature. So those two get more resources. And then, we believe that we've modeled that correctly in terms of ROI. So you know how we put together for this year and we can speak about that again for Yahoo. Yahoo, it's -- we believe it's going to start ramping the second half of the year and hopefully, even faster as it relates to next year. We're working on that. So I think we're -- it's the right thing to do to invest in that. And obviously some of those resources will go to other things once Yahoo is live.

Yeah. The only thing I would add in terms of how we allocate R&D resources is, and we talked about this a little bit when we did our cost cutting back in Q3 of last year. We're very focused on things with sub two-year payback periods right now. So whereas previously we had some initiatives which Adam had previously called them his speedboat initiatives, they're further out in the future. We've cut back on most of that and focused our priorities now on things that we have or our resources on, things that we believe have sub two-year payback. So that's why we have the list of the four priorities because we think those are all very short-term payback and frankly can have the biggest leverage on our business.

Super helpful. And then, Adam, my other question for you is, you touched on Generative AI and I'm interested in what use cases you're seeing over the next three years for Generative AI. I know you've talked about content creation and specialization in the past, but could you talk about how you think Generative AI will get built into your models over the next three years, the use cases for.

Yeah. Absolutely. So I'm not going to talk about productivity and other things because everyone is talking about that. That's a bit boring I think at this point to talk about that context. In the case of the business, what I think's interesting is -- so right now we're testing. It's already part of our Taboola ads console. And if you -- I think you've seen it, Laura, but for those who listen, if you haven't seen it, you should check it out. It's fairly cool. Advertisers can now -- on Taboola, they can get suggested title and suggested thumbnails not only by Taboola prompting Generative AI with what we think would be good for insurance advertisers, but rather using our historic data to prompt into Generative AI titles and thumbnails. We already know from past experience have worked for advertisers in that vertical or in that type of segment. And that gives us an edge because the suggested creatives we give back to advertisers are based on previous success. And in general, my belief is that when it comes to Generative AI, anyone can use it, consumers can use it and business can use it, but the differentiation, the big differentiation will be the data. It's a garbage in, garbage out, as they say in computer science. So I think companies will have unique data, they can prompt into those engines. We'll have an edge and an advantage. We have -- we're fairly big. We reach 600 million people every day. We're probably among the biggest in our space. So we have a lot of performance advertisers that have working with us and we're going to use -- we are using that data as an edge and an advantage. So that's happening now and it'll be happening more and more. I think the second thing that might be interesting is on the more landing page creation opportunity. We had a Hackathon I've saw a glimpse of that. Obviously that's not ready yet. But you can imagine that one of the challenges advertisers have now is that they're not sure how to build the landing page and integrate pixels and how to create the workflows so that they can be successful. They might have really, really good products, but they're just not building the landing pages in a way that could be successful for different channels. So if you work with Google or Facebook or Taboola, it could be that you need different landing pages. And I think that's going to be fascinating to see a whole universe where landing pages are being automatically generated and optimized by Generative AI. And that can be very creative in my opinion. That will take some time, but I think that can be the next step after creative optimization.

Super helpful. Thank you very much.

Sure. Thanks.

Thank you. One moment, please. Our next question comes from the line of Stephen Jue from Credit Susie. Your line is now open.

All right. Thank you. So Adam, I think, you cited eCommerce strength in the first quarter results. Is this primarily a function of a ramp in Connexity or product? And the advertisers you cited here and previously are generally larger and are pretty well resourced. So what can we do to broaden the client base here? And also, stepping back a little bit, I'm just wondering if you can more broadly talk about what you are hearing from advertisers. It does seem like the budget cuts have stopped for the time being and overall seems stable, but are there any rising sources of worry or concern you're hearing about or conversely any sort of optimism? Thanks.

Yeah. So first of all, overall what you've seen, and I think it's part of why eCommerce is doing so well is that advertisers are looking to work with channels and partners that are very good at attribution for performance and to showcase that it's working. So the more you're able to show advertisers in it, and that's why we're focusing on that so much, that you're a good place for them to spend their money in ROI, you're going to get the budget, you're going to get retention, you're going to get happy clients. So we have 18,000 of those as I mentioned on the eCommerce front, which is -- it started with Connexity and Skimlinks and now it's just more Taboola commerce holistically. As I mentioned, eCommerce in the box. We're seeing even greater advertiser success over there. So I'll say that we're seeing advertisers just coming in even stronger to work with us on the eCommerce front. I think especially now they're looking for great -- I don't know if we're as good as Google search, but it feels to me based on the momentum that advertisers really like working with our eCommerce initiatives. So again, I don’t know if that's because of the overall macro or just because we're great or both, but we're doing a good job on eCommerce and I'm happy to see that momentum. Two, I think, since the acquisition, we're working more holistically as one company. So there's a lot of synergies between data integrations, different initiatives like DCO advertisers, Taboola core advertisers buying Connexity, Connexity core advertisers buying Taboola. We have more salespeople selling and cross-selling. So those things are contributing to eCommerce. And I'll tell you, my goal is to double that business. I mean, it's a great business. It…

Thank you.

Thanks Steven.

Thank you. One moment, please. Our next question comes from the line of Justin Patterson from KeyBanc Capital Markets. Your line is now open.

Thank you. This is Sergio Segura on for Justin. We had two questions. Just how should we think about the pipeline of publisher additions for the rest of the year? And then a follow up on Generative AI. Just how should we think about the cost implications from these investments? Thank you.

Sorry. So can you repeat the question real quick? I had audio breakup here.

Sure. Yeah. We had two just on the publisher additions, how that pipeline is looking for the rest of the year? And any way we should think about the cost implications from the investments in Generative AI.

Yeah. So on the pub additions and new publisher revenue, so we're ahead of our plan so far this year. So we continue to see good momentum on signing up new publishers. Adam mentioned some of the names earlier, but generally speaking, we're seeing good progress. Pipeline still looks very strong, so we expect that this year will be another very good year in terms of adding new publishers. And I think we tend to always talk about the fact that when we add new publishers, they tend to be lower margin initially, and then we're able to grow the margin over time. So I think it's also very promising for the future because I think it'll help us -- as we look forward, it'll help us to grow ex-TAC over time as we improve the margin on those publishers. In terms of Generative AI and cost implications and things, again, I think Adam said we do expect it to be a productivity boost. So we do expect it to help our AMs, for instance, be more account managers on the advertising side be more productive because they don't -- they can -- they don't have to sit there and work to generate new headlines and things for the advertisers. Generative AI can help them with that. But even more important than that, our expectation is that it'll help us with our advertiser success and performance advertising initiatives. It'll help advertisers become more successful on our platform. Because one of the things that's important when you're advertising on a platform like ours is to test things. Test new headlines, test new images, test different ways of getting your message out there. Test new landing pages even with different messaging and different ways of converting people to what the advertiser wants…

Thank you, Steve.

Thank you. At this time, that concludes our Q&A session for today. I'll now turn it back to management for closing remarks. End of Q&A:

Thank you everyone for joining us today. I think as you can tell from our remarks and the questions and the recent communication, we're excited to be where we are. I'm personally very energized about our position in the market. I think we have an opportunity to build the very first large scale must by Open Web company, that both publishers and advertisers can rely on, side by side to Google for search or side by side to Meta and other social companies. Taboola can be the gateway to the Open Web. Two side of the marketplace that can optimize user experience, AI and data and all those things that advertisers and publishers need and want. We're fully focused on our four key priorities, performance advertising, bidding, eCommerce, and Yahoo. We're lean. We execute on our plans. And once Yahoo is launched, we expect to be at $2.5 billion run rate. And this is out of a $70 plus billion Open Web market. So we're bigger, but still a small portion of this, big market. So there's a lot of growth for us and we're excited to go there. And what I tell -- and like I said earlier, what I tell myself and Taboola is that at our size, we have everything we need to execute and reach our financial objectives and dreams. These are times to lay low, do the work, execute, and that's all we care about. So we look forward to interacting with many of you. Thanks for joining today. And may you all discover things you love and never knew existed. Thanks.

Thank you. And thank you for your participation in today's conference. This does conclude the program. You may now disconnect.