Good day, and welcome to Outbrain Incorporated Fourth Quarter and Full Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd like to turn the call over to Outbrain's Investor Relations. Please go ahead.

Good morning, and thank you for joining us on today's conference call to discuss Outbrain's fourth quarter and full year 2024 results. Joining me on the call today, we have David Kostman; and Jason Kiviat, the CEO and CFO of Outbrain, which will operate under the Teads brand. During this conference call, management will make forward-looking statements based on current expectations and assumptions, including statements regarding our business outlooks and prospects and our recently complete acquisition of Teads. These statements are subject to risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. These risk factors are discussed in detail in our Form 10-K filed for the year ended December 31, 2023, in our definitive proxy statement filed with the Securities and Exchange Commission on October 31, 2024, and as updated in our subsequent reports filed with the Securities and Exchange Commission. Forward-looking statements speak only as the call's original date, and we do not undertake any duty to update any such statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's fourth quarter earnings release for definitional information and reconciliations of non-GAAP measures to the comparable GAAP financial measures. Our earnings release can be found on our IR website, investors.outbrain.com under News and Events. With that, let me turn the call over to David.

Thank you, Meg. Good morning, and thank you for joining us today. On February 3rd, we closed our acquisition of Teads. This merger brings together two open Internet category leaders, combining the extensive expertise of our branding and performance and of Teads in video and branding into a single solution for omnichannel outcomes across the marketing funnel. This new and expanded company will operate under the name Teads. It's a huge opportunity to take advertising on the open Internet to the next level. Today's open Internet platforms focus on scale and efficiency. Marketers have shown us they expect more from their advertising. They need a partner that can surface the meaningful moments in the consumer's buying journey, using a deeper understanding of audience engagement and behavior to identify when they are ready to discover new products or services and evaluate purchase decisions. Our unique dataset and AI-driven prediction technology better positions us to provide these solutions. The new teams will better serve enterprise brands and agencies, as well as mid-market advertisers and direct response advertisers by delivering elevated outcomes from branding to performance objectives. This foundation will enable us to derive new incremental value from the open Internet as a true brand form and solution. Now, let me provide an update on Outbrain's standalone Q4 and full year results. For Q4, I'm pleased to report that Outbrain delivered both Ex TAC gross profit and adjusted EBITDA within our guidance range. We also generated record free cash flow. This is part of our continued trajectory for several quarters. Q4 results were driven by strength in the same key pillars we presented to you over the last couple of years. These will continue to be important drivers of our business. The first pillar, expanding our share of wallet from advertisers. It is…

Thanks, David. As David mentioned, we achieved our Q4 guidance for gross profit and adjusted EBITDA, generating significant free cash flow in the quarter and for the year, as we saw solid profitability and cash generation, as we see continued benefits from the changes we've been making to our revenue mix and cost structure as noted on prior calls. Revenue in Q4 was approximately $235 million, reflecting a decrease of 5% year-over-year. So total ad spend was materially flat year-over-year during the quarter and increased year-over-year on a full year basis. New media partners in the quarter contributed 9 percentage points or approximately $21 million of revenue growth year-over-year, and net revenue retention of our publishers was 86%, which reflects downward pressure of ad impressions, particularly from one key supply partner, as noted in prior quarters. And logo retention remained high, finishing for the full year at 98%. We saw CPCs remain stable to positive, netting to a slight increase year-over-year for the quarter -- for the second quarter in a row. This, along with continued improvements in click-through rates, drove further growth in RPMs, which have improved in each quarter of 2024. Ex TAC gross profit was $68.3 million, an increase of 7% year-over-year, continuing the trend of acceleration and outpacing revenue for the seventh quarter in a row, driven primarily by net favorable change in our revenue mix and improved performance from certain deals. While Ex TAC gross profit continued year-over-year growth in Q4 on the strength of our growth areas and positive momentum of RPMs, as noted in prior quarters, one of our key partners transitioned to new bidding technology and we completed the transition in early May 2024. This volatility continued to impact our overall growth in Q4 by a high single-digit percentage and our overall…

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Andrew Boone with Citizens JMP. Please go ahead.

Good morning and thanks so much for taking my question. I wanted to ask about the transition of publishers and advertisers onto what is the combined platform. Can you guys help us understand where we are in that transition, whether there's any concern around dis-synergies from maybe potential leakage or anything else that you guys are seeing as we understand that 1Q25 guidance? And then a little bit of a bigger picture. Yesterday, you had a competitor talk about potential issues with the TAM of native advertising. Dave, it would be great if you can just address that. What are you guys seeing around demand for native advertising and that format more broadly? How do you guys think about the opportunity? Thanks so much.

Thanks, Andrew. So I'll take that. So first around the transition. Our focus right now was to sort of unify the teams, start cross-selling. We have a very clear roadmap around the integration of the platforms and a strategic roadmap that is focused both on the traditional publisher side and particularly on CTV and the ability to deliver performance on CTV. So that's -- we've had six months of planning to do. So we have that in place. Eventually, what we plan to do is really to deliver a lot of the performance capabilities from Outbrain into Teads Ad Manager, which is the platform where we're going to be serving primarily brands and agencies and SMEs. And we're going to continue to invest in our DSP business for direct response advertisers. The tech transition and integration will take time, but our teams already sort of are cross-selling with the back office supporting that. We already had, I think, three actually cross-selling opportunities that we are answering, which is super exciting. And in terms of the sort of core legacy market, I think we've been talking for the last two, three years about three core growth drivers that actually Andrew I repeated today. One is expanding beyond the feed. So we have already embarked on that journey a couple of years ago, today it's about 30% of our business, is beyond the traditional feed. We sort of saw the need to deliver to performance advertisers at larger scale around the whole open Internet. So we did that. And the second is really shifting a lot of the performance buyers, the direct respond buyers into the Outbrain DSP, formerly known as Zemanta. So that has been another growth driver. We saw 45% growth in the revenue spend, in the ad spend on that platform. And third, if you look at our numbers which we sort of deliver the organic numbers, we've been continuously growing our Ex TAC gross profit and accelerating it. So it's still single digit, but growing nicely towards the higher single-digits and we will continue to invest in these growth drivers.

Thank you.

Thank you. The next question comes from James Heaney with Jefferies LLC. Please go ahead.

Great. Thanks guys for the question. In your prepared remarks, you mentioned the impressive growth that you saw in the Outbrain DSP. Can you just talk about some of the drivers of that growth and how we should think about the strategy for Outbrain DSP going forward under the combined company? And then I just had another one. Thanks.

Thank you. Hi. So generally, I mean, we've been -- we bought Zemanta about seven years ago and we used the bidding technology and the ability to broaden the ability to get more share of wallet from performance advertisers by broadening the ability to bid not only on Outbrain inventory, traditional Outbrain inventory that's connected to Amplify, which is our exclusive publisher base, but to bid outside of that inventory into native, into display and video. So we've been doing that and that has been a growth driver we identified. I mean, traditionally, we used to sell it when we bought the business as a sort of mid-market performance DSP competing with other DSPs. And we identified certain segments of buyers where the performance is so superior to sort of our direct connection, which allowed us to significantly grow the share of wallet with performance advertisers. And I think, again, we will continue -- as I said earlier, we will continue to invest in that. We think it's a great platform for performance and that will serve the segment of direct response advertisers. We will consolidate many of the capabilities of performance that we have from that platform into Teads ad managers, so that our brand and agency segment and SMEs will also be able to enjoy the ability to sort of launch campaigns and sort of in the future -- I talked about brand performance. I mean that's sort of a little bit futuristic, but the ability -- the unique ability to connect in sort of the same instance, the launch of a campaign for branding and performance, I mean it has been proven many times that those two sort of really support each other. We've seen a lot of research also talk about growth in revenue when you combine these two. And we will have the unique capability to really link a branding campaign with a performance campaign. But today, our focus is to sell branding and performance and bring a lot of the capabilities that legacy Outbrain has into the Teads ad manager.

And just to maybe -- sorry, maybe one quick point. We've talked about the last couple of quarters, but for clarity, so when a customer is spending on the DSP, the accounting for it is a net revenue recognition as opposed to a gross revenue recognition on our core demand platform. That's the biggest driver of the disparity between when I say gross revenue for -- as reported on our P&L is down a few points year-over-year, but our total ad spend is up year-over-year. That's the big difference in that. We've actually been growing ad spend overall, it might not reflect on the face of the P&L and the biggest reason why is the shift to the DSP business.

Okay. Yeah, that's helpful. And then just another one on the -- you mentioned the traditional -- supply outside of your traditional feed now, 30% of revenue versus 26% last year. How do you envision that progressing over the next few years under the combined company? Is that -- does it ever get to a majority or how do we think about that?

I think when we report this number, it's sort of just of legacy Outbrain, so as a -- sort of as a percentage of the combined company, it's going to get much lower, but we continue to invest. We will continue to invest in that. We think it's a great capability for performance buyers that are looking at buying sort of into display, into other formats. So we think that is a growth driver that will continue to support our overall growth.

Great. Thank you both.

Thank you. Our next question comes from the line of Ygal Arounian with Citi. Please go ahead.

Hey, good morning, guys. Maybe just on the Teads sales force factor as we're transitioning out and that impact in 1Q, you talk about better performance in February. Just how is that trending? And as we look at the full year EBITDA guidance, maybe relative to the initial outlook you had when you proposed the merger, what are the factors there? Is it a slower rollout of the cost synergies? Are there revenue synergies in 2025 at all? Just help us kind of bridge through the integration over the course of the year and into next year?

Sure. So maybe I could take both of those, David, certainly feel free to add. So as far as what we've seen with the legacy Teads business and maybe just quickly a disclaimer that the closing date of February 3, so our guidance forward and our reporting, obviously in the future will be effective as of that day. For transparency, as I said on the call, we did share in the earnings release the legacy Teads 2024 results by quarter just for transparency because we do plan going forward to talk about the combined business. So obviously, right now, just based on the fact that we're so recent to closing, I'll give a little color on the two legacy businesses separately for Q1 and for how we see the year playing out to answer your two questions. So in terms of the Q4 legacy Teads business, we talked at closing about the idiosyncratic drivers of French political instability and as you pointed out, the sales force decline and just the merger -- kind of pending merger impact, distraction overall that the U.S. and global team saw as a headwind. We've seen both of those really turn around in the last couple of months to different extents. So with respect to France, we saw the recovery very quickly in January, returning to year-over-year growth, which really proves that that was really a one-time thing that's quickly snapped back. In terms of the distraction, the global revenue and ex TACs that we're seeing from the legacy Teads business has improved in January versus Q4 on a relative year-over-year basis, in February versus January on a relative year-over-year basis, and we feel good about obviously the March pipeline based on where we are now entering March. So we've seen positives bringing the team…

I just want to add a couple of points. One is really there is excitement on the sales teams around the cross-selling and we've seen already some actually materializing and been seeing many customers and the feedback is excellent. So I think that's not something that sort of we're baking into what you see here. And I will talk about CTV, also has been -- it's a business that last year for Teads, it close to tripled. It was 10% of Q4 and it's going to be potentially a higher percentage in Q1. So we see a lot of opportunity around that business too. And when CTV grows, it also helps Teads, particularly, because of the omnichannel capabilities. So that will also have a positive impact around the online video business, which we've, I think, talked about it when we announced the deal. What we see when advertisers spend both on CTV and online video with Teads, it's normally 50% the higher total spend than when you just spend on one of the platforms. So the growth of CTV will also, we believe, continue to support growth in the online video.

Okay. That's really helpful. Thank you. And maybe just a follow-up on the CTV opportunity, particularly given the strength that Teads is seeing there. And just kind of -- I think what you're implying this shift from where CTV has been historically, more upper funnel and brand and there seems to be growing focus around performance. Is that a learning change for advertisers? Are they kind of knocking on the door to be a little bit more performant and maybe just what's that -- whether it's competitors -- lower conversations with advertisers, what's that like maybe kind of broadly, that would be helpful. Thank you.

So I would take that -- so I think we're very excited about CTV and the progress that Teads made over the last couple of years, which has been mostly focused around branding and sort of really leveraging the joint business partnerships that Teads had with more than sort of 50 of the most premium brands of the world that are sort of doing omnichannel and video with them. We believe that the performance is a huge, huge opportunity. We've had many of our SME buyers ask us for video and ability to deliver on CTV. We think it's the early days. I think CTV is a medium that will sort of drive a lot of value for performance, both for brands. I mean when you talk about enterprise brands that we want to drive not just brand awareness, but eventually want to convert to sales and for small-medium enterprises that today video production with AI is in a different level than it was before. So you can generate those creative assets. A part of the strength of Teads is the sort of studio, which is helping advertisers take those assets and make them sort of more interactive and trigger more of a sort of either attention or performance. So we believe that the combination of Teads' capabilities, the exclusive placements that Teads has on CTV, the huge client base, customer base that Outbrain has on the performance side, the combination of those is going to be something that is pretty unique in the market and it's a significant part of our strategic product roadmap investments.

Great. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Laura Martin with Needham & Company. Please go ahead.

Hi, there. So I appreciate the synergies, they go up every time we talk. So at the high end, at that $60 million to $75 million of synergies, how much of that is costs and how much of that is revenue synergy at this point?

Sure. So I can give some color to that, Laura. Thanks for the question. So, yeah, we estimate for 2026 an annual number in 2026 achieved of $65 million to $75 million. Of that 60 -- 6-0 is costs. I could break that down further. And then the remaining 5 to 15 is the EBITDA impact of revenue synergies. So we're keeping that revenue synergies number fairly conservative for these first couple of years here. It is, I think, the biggest long-term opportunity for sure and what makes us all very excited between the various drivers there, cross-selling and geographies and just the data -- combined data impact. So that one's big, but we're keeping it pretty small for our estimates right now. The 60 of costs that we expect to achieve by next year, that is -- three quarters of that or $45 million is personnel-related. And as David said, we've actioned the majority about 70-plus percent of this already. So this will -- this is already secured. We will have a limited impact in Q1 just based on the timing, but it should play out over the next couple of quarters and get there by year-end pretty confidently. The other $15 million of those -- of that $60 million of cost is a combination of non-compensation, which is things like headcount-related items, software licenses, you know, combining offices, community, et cetera, discretionary spend like on marketing and then of course professional fees and things that you just don't need to have anymore. So that one will play out a little bit kind of in time. Some of them are right away, some of them take time until you do your insurance policy or do your marketing events, et cetera, but we have pretty high confidence in that number as well with some upside. And then the third area there is traffic acquisition costs, which as you know, is the largest cost here. This is the most exciting one for me personally. There's just always a lot of room to optimize how we put our demand on supply to optimize our margins from a tax perspective. We've already connected the pipes of supply to demand in both directions and we already have items flowing at a small scale right now, but we do believe that we're able to capture a several million dollar opportunity in the next couple of years from just better optimization of putting demand on supply where it makes more sense.

Just in context on the top line synergies, I mean, we're talking here on what we sort of giving in these numbers, it's less than 2% in total. So we believe there's significant upside there.

Okay. Second, in the press release, you said that your go-to-market is going to be Teads. Does that imply we're changing the name of the company, we're changing the ticker symbol. Can you expand on this comment in the press release that you're going to market over Teads going forward?

Yes, Laura, so when we announced the deal in the -- when we announced the closing, we said, yes, we're going to move forward and operate under the name Teads, the name -- we made a decision to take that name. It's -- we call it the new Teads. I mean, if you look at the old Teads logo and positioning, it's absolutely refreshed Teads, in the sense that it's combining performance capabilities with branding capabilities, many more formats. So we refreshed the whole branding and positioning of the company and we're going to be calling it Teads, and that will be a name change and over time also a ticker change. So we are very excited about this sort of change. I think the market in sort of our industry has been very well-received. I think Teads brand is associated with sort of quality premium brands, video, which are the areas where we're going with CTV. So we felt that this is the right decision. And I think everyone also at legacy Outbrain is very excited about it.

Okay. And then staying with you, David, my last question is about news. So the drumbeat of ad agencies talking about we need to fund news is really getting louder. My question is, do you see money coming back into news or do we still have entire agencies that are buying no news regardless of whether it's political or war? Is there any money coming back into the new genre that you're seeing?

So I would say, no, A, our mix of inventory is way beyond news, but I do see some positive trends. I think it's early days. I think you and I talked about it. I mean, we're in at CES. There's a lot of effort going on between sort of the industry talking to CMOs and to the agencies about sort of the value actually and the fact that having brand advertising need to news is a positive impact. So I think it's happening. I think it's small steps in the right direction.

Okay. Thanks very much. Appreciate it.

Thank you.

Thank you. Ladies and gentlemen, that brings us to the end of the question-and-answer session. As there are no further questions, I would now like to hand the conference over to the management for closing comments.

So thank you all for joining us. As you can -- I hope you can see how excited we are about this combination, the new journey we're embarking on. I think we are very excited about sort of the legacy Outbrain business and the growth drivers. We can see the benefits of the combination already materializing and we look forward to continuing to update you on the progress. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.