TBLA - NASDAQ

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 in users visiting our publisher sites through the adoption of new distribution channels. Today, most traffic to publishers come from search and social. We're seeing OEMs and utility apps integrating new feeds to increase the engagement they have with their user base, and that leads to a rise in traffic to publishers driven from those new sources of traffic like Taboola News and others. And third, we see growth in our ability to drive more revenue per user. Publishers are looking to diversify the revenue streams and take advantage of the editorial clout and trust they have which social networks don't. This includes things like e-commerce, subscription, and more. Our long-term exclusive agreements are a significant competitive advantage for Taboola and provide a predictable base of high-quality inventory for our advertisers. As our publisher network increasingly adopts AI like Homepage4U, Newsroom, and Commerce Widgets, our supply base becomes bigger and stronger. This is great for advertisers and great for Taboola. As you know, we're laser-focused on making advertisers successful and growing our yields as a result. We believe Taboola's greatest opportunity for growth is by growing our advertiser base and getting more budget from advertisers given our huge access to users. It is very encouraging to see yields returning to growth this quarter. A lot of it is driven by investment in AI and advertiser spend growing globally. We are continuing to make strides growing ad spend in important international markets like China where we saw advertisers grow their global spend with us by 2x versus last year. This is the second quarter in a row where we're seeing this trend. You can see a great example in our shareholder letter of how spending is ramping with a major Chinese e-commerce company as we prove how we can deliver strong performance for them at scale. One thing that is unique this year is the learnings we've had about the opportunity to attract Tier-1 advertisers to drive performance. It started with Microsoft years ago and it ramps meaningfully this year as we rolled out Yahoo and Apple. One of our initiatives to attract these Tier-1 advertisers is called Taboola Select. It is where Tier-1 advertisers can work with us to not only be on premium publishers like CNBC, ESPN, USA Today and others but also buy an experience that is even more premium where they have 100% share of voice. A nice example of that is on Yahoo home page where you can see us rendering beautiful ads that are on their own surrounded by the total recommendations. Tier-1 advertisers love that. It is premium and it performs. We're seeing good traction with major car manufacturers, health insurance carriers and food chains. We also partnered with Jounce Media to certify that Taboola Select is free of made for advertising also known as MSA sites reinforcing our commitment to creating brand safe environments for advertisers. I mentioned Microsoft, Yahoo and Apple being big contributors to our learning to attract Tier-1 advertisers. Now let me share a bit more about how we're doing with those. We've been working with Microsoft for nearly a decade now and we feel good about how our expanded partnership is progressing this year. Our technical integration with Xandr is underway and we expect to onboard additional premium inventory by the end of Q4 growing Microsoft even further from where it is now. We are particularly excited about onboarding Outlook mail inventory as we'll now provide our advertisers with access to two of the largest email providers in the world, Yahoo mail and Outlook mail. This has the potential to drive more adoption with performance advertisers specifically focused on email marketing. Now speaking about Yahoo, our sales focus to expand ad budget on Yahoo with Tier-1 advertisers is progressing well. The test of new formats is progressing as expected and showing good results for both Yahoo and Taboola. We continue to expect the test to be concluded in Q1 and are currently working with Yahoo on growing omni advertiser spend on the rest of the Taboola network. This is very small now as we were very focused on Yahoo first but it does represent an area of opportunity longer term for Taboola. Finally for Apple, our focus on sales enablement is seeing significant traction with over 2x growth in the numbers of advertisers spending on Apple inventory in Q3 when comparing July to September. These are all some reasons why we're excited about our core business and the growth potential. Next, I want to move to growth drivers beyond our core focusing on Taboola news and e-commerce. For Taboola news in Q3, we announced the expansion of our partnership with Xiaomi, one of the world's leading smartphone brands for an additional four years. This renewed agreement goes beyond our original collaboration allowing us to enhance our presence in new markets and with more touch points on each device. In addition, last quarter we mentioned that we signed a new partnership with a top 10 global OEM and while we have not shared yet their name, I'm happy to say we started rolling out in October. I really like Taboola news as it's a special access to users for our advertisers but also creates a meaningful driver of traffic to our publishers. It is still small now where we send about more than a million people a day to our publishers but Taboola news as a new distribution channel to publishers can grow a lot. Turning to e-commerce, e-commerce is a great place to be. We continue to witness impressive growth in new channels especially in social commerce access through our shop your likes creator offering. This is where people with social influence can come to us, pick up a product they like and are passionate about and create content. This content is authentic, retailers love it and they get paid when they drive conversion. In addition, a good amount of the strong growth we're seeing in China ad spend this quarter is coming from big e-commerce companies seeing a lot of value in working with Taboola to drive higher customer acquisition and purchasing activity side-by-side to their spending search and social today. To wrap things up, I'm happy with our Q3 performance, bidding our revenue, ex-TAC and adjusted EBITDA guidance, reiterating our guide for the year and raising our 2024 free cash flow target. We remain laser focused on driving demand and improving advertising success. Our investment in AI with technologies like Abby, Maximize Conversion and Ad Maker are central to our efforts and we're excited to announce even more innovations in the near future. We're going to have an Investor Day early next year which is where we intend to share many, many new developments alongside our partners, so stay tuned for more. Now, before I turn the call over to Steve, I do want to take a moment to express my pride in our global team. With everything that is going on in the world, it is inspirational for me to witness Taboola employees' resilience, hard work and spirit. All of these efforts are showing up in our numbers and in industry recognition, including a win at the Digital Technology Award for Best Native Advertising Platform, highlighting a Maximize Conversion case study with Hyundai and INNOCEAN. We were also named a finalist for the AdExchanger Awards in the category of Best Use of Technology by a Publisher for our collaboration with Independent. 2024 is a big year for us and I'm so proud of our execution leading into a strong Q4. We are looking forward to delivering on our guidance and having a very strong close to the year. With that, let me pass the call to Steve to review our financials and outlook in more detail.

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 almost 29% demonstrates our strong focus on cost discipline. With ongoing expense discipline and strong growth expectations, we continue to expect we will approach our long-term adjusted EBITDA margin target of 30% for the full year. The GAAP net loss for Q3 of $6.5 million narrowed significantly from $23.1 million for Q3 2023. This GAAP net loss included several non-cash items. It included $26.2 million of amortization of intangibles, including the non-cash-based Yahoo prepayment, the latter of which is listed as the commercial agreement asset on our balance sheet. I would note that this is the first time we have taken a charge for the amortization of the commercial agreement asset or the Yahoo prepayment, but you should expect to see continued amortization of that asset going forward. The GAAP net loss also included share-based compensation expenses of $15.4 million and holdback compensation expenses related to the Connexity acquisition of $1.8 million. Excluding those non-cash items, our non-GAAP net income was $22.2 million and was within our guidance range for the quarter. In terms of cash generation, we had approximately $49.8 million in operating cash flow in Q3 and free cash flow of $42.9 million. This includes net publisher prepayments, which contributed $6.9 million to cash flow, and interest payments on our long-term debt, which used $3.8 million. Turning to the balance sheet, our net cash balance remains very robust. We ended Q3 with a positive net cash position of $64.5 million. Cash and cash equivalents totaled $217.2 million, remaining above our long-term loan balance of $152.7 million. Regarding share repurchases, we bought back $10 million of shares in Q3. We still have approximately $56 million remaining under our previously announced $100 million share repurchase program. As you know, when we originally announced our share buyback program, we set the goal to offset dilution and maintain share counts at the end of Q1 2023 levels. At the end of Q3 2024, our outstanding shares were down by 6.2 million shares compared to the end of Q1 2023, so we have exceeded that goal. While we continue to believe that share buybacks are the best use of cash given our current share prices, we are constrained by Israeli regulations limiting shareholder ownership to 25% absent approval of an exception, which is close to Yahoo's current ownership stake. Given this constraint, our share buybacks will primarily be used to offset dilution, and we will also consider paying down long-term debt with our excess cash flow. As always, both the share repurchase program and the debt paydown are contingent upon the availability of sufficient working capital. Looking ahead, I'm optimistic about the trend lines of our business and our team's ability to drive sustained and accelerated growth. We've had three strong quarters in 2024, and I believe we will continue to build on our momentum as we close out the year. Our guidance reflects strong expectations for the fourth quarter. We continue to ramp advertising spend due to our advertiser success initiative, and as contextual data increases due to our increased scale, which will continue to improve our monetization performance. With three strong quarters behind us, we are reaffirming our annual guidance for revenues, gross profit, ex-TAC gross profit, adjusted EBITDA, and non-GAAP net income. Revenues are projected to be between $1.735 billion and $1.765 billion, representing a 22% growth at the midpoint. Gross profit is projected to be between $535 million and $555 million, and ex-TAC gross profit is expected to be in the $656 million to $679 million range. That ex-TAC guidance reflects a 25% increase year-over-year at the midpoint. We continue to expect adjusted EBITDA to be over $200 million for the year. Given our strong performance year-to-date, we are raising our free cash flow target to over $105 million. These targets for adjusted EBITDA and free cash flow represent roughly a doubling of both metrics compared to 2023. Finally, we anticipate non-GAAP net income of $84 million to $104 million for the year. For the fourth quarter, we are issuing the following guidance. We expect revenues to be between $460 million and $490 million, gross profit from $180 million to $196 million, ex-TAC gross profit from $205 million to $221 million, adjusted EBITDA from $83 million to $99 million, and non-GAAP net income from $37 million to $53 million. In summary, we are confident in our ability to grow and scale our business while maintaining a disciplined and balanced approach to spending. Our emphasis is on enhancing efficiency and profitability even as we continue to invest in our growth. We believe that our strategic investments in technology will deliver long-term advantages, which will positively impact our financial performance and benefit our shareholders. You saw our announcement of Abby last month, which is a great example of how investments in technology can help our customers and make us more productive as a business. Our momentum is very strong heading into Q4, and you can see that reflected in our accelerating year-over-year growth rates. This momentum, strong growth, and advancements to our technology bring us closer to becoming a must-buy for advertisers seeking to connect with consumers worldwide on the open web. With that, let's move to Q&A. Operator, can you please open the line for questions?

Thank you. [Operator Instructions]. Our first question comes from

Hi. Thank you. This is Ethan Widell calling in for

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 can become something that publishers need to and can rely on. And as I look at the trend with Xiaomi renewing and expanding, I mentioned a top 10 OEM in the world that has launched and a lot of great conversations that are taking place, and I will say that the opportunity for Taboola News is not only to be partnered with OEMs, but rather with many utility apps and anyone that is trying to go up the food chain and be engaging consumers beyond just the actual utility. So whatever you actually do with your app, you might want to offer news to consumers in a local way, get them to engage with you more than one or two times a day, and Taboola News is such a great global aggregator news that can do that. So I think over time, we might see Taboola News integrated beyond just OEMs, but rather with many utilities that we all love and use every day. There's a question about Abby. I can take that. So first of all, I hope you enjoyed me walking the streets of Manhattan. It was fun and convincing my wife to work with us. That was also great. But on a serious note, I think it was really great to see the feedback we got from the industry about, again, not only simplifying the journey advertisers have as they want to drive growth for their business, and Abby is mainly on that boarding phase right now, such an easy and intuitive way to interact with advertisers, big or small, as they look to become an advertiser. And as you know, Laura, it's very, very complicated for businesses, even the most sophisticated ones, to start a campaign, come up with a CPC or CPM, which bidding strategy, what is the viewable CPM, such a complicated industry. And I strongly suspect that over the next three to five years, we are going to see Meta and Google doing a lot more in that world and Taboola as well, kind of making it very, very simple while still providing transparency and control for advertisers to succeed and onboard. So over time, again, I think this will help us, one, make it easy to onboard Taboola and hope to grow our advertising account. But then even more, just beyond just the onboarding phase, helping existing advertisers kind of manage their campaign, suggest things. I was joking internally that if Taboola had one million account managers, what would be the experience advertisers have? Obviously, we're not going to have a million advertisers, but maybe Abby can imitate that experience. So I really like that. And again, it's one step out of many, many, many steps. You're going to hear from Taboola investing in Gen AI.

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 thumbnails and Steve may like text. So each one will give you an experience that will help them understand the product better, discover the things they like, and eventually convert. So there's just a really long roadmap here on things that we can do. I'd like to see more advertisers, big and small. Abby will, I think at first, help sort of like the mid-size advertisers. Think about maybe a financial services advertiser that wants to be successful but does not have the resources to do so, does not have the team to do it, but now can. And as we continue to invest, and we do have people dedicated to this, we'll have even smaller and smaller advertisers, which is great because it can diversify the advertiser experience for consumers, drive yield growth. And like I said, I think that with just investing, with advertiser success, Taboola can double and triple the company on our existing supply. And as you know, we have no intent to not grow supply, but that still is encouraging because by just doing that, we can grow significantly. So that's with regards to just Abby and Generative AI, and the feedback was really exciting since we launched it.

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.