Good day, and thank you for standing by. Welcome to the Taboola Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Jessica Kourakos. Please begin.

Thank you, and good morning everyone, and welcome to Taboola's fourth quarter and fiscal 2023 earnings conference call. I'm here with Adam Singolda, Taboola's Founder and CEO, and Steve Walker, Taboola's CFO. The company issued earnings materials today before the market and they are available in the Investors section of Taboola's 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, Jessica. Good morning, everyone, and thank you all for joining us. And before we talk about the business, I want to start with a word about our people. I've always said that a company's true innovation is its culture and people. And I'm so proud of the tremendous resilience displayed by our nearly 2,000 Taboolars during the war in Israel. Their resilience is what's driving our progress in reaching new users, delivering engaging experiences in the open web, improving our effectiveness at monetization and driving yield. We have real momentum coming into this year, and it shows in our Q4 results and strong 2024 financial guidance. Turning first to our quarterly results, we had a strong end to 2023; Q4 ex-TAC of $168.5 million, growing 6% versus 2023 Q4. Q4 adjusted EBITDA of $50.1 million, a significant beat to the high end of our guidance by $18 million, representing over 30% adjusted EBITDA margin. Free cash flow in Q4 was $10.5 million, bringing our 2023 free cash flow to $52.2 million, representing 3x growth over 2022, as well as 50% conversion to EBITDA, which is our desired stated goal. 2024 is set to be a record year for Taboola across all key measures, revenue, ex-TAC gross profit, adjusted EBITDA, and free cash flow. On the revenue front, we're back to fast growth. Revenue is growing 33% to nearly $2 billion this year. Ex-TAC is growing 25% to $670 million. We are reiterating our adjusted EBITDA guidance of over $200 million, which is 2x 2023. And we are reiterating our free cash flow guidance of over $100 million, also nearly 2x of 2023. On the business front, there is a lot of good momentum. 2024 is benefiting from fast adoption of our AI offerings, and we assume yield expansion this…

Thanks, Adam, and good morning, everyone. As Adam mentioned, we had a strong end to 2023. Our Q4 revenues were approximately $420 million and grew 13% year over year, accelerating from Q3 levels. Ex-TAC's gross profit was $169 million, which represented growth of 6% year over year. Ex-TAC growth was driven by double-digit growth in advertising spend and included a small contribution from Yahoo in the quarter. These positive factors were partially offset by margin compression due to the ad rate declines in 2022, which have since stabilized in 2023. Net income was $3.7 million, and non-GAAP net income was $31.4 million. Adjusted EBITDA was $50.1 million, representing a 30% adjusted EBITDA margin. Year-over-year, adjusted EBITDA was down, which was due primarily to higher expenses related to the onboarding of Yahoo's supply that were not in the year-ago period. Operating expenses excluding Yahoo would have been relatively flat year-over-year, reflecting strong cost discipline in 2023, which we plan to continue into 2024. For the full-year of 2023, we finished with over $1.4 billion in revenue, $536 million in ex-Tac gross profit, and $99 million in adjusted EBITDA. We had a net loss of $82 million and non-GAAP net income of $33 million. We also generated $52 million of free cash flow in 2023, which was up 181% versus 2022. Free cash flow benefited from the stronger than forecasted adjust EBITDA, which reflects the cost controls mentioned previously, partially offset by the expenses related to the onboarding of Yahoo inventory in the period. Free cash flow in Q4 would have been even stronger if not for the timing of some payables and capital expenditures that we mentioned were delayed last quarter. As Adam said, our strong revenue and Ex-Tac gross profit performance was driven by strength in our e-commerce, bidding, and…

Thanks, Steve. I've never been more bullish about Taboola, and I'm so proud of our Taboolars' dedication, passion, making us the high-performing company through the most difficult of times. We're coming in strong into 2024, making it a record year for us. Revenue is growing 33% to $2 billion, ex-TAC is growing 25% to nearly $670 million, EBITDA is doubling to over $200 million, free cash flow is nearly doubling to over $100 million. And on the back of these numbers, we're now seeing an authorization of $100 million of buyback, essentially looking to buy 6% of our company. As I mentioned, our industry is changing. And with companies like Netflix and Disney, Uber, DoorDash, Amazon, and more expending through advertising initiatives, I suspect we're in the beginning of an exciting ad mania. Taboola has a chance of becoming the partner of choice to many of them. And as I said at the beginning of our call, in addition to Yahoo, I'm incredibly excited to have just signed another iconic consumer brand that validates Taboola's advertising-in-a-box value proposition. Our vision is to become the recommendation engine for the open web, and build the very first multibillion dollar gateway for advertisers to reach publishers, OEMs, and apps outside of walled gardens. Today is a good day for us. I'm excited to get 2024 going. To everyone, thank you for being part of our journey. And with that, let's open it up to questions. Operator?

Thank you. [Operator Instructions] Our first question today will be coming from Andrew Boone of JMP Securities. Your line is open.

Great, thanks so much for taking my questions. Adam, as we think about yield improvements in 2024 and the inflection that you guys are expecting, can you just help us understand what the key drivers, as well as what are products that are your key priorities in terms of improving yield over the next year? And then I want to step back and talk about a big-picture question for Yahoo and Taboola. If I go back and I think about 2022 pro forma revenue of kind of that $2.5 billion of gross revenue, is that still on the table? Is that still the roadmap as we think about maybe 2025 or what are the puts and takes as we think about that benchmark? Thanks so much, guys.

Sure, thanks for the question. Good morning, everyone. So, on the Yahoo front, there's a lot going on. And as you know, it's number one investment as a company because we think this drive the most amount of value to our clients, our partners, and to Taboola itself in a competitive way as we're adopting and going off to a new business. So, let me just drive in, into that. 2024, we're starting strong. We've lapsed conversion already crossing the 60% adoption. As a quick reminder, Max Conversions is kind of our AI that allows clients and advertisers to work with us in a similar way to how they work with Google and Facebook, where they don't have to tell us what is the CPC they want to bid or what is the CPM they're looking to buy; they just give us their budgets. At times they give us their targets for what is worth -- what is the client worth, we do the rest. It's the fastest adopted product since I started Taboola, and it's really fantastic. We're seeing great case studies, not only from Taboola's advertisers, now also with Yahoo advertisers migrating to Taboola's technology. And we're publishing those case studies because we're seeing advertisers that essentially either are able to spend more or new advertisers that are churning less. And this is a really good metrics for us to follow. Again, we know as flower examples on my letter. But essentially just from a numbers perspective, we're essentially seeing up to 50% boost in the amount of conversions at the same price. And in other times, we're seeing the same amount of conversions, but the price is being reduced by 20%. These are serious numbers. And also, just from the client's perspective, the experience they have working…

And then to your second question about $1 billion opportunity with Yahoo, the simple answer on that is yes, we still believe there is more than $1 billion of value in that partnership. It's been -- by the way, we did say that we expect to see $100 million in revenue from the supply in Q1, so that's encouraging. That's a good step towards that. Advertisers will be fully migrated only in Q3, so that's also key to capturing the base value of the partnership. And then, from there, what we expect is that the revenue will continue to grow as we capture synergies to get us to the full billion dollar value. So, yes, we expect it. It'll happen over time.

Thank you so much.

Thank you. [Operator Instructions] And our next question will be coming from Jason Helfstein of Oppenheimer. Your line is open.

Hey everybody. Just some clarification and then a question, so to be clear, so the $100 million in Yahoo, that's not cumulative, that's like for first quarter, correct?

Correct, that's $100 million on Yahoo supply in Q1.

And then, you said the fourth quarter obviously was like meaningfully below that. You're not giving the number, but we have to guess. Just repeat the language you said, how much it was like the way you described in the fourth quarter?

We said low tens of millions.

Okay. So, I mean like so kind of hit the elephant in the room here. I mean, if you play around with the math that means that like the kind of ex-Yahoo, the business is decelerating, but like that's not really fair, right? Because at the end of the day you have certain amount of advertiser demand, there's different publishing sources, different yields you're trying to get. So, just how should we all look, we're going to all kind of play with math for the next year to look at the kind of the with and without Yahoo impact. Like how are you thinking about that? Because I don't think you're describing the business is like slowing down. So, just how do you think about like the puts and takes around bringing that inventory in kind of like the yields you get out of that versus other inventory and like should we be doing that math on the growth ex-Yahoo and then just one quick follow-up on identity and cookies?

Okay. So, I'll take that first question and it's a good question. So, first of all, we're growing nearly $500 million in top line revenue this year, so 33% year-over-year, so obviously, strong growth. A good chunk of it is Yahoo, but not all of it. As you observed, the complexity of that is that Yahoo comes with both supply and advertiser demand. In the $100 million that we just talked about, that is Q1 and that's revenue on the Yahoo Supply. And but it's a mix of Taboola advertisers and Yahoo Advertisers. So, where the top line growth comes from over time is also migrating the Yahoo advertisers over and growing our overall advertiser base, thanks to this really great high quality supply we have. So, in order to get full growth, we need to go there. That's Wave 1, and we expect to have the advertisers migrated by Q3. And then, as I mentioned before in answer to Andrew's question, then Wave 2 is to start to grow the synergies to get to the full $1 billion of value. So, you are correct that it's not as simple as you just bring over the supply and you're done. We have to bring over the advertisers. It's more complex. So, that's kind of the way to think about it. And you're right, our core business is still growing. It's just that Yahoo will take time to get to the full ramp.

And then, just on Identity, you've talked in the past that you're not dependent on cookies and so folks should be less concerned about kind of where we go from here. However, there's going to be more identity metrics that obviously are going to be adopted and coming to the market, on third-party metrics like can you use those metrics to drive kind of even more yield even though you don't need to use identity? Thanks.

Yes. I think we'll take the right thing about it is, from a downside protection in terms of risk that companies might have, we believe the risk is mitigated for two reasons. 1, we have the past with Apple deprecated cookies in 2020 and we did well. In fact, we actually accelerated yield, so that's good. And the second thing is that we have a large amount of first-party cookies today as we store we reach 600 million people a day and people click on Taboola tens of billions of times. So, we think we have a good kind of setup for cookie deprecation. So, the way I think about it is, we can do well and potentially even grow because again, in the past, other demand came to us when it couldn't find other channels and we were a good channel to spend money on. If there's anything in the market that can accelerate that even further, we'll take it. I just don't -- personally I feel comfortable because we don't need any new solution to do well. I think we have what we need to cross that bridge successfully to our publishers and advertisers. And again, just as a reminder, the vast majority about 90% of our revenue comes from clients who buy from Taboola Direct. No programmatic, no agencies, which means that we have pixels on their pages. So, when someone moves from our publishers to their pages, we know we drove that conversion. So, that's why we don't need third-party cookies to demonstrate value to clients as they buy from us. This is a fundamental point. There is I feel there is potentially even further upside to yield, but the downside is mitigated.

Thank you.

Thank you. One moment for the next question. Our next question will be coming from Laura Martin of Needham & Company. Your line is open.

Good morning, you guys. My first one is on political. So, globally, there's a really strong election cycle going on in 2024. And can you remind us how that impacts your impression growth and your readership and how that flows through to revenue in a political year, please? And then I'll ask my second one after that.

Good morning, Laura. Thanks for the question. Hey, it's up. So, the way we think about historically, we did see some bump in kind of demand coming on political season, but especially from video with some more kind of increase in video demand in our guidance and way we kind of like manage the business, we don't assume that is coming. So, want to be conservative in terms of what might happen. There is also potential acceleration in traffic because there is more viewership and things of that nature. Again we don't assume those things as a material kind of like financial benefit to us. But historically, we did see some nice bumps, but again nothing too significant that we would like to sort of embed in our planning.

Okay. So, that's an upside driver because it's not in the numbers, super helpful. By the way, they're talking about $17 billion of spending in the U.S. alone. So, I think it might be a bigger political year than people than your historical lift.

That's good.

The second question I had for you, Adam is I'm really curious as you bring over these new types of advertisers that Taboola has never had with Yahoo like Verizon and Citi and these big enterprise, high quality branding customers. Is that, A, I'm really interested in what kinds of challenges or what kinds of things they need that your historical advertisers have not? And secondly, does it give you new product ideas when you think about the product roadmap? Are there things these types of advertisers are asking for that could sort of, if you develop them could really forever accelerate the trajectory of revenue growth of Taboola. What's your point of view on that?

Yes, this is it's such a good question, because we obviously this is a very new type of segment of clients that get introduced to Taboola. Most of it right now is on the Yahoo side, right, like we're filling that incredible kind of publisher with a mix of Taboola and Yahoo advertisers. But what we're seeing is, first of all, they really appreciate the technology that we can bring to the table. So, they're adopting Max conversion, our pixels and these are new things to them and it allows us and our account managers to and I think a lot of our account managers are always daily to see the graphs and to see the trends and these are really good trends, both in terms of increase of budgets and performance as it relates to conversion rates and CPA. So, it's early days. It's only $100 million. So, it's still early days, but I'm seeing really good things and they are very happy. So, these clients want to spend time with us and the Yahoo team and this is all good beginning. Where I think it's going is this potentially will allow us to develop new formats and kind of new experiences that those clients are used to getting either historically from Yahoo or on other channels. And I think that might open up a whole new way users would experience sponsored content and ads on its own network, as well as in Yahoo over time. So, I would say, stay tuned for potential UX innovation and formats and experiences that those brand advertisers are looking for that we are yet to offer. So, I do think they might make us even better, those clients. And we try to be humble. We're learning. We're asking questions, and we're spending time with them. But I'm excited mainly by the performance. That's the most important thing. But I'm sensing they would like us to further develop the way we present ads on the open web, and that might affect not only our relationship with Yahoo but whether how we render ads across our entire network, Disney and NBC and the rest of our great partners.

Thanks very much.

Thank you. One moment for the next question. Our next question will be coming from James Kopelman of TD Cowen. Your line is open.

Good morning. Thanks for taking the question. The first one is for Adam. In the letter you referenced the amount of contextual data that Taboola has for AI and deep learning. Can you talk about how you view Taboola's growing data set as a differentiator when it comes to training AI and leveraging generative AI over time? And then I have a follow-up for Steve.

Yes, sure. So, as it relates to just the amount of data we have, I think the most important thing and I speak a lot about becoming the must-buy for the open web. And what I mean by that is, it's a matter of how big is your actual gross revenue and your spend, because this is a good proxy for how reliant advertisers become on you, because you're big enough that it's worth their time to spend money with you. Because again, I think today the ad tech industry is a bit fragmented, or too fragmented for advertisers to rely on you. And I'm looking at companies like Snapchat and Pinterest and X, it's in the $2 billion to $4 billion range and now we're getting into that range. So, I think, first of all, the most important thing to become a must-buy is growing revenue and get that flywheel going so that advertisers want to work with you and it's worth their time. Two, the footprint we have and the code on the page Taboola has, I would argue, is probably the largest in the open web or in the world. I don't know of any company that has a first-party relationship with publishers like Taboola at our site, which really gives us first-party access to everything that takes place on the page, from context to scrolling to clicks to purchases to things of that nature. And I think that's growing exponentially, obviously, with Yahoo. So, this is, I think, one of the most important assets the company has, which is code on page exclusively for long term. And this is what gives us also predictability as a business to know that we don't expect any big shift one way to the other. And then, as we look…

And then for Steve, high level, how should we think about the seasonality of both gross revenue and Ex-Tac in 2024, given the various moving parts around Yahoo, the new unnamed publishing partner, and your typical historical seasonality. And then, finally, I just want to ask about OpEx efficiencies. What are some of the ways that you're able to limit headcount increases this year, even as you scale? Thank you.

So, in terms of the seasonality, so Yahoo is like a very large publisher in our traditional core business. So, I think their seasonality is very similar to our historical pre-connect of the seasonality. So, that's the way to think about adding them to our network. As a company, as we've become more and more fourth-quarter-dominated because of our e-commerce business in particular. And this year, obviously, with the bringing on Yahoo over the course of the year, we'll be more back half loaded than usual as well. But generally, the way to think of seasonality with Yahoo is it's like a large publisher and they have very similar seasonality to other large publishers. They're number one or number two in news, sports, finance, and that is pretty much what the kind of core of our base is. So, that's a way to think about seasonality. In terms of OpEx and how we control headcount here, I think we've shown pretty good cost discipline over the course of the last year. I mentioned in my prepared remarks that our OpEx for Q4 and in fact for all of 2023 would have been flat year-over-year except for the hiring that we did for Yahoo to support that. I would expect that our fourth quarter OpEx space is probably going to be similar to what it is the rest of this year. There may be a slight increase as a result of some additional hiring that we have to do for Yahoo, but we're really working on kind of keeping a lid on costs. And the way we do that is we find efficiencies and we find ways to leverage the people we have to do more. Frankly, we're using generative AI and other AI tools internally now to generate productivity and to improve things. So, for -- and a great example, that is exactly what Adam talked about. Historically, our account managers who support our advertisers used to spend a lot of time helping the advertiser figure out what's a good headline, what's a good creative or image for this ad. Now we have generative AI tools that help them do it, can generate a dozen of them instantly, whereas it used to take a lot of thought and a lot of time to come up with a dozen. So, it's all about productivity, finding ways to leverage your people across more accounts, and I think we're doing a pretty good job of that.

Great. Thanks, guys. I appreciate all the color.

Thanks, James.

Thank you. One moment for the next question. Our next question will be coming from Dan Day of B. Riley Securities. Your line is open.

Yes, morning guys, and thanks for taking the questions. So, this iconic consumer brand that you've mentioned here, possible to say whether it's a traditional open web publisher that you typically partner with, but maybe on a bigger scale. So, you feel like it's worth specifically calling out or maybe like a new type of partner. I'm thinking something like a retail media network or a company maybe new to the advertising business or something along those lines. And then, if there's any prepayment or anything else that could impact cash flow associated with this publisher with.

Yes, we can't say the name. It's not a traditional publisher. So, it's an iconic brand that signed and rolling out to us. I don't think we can mention the name, but I hope we can mention that soon.

Okay, great. So, question, it seems like every week, since you last reported, we're hearing about layoffs at open web publishers, how much this industry is really struggling to survive for a lot of them, especially how they're struggling to generate traffic off search and social and anywhere near the levels they have in the past. So, given you're in part dependent on them generating traffic to their properties, how do you think about that as either a headwind, an opportunity for you to help them through these struggles?

Sorry, Daniel. I missed a part of that question. Can you give it to me again?

Yes, just generally, open web publishers are struggling. A lot of them going through layoffs and struggling to generate traffic. So, just how you think about your role as an ad tech partner here in helping them continue to generate traffic and what you can do there.

Sure. So, I can take this one. So, overall, on our network, we're not seeing any material impact to date. I think also many of our publishers are enterprise big publishers that have a lot of direct traffic. So, to date, we haven't seen any material impact. And then, also, I think this is an opportunity for us because the way we approach working with publishers it's really at the most strategic level, whereby they're able to use our homepage for you to drive homepage personalization. They're able to use our e-commerce business to drive diversification of revenue, subscription. We have mentioned AI to help them kind of personalize a page once users lands on it. And I think if you're a publisher, especially if you're a senior person on the publisher side or a senior product manager, when you think about who do you want to work with, you just want to make sure that you can work with companies that can drive audience growth, because you're concerned about that going down. You want to make sure you work with companies that can increase your engagement with consumers, and then as well as kind of like your ARPU or your lifetime value. So, I think this is such an important differentiation we have. I can tell you I just had a call a week ago with a fairly big publisher from the CEO and the CEO asked me, what about Taboola News? Are we getting Taboola News as part of the deal? And I said, well, of course. And I said, but we have to work for a long time because we can't just put people on and off. And the entire conversation was about added value. It wasn't about CPMs. It wasn't about yields. So, it wasn't about guarantees. It wasn't about redshirt. It was about other things publishers are thinking about. So, this is, to me, such a fun part of my job, as well as an exciting moment that publishers want to work with us because all of the technology investments we make beyond just money.

So Daniel --

Okay, great. Just to -- sorry, go ahead.

Back to your first question about the iconic consumer brand, I checked with our PR folks, and what we're allowed to say is we were selected by Apple as an official advertising partner for Canada and Australia at this point. So, I think that's what we're allowed to say.

Okay, awesome.

Yes, good to hear.

Thanks, guys.

Thank you. One moment for the next question. Our next question is coming from Justin Patterson of KeyBanc. Your line is open.

Great. Thanks for the question. I just want to up level the conversation a little bit around these bigger brands that are opening up like Yahoo originally and now Apple in there. It seems like this is just a new opportunity for Taboola power a lot more of these bigger brands. I guess, one, just what's really changed around that? Was it just Yahoo that opened this door over the past year? And then two, as you've gone through Yahoo, how should we think about just the incremental investment to support more of these brands to win more business and scale up over time? Thank you.

I will start, Justin, because I can't believe the CFO was able to break about Apple. Now, Steve, we are going to have to talk about this afterwards. But obviously we are very excited about Apple choosing to invest into this exciting market. So, to your question I think to me what's fascinating is that, you can already see companies like Amazon and others speaking about advertizing being the second or EBITDA they have. So, the trend is that advertizing is going to become a trillion dollar market. And, I believe board members of all Fortune 500 companies are going to ask their CEOs what is your advertizing strategy because it's too big. And if you reach consumers, it cannot be ignored. Not only that, it can be a fantastic if not one of the most lucrative growth engine for Fortune 500 companies all around the world. Now, I think the way it's going to pan out is that many of these great companies would want to sell directly to the top of the market. We would like to build relationship with enterprise account. However, there are two things that would be missing. One, it's unlikely they are going to sell to tens of thousands or hundreds of thousand's performance made from the advertisers. And the second thing that it is unlikely they will develop a technology that use AI and data and match make between users and ad in a way that works for advertisers to continue to buy. And this is exactly I think where Taboola has an opportunity which I am very excited about. I mean I never knew -- I never thought few years ago, we will be in a position where we will announce a billion dollar partnership with great company like Yahoo And now, Steve stole my thunder. But now, Apple chose Taboola. And I think this potentially can become an opportunity for the company to kind of be this ad engine or call it advertiser in a box for these companies that say, well, we should get a billion dollar or more from the advertizing space. So, I am excited about it. This is more than I ever thought will happen. But I do think it's happening. Again, we are seeing exciting partnership, Pinterest, with Yahoo Netflix, with Microsoft. This is really a whole new beginning in my opinion. And, I hope we can play a big part of it.

In terms of -- sorry.

No, go ahead. Sorry, Steve.

Yes. In terms of incremental investment required to support these types of partnerships, I guess what I would say is the reason I think we are winning some of these great partnerships is because we have invested so much in our performance advertizing capabilities. And while I think we have a long ways to go, I still consider us in the early innings here. In terms of being great, we are well-faceted at it. And I think that's what helps us win these partnerships. Obviously every partnership we do of significant scale has some unique requirement. Yahoo, we are definitely learning from -- as Adam mentioned earlier, we are learning from the advertisers things that they would like. Maybe they got to move it from Yahoo previously. Maybe there is new things we're learning that they would like but they never got from Yahoo, but we could do. So, yes, you always invest something in terms of building capabilities for any large partnership. But it's all part of kind of our core business like as Adam said, we're learning from these advertisers things that they want. We will invest in it that will impact -- then positively impact all of our business not just that partnership. So, while there is investment, it's basically just a way to advance your business. And it's true of all these partnerships that we are signing.

Got it. Thank you both. And from what it's worth, Adam, you still brought the thunder there.

Thank you. Thank you, sir. I appreciate that. And Steve will still get a review after this, but thank you.

Thank you. And this does conclude today's conference call. You may all disconnect.