Good day and thank you for standing by. Welcome to the Taboola Third Quarter 2024 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 hand the conference over to your first speaker today, Jessica Kourakos, Head of Investor Relations.

Thank you, and good morning, everyone, and welcome to Taboola's third quarter 2024 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 Investor 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 statements, limitations, and 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 and the earnings press release posted on our website. With that, I'll turn the call over to Adam.

Good morning, everyone, and thank you all for joining us. Q3 was another strong quarter, beating our guidance midpoint for revenues, extra gross profits, and adjusted EBITDA. With this strong quarter and the momentum we've seen for our run rate heading into Q4, we are reiterating our 2024 guidance for all metrics and raising our free cash flow target to more than $105 million, which represents more than 2x level what we generated in 2023. 2024 continues to be a big year for us. As you can see in our financial performance and our return to positive yield growth in Q3. As we look towards the future, our aim is to continue executing and building out our offerings to delight both our advertiser and publisher partners. Given the strength of our supply, much of our focus will continue to be on growing the number of advertisers and their spend with us. This includes making sure our technology is meeting advertisers' needs throughout the entire journey with Taboola. As a reminder, Taboola's core business is helping advertisers reach consumers on publisher sites and driving performance while also helping publishers grow their audience, engagement, and revenue. As I look into the growth potential of our core business, there are three exciting opportunities that are worth noting. First, the growth in publisher adoption of AI. Most publishers have yet to fully adopt AI in a meaningful way. Today, the average user reads about one to two pages per visit, which is way too little. With AI personalizing homepages and article pages, that number should grow and help drive engagement. This is a great opportunity and a differentiation for us as more and more publishers use our publisher platform to go beyond just generating revenue and drive personalization and engagement. Second, we see growth…

Thanks, Adam, and good morning, everyone. As Adam mentioned, we've had another strong quarter, and we are well positioned to build on this momentum in the fourth quarter. So, let's dive into the details of our financial performance. Q3 results were strong, showcasing continued growth across all key metrics. Revenues reached $433 million, reflecting a 20% year-over-year increase, while ex-TAC gross profit of $166.4 million grew by 30% year-over-year. This strong ex-TAC growth in Q3 was primarily driven by increased advertiser spending, particularly from Tier-1 brands and agencies, and the addition of a significant amount of premium supply since Q3 of last year. As we have previously discussed, this new supply is coming from Yahoo, Apple, and other premium publications. Net loss was $6.5 million, with non-GAAP net income coming in positive at $22.2 million. Note that income before income taxes was positive at approximately $3.5 million. We had a relatively high income tax expense charge this quarter due to the timing of tax provisions. The volatility arises from a change in deferred tax expenses between quarters. In any case, there was no cash impact. Adjusted EBITDA for the quarter of $47.9 million was up 110% year-over-year and reflected a 29% adjusted EBITDA margin. Free cash flow of $42.9 million benefited from our growth in adjusted EBITDA and favorable operating leverage with our new publishing partners. I would note that over the trailing eight quarters, our conversion of adjusted EBITDA to free cash flow has been 60%, which is at the high end of our long-term expectations of a 50% to 60% conversion rate. Q3 operating expenses of $128.3 million were up approximately $9 million versus the year-ago period. Headcount and cost increases were primarily limited to the growth areas of our business. Our improved year-over-year adjusted EBITDA margin of…

Thank you. [Operator Instructions]. Our first question comes from Zach Cummins at B. Riley Securities. Your line is open.

Hi. Thank you. This is Ethan Widell calling in for Zach Cummins. Thanks for taking my question. To start, can you talk a little bit about your progress with your Apple relationship, and when might you expect that to become a meaningful revenue distributor?

Sure. Good morning, and thanks for joining. So we're very happy with the Apple partnership on multiple fronts. One, as we said, we think there's an opportunity for Apple to become one of our larger partners over time, which is exciting. Two, we're seeing more and more opportunities through the Apple partnership to, one, attract premium advertisers. It's part of our Taboola Select offering, which is great. We think that attracting premium, Tier-1 advertisers that still want to drive performance is one of the largest growth engines for the company, and there's no much more premium than Apple. Three, because there's such a huge validation in the marketplace that Apple has chosen Taboola to be their monetization partner, we think that as the industry is evolving to be much more kind of leaned in into advertising, we could be having more exciting partnerships like Apple. So for all those reasons, we think it's going really well.

Got it. Thank you. And then with the adoption of Max Conversions, what's been the feedback so far from advertisers using that solution? And can you speak a little to the mix of advertisers using the offering long-term?

Yes. So we mentioned that the adoption rate of Max Conversion is about 70%, which is great. If you compare quarter-over-quarter, we had about 1,500 advertisers joining in this quarter versus the one before, which obviously is great. These are direct advertisers using Max Conversion, so that's fantastic. And also when you compare the amount of campaigns, we're seeing 36% growth quarter-over-quarter, thanks to Max Conversion. So as I look at the industry and, again, the trend of big and small advertisers wanting to work with companies that can drive performance, Max Conversion is a key element of our AI investment to do that. We also mentioned that we're seeing a kind of good growth coming out of China as advertisers are able to drive performance for that in a fairly significant way. And again, Max Conversion is an enabler for that. And we're seeing growth in some good verticals such as healthcare, auto manufacturers, and more. So I think overall, our investment in AI is a big contributor to our growth.

Our next question comes from Dan Medina at Needham & Company.

Laura Martin standing in for Dan Medina. So I have three things. One, traffic. So you said that you're driving a million people per day for traffic. Could you give me some kind of goal for traffic over time? And can that get to 10 million? I mean, a million feels like a lot to me, but maybe they don't think it is. So I'm interested in growth of traffic as a metric. Secondly, Trump, I've never heard you talk about China before. And we're right on the cusp of a new President who says he's going to put big tariffs on China. So could you give us the number of how much is China of your revenue? And how much is at risk if we start putting tariffs on China? And then, third, Abby, you guys did a great demo. I think Abby's a great product. Can you tell me how awareness is going to get the self-serve products? So I've been curious as to like how you actually tell small and medium investors that Abby exists as an option for them to drive advertising. Could you update us on those three things? Thanks.

All right. So good morning, Laura. Thanks for the question. So Taboola News is really an exciting business because not only do I think it's going to become and has a chance to become a significant growth driver for the company, I mentioned before, I think it can be hundreds of millions of dollars of incremental revenue for the company and very special type of access to supply and data that as you work with consumers before they ever open their browser, ever get to search and social. So we are kind of like their first main dish, if you will, introducing them to products and offering and content before they even start their journey. So it's a very unique access to consumers. I love that business. Two, and again, I said financially it can be significant. And as I look at the trends in the industry with search and Gemini and social networks and all those things, policies being changed, becoming a source of traffic for publishers is as important, if not more, to actually driving revenue. So I think with that, driving over a million people a day is a significant number. Over time, I would like that to be over 10% of publishers' source of traffic. If you think about it today, when publishers opened their Google Analytics to see where is traffic coming from, they're seeing usually 20%, 30%, sometimes more coming from search, 20%, 30% coming from social, and then the rest is very, very insignificant. I would like us to be kind of like a double-digit source of growth, a source of traffic for them, so that over time, much like companies are having SEO strategies and perhaps in some companies all they do is optimize for SEO, people will optimize for Taboola. We…

And then regarding, sorry about that, Laura, regarding your question about Trump and the impact of potential tariffs on our business overall. So our Chinese business, which I think, to your point, is a good proxy for how big an impact that could have. So it's low single-digit percentages, probably 3% to 4%, depending upon how you measure it, demand side, supply side, et cetera. A big, decent portion of that is Chinese demand on Chinese supply or Taiwanese demand on Taiwanese supply or the like. So that would not obviously be affected. Some of it is what we call kind of import demand. So it's Chinese demand on U.S. and other countries' supply. That's probably, the Chinese demand on U.S. supply is what would be at risk, but that's a fairly small percentage of our business. I don't have it broken out exactly that way, but it would be 1% to 2% max. So we're not as concerned about that from a direct impact perspective. I do think that there's, we've started working with some of the Chinese retailers who have been spending a lot with Facebook and Google and others, but we're earlier in that journey. So again, we don't have as much revenue at risk there. So that's, I think it's not a big impact on us.

Our next question comes from Jason Helfstein at Oppenheimer.

Hi, this is [Steve Roman] [ph] on the line for Jason Helfstein. So just two questions from us. One, is the 3Q TAC rate representative for next year and any color as we're thinking about modeling next year? And then secondly, I'm just asking for a progress update on filling the Yahoo inventory. What inning are we in roughly? Thanks very much.

So let me take the question about kind of next year expectations. So I'll talk kind of generically about that. So first of all, we don't really want to guide now. We'll guide in February. We're obviously happy that we've hit everything that we said we were going to do in 2024 thus far. And we reiterated guidance. So we expect to meet all of our goals this year. And we are excited about, we have many growth drivers going forward. So we have continued opportunity to grow advertiser budgets. That's the biggest thing we need to do, by the way, to continue to grow our businesses, grow advertiser budgets. And our investments in AI, like Abby and our Max Conversions, algorithms, those are the keys to continue to grow that. They drive lower churn and higher net dollar retention among advertisers, which is, again, what helps us grow the budgets over time. We also have growth drivers in our core with great supply from Yahoo, Microsoft, Apple, other publishers that we've expanded and grown with over time. So I think, we believe we have a lot of supply, and we have an opportunity to grow revenue as a result of that. And then beyond core, Taboola News, e-commerce, our bidding, they're all growth drivers that we think can help us grow faster in the future as well. So while we don't specifically want a guide, we're excited about our growth prospects. And we're happy to continue to say that we expect our long-term growth rate should be 20% plus. And then I would also say, as Adam said earlier, we're going to have an Investor day in 2025 in probably March. And I think that's a good opportunity for us to go deeper on where are we investing? Where do we see the growth coming from? How is it going to work? So I think that'll be a good opportunity to go in more depth.

On the out front, just to say that, one, we're obviously, as you can see with our numbers, we're happy with our progress. We're laser focused on advertiser success and migration of Yahoo, Omni advertisers. We're seeing very good results, really amazing names that are happy and expanding. And it's great to see the partnership we have with Yahoo and the ecosystem around us. And just to say one more note about that, I think in general, what we're seeing more and more as Yahoo becoming part of our core business is that that partnership and that type of partnership is really contributing to Taboola's success and growth over time. As I think about having such special, unique, exclusive access to supply, special, unique access to data and contextual segments we can bring to market, it's something that advertisers really want. Google has YouTube, Amazon has Twitch, and we have Yahoo and Apple and others. So the more we can grow that type of uniqueness in the marketplace and make advertisers realize the opportunity with the open web, non-search, non-social, I think it's going to be a big part of our strategy moving forward as we think about becoming the performance advertising company of the open web.

Our next question comes from Andrew Boone at JMP Securities.

Adam, I'd love to hear more about the outcome of you guys introducing more automated tools. So if I think about Abby as well as Max reducing friction for advertisers, has that led to an increase of smaller advertisers? What's the outcome of that other than just saying, hey, budgets are a little bit more robust and you guys are getting more spend there? And then, if I think about some of the other drivers across the business, I'd love an update in terms of e-commerce and what you guys are seeing there. How do we think about that contributing to 4Q? And then more broadly, what can we expect on the product side as we think about the roadmap for '25 and beyond? Thanks so much.

Sure. Hey, good morning, Andrew. So on the first one with Abby, it's early days in terms of what's the impact for us to share, but let me say two things as investors think about our business and our advertiser business. In terms of the product effect, what you really want, we want it easier for advertisers to join, which does mean we want less churn, which means we want more advertiser count over time. We have about 15,000 to 20,000 direct advertisers, which again, outside of Google and Facebook, it's a remarkable, astonishing number to have the vast majority of our revenue coming from advertisers who work with Taboola's technology and Taboola's AI Direct. That is very special and it gives us the license to invest more in AI and invest more in technology and improve advertiser success. Abby is a pillar on that journey. And like I mentioned, we look at the entire journey so that advertisers essentially have it on the one hand, very simple to join and be successful, that is on the churn front, but then also be able to spend more and more with us. And that could be more of, like I mentioned earlier, sort of an account management agent and other tools that we can bring to market. Over time, I think generative AI can do things as far as even generating landing pages for advertisers. Today, if you think about campaigns that advertisers create on Google, Facebook, and Taboola, the landing page tends to be the same between all of those. Over time, I think we can even be in a situation that the landing page is personalized to me. Andrew, you might like video experiences. You'll see videos on landing pages that will help you convert. And I may like…

So you also asked about e-commerce and kind of where we're going there. So I guess first, I would say e-commerce continues to perform well. It's one of the reasons that we see, that we expect to have an accelerating growth in the fourth quarter and a very big quarter in terms of our year-over-year growth and the like. So I think it continues to perform well. And generally speaking, I think where we continue to invest there is basically in, similar to our core business, it's in making it work better for advertisers. And now we're investing more in sales teams to go out and get more retailers for that business and then expanding globally. So I think that's kind of where we're focusing on growing that business over time.

One more note to that is, and I mentioned that in the letter, one of our, actually the largest growth segments within our e-commerce business is what we call Shops Your Likes, which essentially is a way for creators that use social networks to come to Taboola, pick up a product they like, or actually an offering of multiple products that they like across the open web, create authentic content that they are passionate about, link to it on their social network, and drive conversions and real products being sold through that channel. I can tell you we're getting calls from retailers leaning in and asking us questions about that. They want more of it. And what's nice about it, it's not only driving financial growth, but also it's really a new era. We're seeing those creators, some of them are quitting their daily jobs and all they do now is create content with Taboola for commerce. So it's a whole new ecosystem that we're growing. We're early stages, but it's growing really fast. And then also those retailers now have access to content, which is very, very good content. So they can reach out to those creators, they can partner with them. So it's a win, win, win across everyone. And again, I like that because it's a new type of supply, a new type of financial growth for us within the e-commerce. And I'm very happy that we're part of that ecosystem.

If I could sneak one more in, Steve, if I think about headcount and where you guys have allocated dollars across the P&L, you guys have been very consistent in terms of 2024. How do you feel about your staffing levels as we think about '25? Is there any areas that we should expect investment as we look at next year? Thanks so much.

Yes. So I think, and in fact, you saw that in Q3, our sales and marketing expenses were up a bit versus Q2 linearly. And that is a starting point of investing in more sales teams, especially to bring in more of what we're calling internally kind of our ideal customer profile customers, which would be customers who we think do particularly well in our network, especially in the area of direct-to-consumer products. So think of it like Ooni Pizza Ovens, who's a big advertiser of ours, and they're selling pizza ovens directly to consumers. That's the type of advertiser that tends to do relatively well with us. So we're investing more now in sales teams around that, as well as some other areas, which is more about bringing in really good, larger brand dollars. Not necessarily the biggest brand, by the way, not branding, they're still performance, call them brandformance, but they're basically big or emerging enterprise advertisers who spend big on the internet. So we're investing more in sales teams to address them as well. So yes, we are starting, that's probably the biggest area of investment for us, is investing in sales teams to kind of go after markets that we've identified are particularly lucrative for us and to bring on more demand. Because as we've said, like right now, the quality of supply we have is amazing and the amount of supply we have is amazing. And we need more budgets basically to continue to grow the business, which when you've got good quality supply, you should be able to get those budgets, but it is a sales effort. So that's where we're investing.

Our next question comes from James Kopelman at TD Cowen.

The first one is for Adam. You mentioned in the letter that most publishers have yet to adopt AI in a meaningful way. We've seen similar commentary in some cases across the broader ad space, and it seems like education is probably a big part of it. How are you approaching educating publishers to get them accustomed to all these new and admittedly disruptive AI tools? And are you finding that clients are a lot more comfortable than they were, say, six months ago? And then I have a follow-up for Steve.

Hey, good morning. Yes, I think innovation like innovation, a lot of times ecosystems tend to change when the upside is or downside is significant. And it's one of those moments now when you look at AI and what it can create now more than ever at the same time, you're looking at also the downside if you choose not to change, where you're seeing much more kind of leaned in conversation in general. And so, as an example, a year ago, two years ago, three years ago, the notion that homepages will be fully personalized by machine and the article pages will be fully personalized, even to the extent that the design will change by machine, was ludicrous because that was a very sensitive area to tap into. But these days, when you're seeing things like, TikTok, For You Page doing such an amazing job attracting more than an hour a day of consumers engaged, solely driven by AI. And we're seeing obviously the growth of OpenAI and Gemini. Everyone wants to see what is their part of it. And I think this is why a lot of the growth we're seeing with adoption is because the industry is changing around us. And we're just the best position to, one, offering those technologies because we've been investing in them for a long time. And two, we have the trust of publishers that I think more than any other company in the world, I don't know any other company that has such a vast list of Tier-1 trusted publishers that that wants to change and grow together. And you're seeing those renewals and you're seeing the exclusivity and all those things. So I think it's a combination of the industry is changing around us. And then we're well positioned to just tap into that. So that's why I think that happened.

And then for Steve, what were the key drivers getting you back to positive yield growth? And more broadly, can you just remind us of the dynamics behind yield trends over time and mid the Yahoo ramp, as well as your work on performance advertising? And finally, looking ahead, how should we think about yield trends in the next couple of quarters as we head into 2025? Thank you.

So good question. So I think the key drivers to get us back to positive yield growth, basically it was that we had completed onboarding the full supply from Yahoo. And then we had transitioned, early this year. And then we had transitioned the advertisers fully by the end of Q2. So that gave us the opportunity then in Q3 and going forward to start to grow those advertiser budgets. And growth of advertiser budgets, as long as the supply is relatively stable, is what drives increased yield over time. So I think the key driver was our supply had stabilized. And now we had brought over those advertisers. So we had a chance to start growing them. And that's what brought us back to positive yield. Looking forward on that, our expectation is that we will continue to drive higher growth of our demand side than we will on our supply side, intentionally, by the way, because we have really good supply. So that'll drive positive yield growth. So we do expect it to remain positive and to continue to drive positive yield going forward. And as you alluded to, a big part of that is our investments in AI automation like Abby, our investments in our algorithms such as Max Conversions that make it easier for advertisers to work with us and also make them more successful. So those investments are what will help drive higher advertising budgets with us and will help drive that higher yield over time. So my expectation is now with all the onboarding and the supply we've done, we should have a more stable supply environment. We should be able to grow yields here going forward, which by the way, also gives us the opportunity in our core business to grow the core ex-TAC margin over time as well, which I expect to do.

Our last question comes from Mark Mijatovic at The Benchmark Company.

Steve, maybe a follow-up to the headcount question and specific to Tier-1, ad sales capacity. Can you just talk about where you are today and how much of a limiting factor that is on you fulfilling all of the Apple supply that you have today? And I assume that there's probably other Apple-like publishers out there that you can also address, but you need that sort of Tier 1 sales capacity to address. And I'm just curious sort of how you, where you are today and what you, where you expect to be, over the next six months there in terms of that Tier 1 sales capacity. Thanks.

Yes. So I think, I wouldn't say it's necessarily a limiting factor per se, but I do think we've identified specific opportunities to invest in our sales teams and our sales efforts to drive additional demand that we think will be positive ROI and will help us drive increased performance, increased yield, in essence, from our supply. So we're obviously doing that. And that's what I talked about. The one, the direct-to-consumer sales team, we're investing there. The second one, which we call internally emerging enterprise which is kind of mid to larger advertisers who are, also, focusing on performance campaigns. So we're investing there. So I would say that we've definitely identified some areas where we think we can invest and have positive ROI and drive more ad dollars. I also think, though, that there's a big opportunity for us just to grow our existing advertiser base based on the fact that we've got that they're seeing positive returns from us. When you have a huge influx of supply, like we've had over the last, basically, nine to 12 months, what happens is the supply becomes cheaper initially, and advertisers typically see higher -- better CPAs, lower CPAs, cost per acquisitions. And then over time, you get more budgets from them because they say, oh, wow, this is working well. So we're now in that, oh, wow, this is working well phase, and we need to go get more budgets from them. So I think the opportunities we have identified around direct-to-consumer and emerging enterprise and the investments we're making in new sales teams there are part of the story. The other part of the story is, we expect to be able to grow budgets from existing advertisers with our existing team, which is obviously, best way of doing it because that's higher productivity. So I think, we haven't said exactly where we get to on the sales teams, and I think we should talk about that more when we guide to 2025, but I think that gives you kind of a flavor of where we are and what we're investing in.

That's helpful, Steve. And then maybe one last question, unrelated. You talked about, I would call these sort of three relatively new revenue opportunities, the top 10 global OEM, the China advertiser, and then I would call it maybe more of an emerging new relationship with Microsoft Outlook. Could you [fourth-rank] [ph] maybe those opportunities in terms of revenue over the next six to 12 months, just trying to get a sense of how much contribution you can expect from either of those three? Thank you.

Yes. So good question. One that, frankly, I don't even have in front of me. I would say that all three of them are good-sized opportunities. By the way, all three of those are, in essence, supply-side opportunities. Well, two of them are supply-side, one of them is demand. So the Chinese retailers are, that's a demand-side opportunity. The other two are more supply-side opportunities. But I'd say, in general, all three are significant opportunities, and all three we think can be meaningful to our growth over time. But frankly, we haven't quantified them. I'm not sure if we necessarily want to, and I don't even have it in front of me. So sorry for the vague answer, but we don't have that.

This concludes the question-and-answer session. I would now like to turn it back to Adam Singolda for closing remarks.

Thank you again, everyone, for joining us this morning. As you can see, I'm very happy. We're very happy as a team with our Q3 performance, exceeding revenue, ex-TAC, and adjusted EBITDA guidance, as well as raising our 2024 free cash flow target. Even more, I'm very proud of my team's hard work and the resilience they've shown. We'll continue executing on our strategy, launching new products like Abby, and delivering on our financial targets. I look forward to seeing everyone soon and hope you can join us for Investor Day early next year. It's going to be great. Speak soon.

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