Good day, and thank you for standing by. Welcome to the Taboola Second Quarter 2021 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to Jennifer Horsley, Head of Investor Relations. Please go ahead..

Thank you, and good morning, everyone. And welcome to Taboola's second quarter earnings conference call. I am here with Adam Singolda, our Founder and CEO, and Steve Walker, our CFO. We issued our Q2 earnings press release yesterday after market and it is available, along with our Q2 shareholder letter, in the Investors section of our website.

Now I'll quickly cover the Safe Harbor. Certain statements today, including our expectations for future periods, are forward-looking statements. They are not facts and are subject to material risks and uncertainties described in our SEC filings.

These statements are based on currently available information and we undertake no duty to update them except as required by law. Today's discussion is also subject to the forward-looking statement limitations in the earnings press release. Future events could differ materially and adversely from those anticipated.

During this call we will use terms defined in the earnings release and refer to non-GAAP financial measures. For definitions and reconciliations to GAAP, please refer to the non-GAAP tables in the earnings release posted on our website. With that, I'll turn the call over to Adam..

one, driving yield growth by bringing Connexity merchants to Taboola's existing relationships with publishers. Business or publishers will make more and we will become even more competitive.

The second synergy is selling to 9,000 publishers of Taboola that exist in Connexity publisher products, such as shopping sections and products alongside editorial content. Connexity is also heavily weighted in the U.S. and we see great opportunity bringing Connexity global by leveraging Taboola's worldwide presence.

And lastly, to credit super data sets, to drive further yield growth to both Connexity and Taboola's partner. In Taboola's execution obsessed fashion, we have teams in place building out the plans on all of these fronts so that we can hit the ground running once the acquisition closes, which we expect will happen by the end of the third quarter.

As I finish my opening remarks, let me summarize saying we are very excited to be a public company and speaking to all of you. We beat our expectation in Q2 and we're raising our guidance this year. This also gives us confidence in raising our expectation for growth in 2022. We expect to grow over 30% on a non-pro forma basis.

Additionally, we previously told you it's expected that Taboola's standalone ex-TAC profits will grow 16% in 2022. With the completion of the Connexity acquisition we are raising our expectation for next year projecting that we will grow ex-TAC gross profit faster at 17% on a non-pro forma basis, despite being a much larger base.

Beyond it all, I can tell you that together with Connexity we will be at the forefront of power recommendations for the open web, as well as e-commerce in the open web as an alternative to walled garden. Amazon has millions of merchants, but merchants mainly have Amazon. That changes now.

I would now like to pass it over to Steve to take you through in more detail our financial performance and guidance..

Thanks, Adam, and good morning, everyone. As Adam indicated, we had a very strong first half of the year and this is reflected in our financial performance. If you read our earnings release, you notice that we beat our Q2 guidance on all measures and we are raising our guidance going forward.

But before I get into specific numbers, let me take a step back and remind everyone of how we look at and measure our business. We are focused on achieving profitable growth. The way we measure our performance against this goal is by looking at two measures. To measure growth we look at ex-TAC gross profit growth rates.

And just as a reminder, ex-TAC is what we keep from our revenue after we pay our publishers. To measure profitability we look at adjusted EBITDA margin. Adjusted EBITDA margin is our adjusted EBITDA divided by our ex-TAC gross profit.

Just as SaaS businesses have a rule of 40 where they always want their growth rate plus their profit margin to exceed 40%, we too want the sum of our ex-TAC growth rate and our adjusted EBITDA margin to exceed 40%. So now let's get back to the numbers.

In terms of Q2 performance, revenue was up 23%, ex-TAC gross profit was up 18% and adjusted EBITDA was up 17% versus Q2 of last year. This strong performance was driven by the good business momentum that Adam mentioned previously.

We are winning new business, seeing good demand in our agency and brand offering which we call Taboola high impact placements, and we are maintaining strong yield overall. Of the Q2 gross revenue growth of $61 million, $23 million came from new digital property partners and $38 million came from growth of our existing digital property partners.

That translates into net dollar retention, or NDR, of 114% and primarily reflects strong improvement in our yield. So, very good overall net dollar retention and a continuation of the positive momentum we saw building through the back half of 2020. Our ex-TAC gross profit was up $18 million or 18% year-over-year.

It benefited from the growth in both new and existing digital property partners as well as from the continued flywheel effect in our business that drives improvements in yield, and which helps us move from paying some publishers on minimum guarantees to paying on revenue share over time.

These gains year-over-year were partially offset by the withholding in 2020 of $10 million in guaranteed TAC payments to publishers that were subsequently paid back in the fourth quarter of 2020. Turning to expenses I would note three unusual items.

First, $76 million of the year-over-year increase in operating expenses was due to share based compensation triggered primarily from going public. Excluding share-based compensation, operating expenses were up $11.8 million or 18.5% year-over-year. Second, I would note that research and development expenses were up $0.2 million year-over-year.

We increased our investment in R&D-related headcount, but that was offset by lower depreciation related to the timing of new server investments. To explain that, in 2020 as we entered a recession we froze new server purchases which reduced depreciation last year.

But as we discussed previously, this year we invested an extra $14.1 million in servers, even above our normal investments, to support our business. This was a growth initiative to see if we could drive further yield improvements.

Finally, I would note that G&A was higher by $8 million year-over-year, which was driven by public company expenses and a partial return to more normal operations following the COVID pandemic.

The strong revenue performance flowed through to profits and resulted in adjusted EBITDA of $40.8 million, up $5.9 million year-over-year, and a ratio of adjusted EBITDA to ex-TAC gross profit of 34.9%, both of which were above our guidance. It is worth noting that we had net loss of $61.4 million, which was $74.3 million lower year-over-year.

This was driven by higher share-based compensation triggered by going public, as we talked about previously. Given the share-based compensation driven loss and an abnormal share count coming from our end-of-quarter public listing, GAAP earnings per share is not particularly meaningful.

I did want to mention though that, for future modeling purposes, we estimate the fully diluted shares outstanding at the beginning of Q3 to be approximately 256 million shares. Q2 produced operating cash flow of $23.1 million and free cash flow of $6.9 million, which included the server investments that I referenced earlier.

We ended the quarter with $585 million in cash and cash equivalents with approximately $350 million coming from our public offering. Following this strong performance in Q2, which was on the back of a strong Q1, we are now comfortable increasing our standalone expectations for Q3 as well as our full-year guidance.

We are now projecting that 2021 full year ex-TAC gross profit will be $468 million to $472 million, which represents growth of 22% to 23% versus 2020. That's an increase from our previous guidance which was 19% to 22% growth..

We are expecting 2021 full-year adjusted EBITDA to be $150 million to $153 million, which translates into growth of 41% to 44% versus 2020. It's also worth noting that this demonstrates a very healthy adjusted EBITDA margin, meaning adjusted EBITDA divided by our ex-TAC gross profit of over 30%.

Per my previous comments about always seeking to beat the rule of 40, our growth rate of over 20% and our adjusted EBITDA margin of over 30% well exceeds that goal. And one very important note, all of these numbers are excluding our pending acquisition of Connexity, which is expected to close in the third quarter.

Speaking of Connexity and looking forward to 2022, we expect to grow ex-TAC gross profit next year by 30% on an as reported or non-pro forma basis. This assumes we have one quarter of Connexity results in our financials in 2021. If we close sooner that would obviously change that estimate.

In terms of pro forma growth rates for 2022, previously we had set expectations that Taboola would grow in the mid-teens as a standalone. In fact, we had projected 16% in the Investor Presentation we used for our Roadshow.

With the completion of the Connexity acquisition, we are now comfortable raising our expectations for next year, projecting that we will grow ex-TAC gross profit at a faster rate of over 17% on a pro forma basis despite the much larger base. I also want to update you on the PIPE resale registration we filed on July 13.

Due to the significance of our pending acquisition of Connexity, we need to put additional information in the PIPE registration before it goes affective. We are working hard on that and expect the revised registration to be ready by early September and we expect it to go effective by mid-September.

Let me just wrap up by saying that I'm very optimistic about the future of the business. We have a great team and we are laser focused on continuing to deliver predictable, profitable growth over the long run. We are proud of our track record of performance which I think demonstrates our ability to execute.

Our track record of success is also aided by a very strong business foundation that lends itself to consistent profitable growth. We have long-term exclusive agreements with incredible publishers, we have a large base of advertisers, 90% of whom work with us directly and even allow our AI technology called Smart Bid to optimize on their behalf.

We have a business that's not reliant on third-party cookies but rather uses contextual signals for targeting. And perhaps most importantly, we have scale. And in our industry scale matters because it drives a network effect that leads to higher yields which is a competitive advantage that drives higher margins.

Finally, I'm optimistic because Connexity adds to all of these strengths.

We are adding a large network of new publishers, 1600-plus direct advertising relationships with great brand name merchants, new forms of data that will help us enhance our yield, and importantly, more scale that will further drive the flywheel that is our competitive advantage. So, we're very excited about the future with Connexity.

And on that note, let's open this up for questions..

[Operator Instructions] Our first question comes from Andrew Boone with JMP securities..

Hi, guys. Thanks so much for taking the question. One on guidance, please, and then we can go to anything. On 2022 we're looking at 11% 2021 revenue -- GAAP revenue growth.

So, as we think about 2022 and the 17% you just outlined, can you help us understand the underlying drivers as we think about 2022? Do we expect revenue to reaccelerate or do take rates continue to expand? And then on high-impact placements, I think Steve mentioned success there.

Can you talk about the potential with brands and just update us on your progress with video? Thanks so much..

Thanks, good questions. So, this is Steve Walker, CFO. So, I will answer the first one about expectations for 2022. So, we would expect that typically our gross revenue should grow at a comparable rate to our ex-TAC, just slightly slower, because we do expect some margin expansion as we go forward.

So, we haven't given specific guidance on it, but I would say that it will be -- the gross revenue growth rate will be much closer to that 17% than it has been this year. So, I think that's -- we expect it to kind of be in line with that. And I'll let Adam answer the question about high-impact placements and brands..

Andrew, good morning and thanks for the questions. So, I already saw some in my data. we're seeing great momentum and feedback from premium advertisers, specifically agencies and brands. With regards to a high-impact placement strategy, let me just quickly explain what that is.

So, right now, and the way I started the Company was to provide editorial recommendations alongside ad recommendations primarily at the bottom of the article page. So, if you read an article on CNBC the bottom of it will say more from CNBC, powered by Taboola and more from around the web powered by Taboola.

The advantage we've seen expanding from that sort of anchor is the opportunity to expand to other placements from the same publisher base. So, we went to a publisher, then we offered them an opportunity to replace traditional advertising placements such as in the middle of the page, read article, homepages, section front.

So, quite completely different high, visible, bigger placements. And the opportunity for the publisher was to replace those traditional ad units with recommendation reels. So, think of, again, a combination of editorial recommendations with -- and this time bigger, higher impact advertising experiences.

And that's something that got a lot of good attention from the advertising community. Last year, you know that we reported $90 million of video revenue and we were seeing that growing in the right direction globally. So, we are signing trading deals with agencies, we're seeing direct advertisers getting excited and the performance is also fantastic.

In this case they measure us more in things like viewability, completion rates, things of that nature. And again, what's to me most exciting is almost the after advantage we have in that bundle, which this is 1 plus 1 equals 3. We already have three-, four-, five-year relationships with these publishers, so they are so open minded to do more with us..

And our next question comes from the line of Sham Patel with CIG..

Congrats on the strong results and the Connexity deal and going public. I had a couple questions. Now that you guys have entered the e-commerce space in a meaningful way, there were a couple other areas that you guys talked about during the stock process, app downloads and video.

I was just wondering how you are thinking about the roadmap there, if M&A makes sense and if there is anything near-term that would make sense there. And then second question, Adam, you talked about this in your prepared remarks.

But with the anything and anywhere kind of approach/strategy -- can you just talk about how you're thinking about the ramp in revenue there? Is that something that you're contemplating ramping next year or is that more of a multiyear initiative? Thank you, guys..

I will start. So, in general I think that short-term will be quite focused and busy. We are so excited about the e-commerce opportunities. It is a huge TAM, it's a $35 billion TAM just in the U.S. Connexity is already one of the largest companies in the world doing that e-commerce for the open web in the media space.

So, if you think about just narrowing those two, bringing the merchants, 1,600 direct merchants onto our 0.5 billion active daily users a day across our global distribution of publishers, the synergies and opportunities are just so exciting to us as management.

And specifically as it can contribute to things that make Taboola even more competitive as we continue to grow. So, driving yield growth, more super data sets, optioning our publishers. I cannot wait to give a call to 9,000 of our publishers and tell them how about starting to launch a shopping section on your site.

Everybody wants a wire cutter, everybody wants a CNET and this is about to happen. So, I'm just waiting for that moment to happen. So, there's a lot of work ahead of us and exciting ones at our team. We are working on building that plan and all of we can move together. So, we are going to be quite busy and focused.

Saying that, I think the fact that our core market is growing so fast and it allows us to have exciting EBITDA margin and dollar amount, that definitely keeps our appetite going.

And I think on that front you should expect us to continue to think about more in the e-commerce space we might be interested in doing, as well as other things such as gaming and app download to be discovered. We've seen Facebook doing such a great job recommending games and things of that nature for people to download and discover.

And I think that's going to be a great opportunity in mobile, especially since that's a big part of our business. So, that's something we're going to continue to consider organically and inorganically.

And then in general, so in the future I think we are seeing good revenue growth from those things, I would say not only in topline growth but also in ex-TAC and margins.

So, as you think about things such as video, which is in our anything bucket, every dollar in the video space from our perspective is not only driving growth, it drives profitable growth even more because the yield is better. So, you should think about these areas not only as growth opportunities but also making us stronger on a profit perspective.

And then beyond those things, other areas that are interesting to us are things such as connected TV, which I speak about often, automobile. We are seeing great momentum in integrating in Android devices and becoming the Apple News for the rest of the world that are not iOS.

So, we have this huge index of content, which goes so much more than advertising space. And that we can put this to good use as we expand to other areas beyond the browser. So, all those things give us a lot of comfort and we are already seeing them paying in a good performance in revenue such as in video..

[Operator Instructions] And our next question comes from the line of Laura Martin with Needham..

Good morning, great results you guys. So, could we talk about the business model, just following up on the prior question, Adam? So, you said you're going to call your clients and you're really excited to upsell them to launch a shopping center on their site.

How do you get paid for that?.

Good morning, and thanks, Laura and everyone, for your questions. How do we get paid for that? So, Connexity has essentially two touch points with publishers today. One is a shopping section. It looks like an Amazon, but it's carrying the brand of the publisher.

And we've all been on CNET, we've all been on the shopping sections that are an extension of the site. And there's so much more trust that goes alongside that environment and Connexity powers a lot of those shopping sections across -- sites across the web.

And the second thing they do is they integrate product recommendations alongside editorial content. And again, we've all seen this before. You read an article that speaks about comparing devices and you buy one of them. So, that -- these are the two main touch points. They have two revenue models or I would say two payment structures.

The first one is CPC, which is most of what Taboola has today. And that means every time someone clicks on a product that's been recommended either on the shopping section, shopping side or alongside editorial content, it gets paid-per-click. That is more than 50% of the revenue.

And then the other types is CPA, which means they don't get paid per click, but they do such a good job recommending their product in the right time that they believe it's going to convert on the other side on the merchant page. And they get paid when someone actually converts. That's less than 50% of the revenue.

So, then when revenue is being generated it's being then shared with the publisher, again, very similar to what Taboola does today, only they live in a parallel world which is e-commerce.

So, that's why when we call our publishers and tell them let's do those two things Connexity can do for you, from their perspective it's going to fall exactly in line with what we do with them today. We are going to expand the pie, we're going to grow the pie, generate more revenue this time from e-commerce and pay them a revenue share.

So, what that means is the revenue per publisher has an opportunity to grow. So, it's like a vertical growth..

So, what I hear you saying is that when you take Connexity out of the US into your international sites, you're going to keep the Connexity business model and not really integrate them into your more core business model? You are going to keep theirs on the e-commerce stuff..

Yes, I would say what we're going to do -- and I talked about some of that on the letter, but we're going to do all of those things.

So, the easiest and immediate step would be to take all of the advertisers that work with Connexity now and have them participate in the marketplace of Taboola's existing recommendations and that should drive yield and already create some synergies and growth.

In addition to that, we will upsell publishers to do more than what Taboola is already doing with them and also have an e-commerce strategy for their site. If that makes sense..

Perfectly. And then my second question, and I'll stop after this one, is I remember back in 2019 we brought a bunch of clients in-house by guaranteeing them payments. I think those contracts are coming up.

Are you going to have to re-guarantee those or are those contracts going to stay in-house? And how are you thinking about guaranteed payments for clients going forward? What is your decision rule about when you guarantee revenue levels in your client base?.

So, good question. Thanks, Laura. So, just as a reminder for everybody, in 2019, what Laura was referring to and asking about was we had a very unusual opportunity in 2019 to basically win a large number of very big brand name publishers all at once.

We decided to go ahead and do that even though we knew that by doing that we'd be bringing on more supply than we were ready for at one time and we'd lose money on a number of those publishers up front. And basically in retrospect, we were able to see that it was about $60 million that we ended up investing in that initiative.

We did it because it was a good business opportunity. We knew that we could turn those publishers profitable over time and basically catch up with the demand, have the demand catch up with the supply. We did that and by 2020 those publishers were breakeven to profitable.

And you can see in our margins that we had recovered and we're back where we would've expected to be and in fact, higher than we'd ever been before because those publishers were then driving growth in our network. So, that's what Laura was referring to.

To your more specific question about renewing those and whether or not we expect similar things going forward, so first of all, most -- I believe all those publishers are still with us. At least in one case that I know of we've already renewed with them and extended them.

As we renew, we are almost always able to find ways to increase our margins and also make them more money. So, and that's a track record that we have over a long period of time. So, as we are renewing those they're getting more profitable.

So, for instance, the one that I mentioned that I know has already renewed, the margin is higher and they are actually making more money with us now. So, they are happy and we are happy. And that's pretty typical for us -- as we renew publishers we usually are able to find ways to make them more money and improve our margins at the same time.

So, that's what's typically happening. I'll also say -- I think part of your question was should we expect any sort of thing -- event again. We don't see any sort of similar kind of alignment of the stars where there is a huge amount of supply coming out that we will extend ourselves and cause a decrease in margins. We don't see that at this point.

So, we don't expect another event like that going forward..

And our last question comes from the line of John Blackledge with Cowen..

Two questions, I hope you can hear me okay, it's been a little choppy.

On the Connexity deal, once it's closed how long would it take to integrate Connexity's offering to your current set of publishers? And then second on M&A, how should we think about further M&A in the near and intermediate term, just given the significance of the Connexity deal? Thanks..

So I would say on the timing of how quickly we can integrate Connexity, so we view the synergies as basically coming in two steps. So, there's the -- what I would call, low hanging fruit things that we can do very quickly.

So for instance, bringing their demand to our supply, as Adam referred to, basically getting their 1600-plus good brand-name merchants spending in our supply area is something that we can do fairly quickly. Obviously we will get better at it over time, but we can do it fairly immediately.

Likewise, upselling our publishers to use their services as they are currently set up to do, that should be a fairly quick thing to do in the geos where they are set up, like U.S., UK, Germany. We can start that pretty immediately. I would say soon thereafter we can also start rolling them out geographically because they are 75% U.S.

and most of the rest of their business is in Germany and the UK. We can bring them to France and Italy and Japan and all of the -- Australia -- all the other markets where we are very strong and have a good presence. We can do that pretty quickly. They need to do a little bit of work to get the demand side there, but they know how to do it.

It's a fairly fast thing, so I would call those the medium-term. And then the longer term opportunity on the synergies which we're very excited about is basically then to start using some of our technology to help them improve what they do and vice versa. So, kind of integrating the tech stacks. That one will take a bit longer.

We don't have a specific timeframe on that yet but that will happen over time. But I think we're pretty excited that a lot of the synergies and the dollar value of the synergies can start fairly quickly. Just to give you a sense in our model, we didn't build in huge synergies in 2022; we built in some of those quick hit ones.

But we expect them to really start to kick-in in a stronger way in 2023 and forward. So, that's in terms of the timing of the synergies. In terms of -- I think your second question was more around acquisitions and M&A. So, I think Adam referred to this.

Right now our mentality is we need to obviously make this one work and we are going to be heads down to make sure that we make this one work. So, we don't anticipate any other large M&A in the near term.

I never want to say never because if something comes along opportunistically that we think is a great opportunity, we are going to need to look at it. But our if you were to ask us today, are you going to do another major acquisition in the near term, we'd say no because we need to get this one working quick -- working well.

So, our immediate focus is making this one work. We'll obviously keep our eyes open. We have ongoing dialogues with multiple companies, but unless something is a -- we just can't afford to pass on it, we're going to focus on making Connexity work right now..

Thank you and that concludes our question-and-answer session and I would like to turn the conference back over to Adam Singolda for any further remarks..

Thank you. So, I just want to say this is a very special moment in time for us at Taboola and I feel like our community is around us. We just went public 1.5 months ago. It was such an amazing day. My mom flew in. I couldn't believe, I started that business from their house 14 years ago. It was emotional and exciting and incredible.

We acquired a few weeks afterwards Connexity to bring the power of Amazon to the open web. As we mentioned, the future of the open Internet will be driven by e-commerce. We are bidding and raising our performance and expectations. That's exciting.

It's a huge $60-billion-plus market that is growing fast, and I feel we have so many meaningful advantages working in our favor, starting with the Company's culture and execution of the leadership as well as assets we've built over the years in technology and relationships as we look to build the largest open web company in the world, Google for search, Facebook social and Taboola open web.

On a personal note, I really like being a public company. I want to thank all of you for asking us great questions, interacting with us. It makes us better and we look forward to continuing that with everyone. So, thank you..

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day..