Greetings. Welcome to the Innovid Q1 2023 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, John Williams. You may begin..

Thank you, operator. Before we begin, I'll remind you that today's call may contain forward-looking statements and that the safe harbor statement in today's earnings release available on our Investor Relations page also pertains to this call.

Changes in our business, competitive landscape, technological or regulatory environment and other factors could cause actual results to differ materially from those expressed by the forward-looking statements made today. Our historical results are not necessarily indicative of future performance.

And as such, we can give no assurance as to the accuracy of our forward-looking statements and assume no obligation to update them, except as required by law. In addition, today's call may include non-GAAP financial measures. We use these non-GAAP measures in managing the business and believe they provide useful information for our investors.

These measures should be considered in addition to and not as a substitute for our GAAP results. Reconciliations of the non-GAAP measures to their corresponding GAAP measures, where appropriate, can be found in the earnings presentation and earnings release available on our website and in our filings with the SEC.

Hosting today's call is Zvika Netter, Innovid's Co-Founder and CEO; Tanya Andreev-Kaspin, Innovid's CFO; and Tal Chalozin, Co-Founder and CTO, who will participate in our Q&A session. I'll now turn the call over to Zvika to begin..

Thanks, John, and thank you all for joining the call today. I'll begin with some thoughts about the first quarter and some recent business updates and highlights. Our CFO, Tanya Andreev-Kaspin, will provide details on our Q1 performance and updated guidance followed by Q&A.

We were excited to share our preliminary results a few weeks ago and are even more thrilled to share our full Q1 results and update on our progress today. I'm proud of our team for winning new business and remaining focused on execution. So to start, let's talk a bit about our quarter and the current environment.

We beat both our guidance and consensus and are tracking ahead of where we hoped it would be when we last spoke back in February. Our Q1 revenue grew 18% year-over-year, and we posted year-over-year adjusted EBITDA improvement that exceeded our guidance.

We remain very focused on profitable growth, and our Q1 results demonstrate that we're executing on our plan. Innovid benefits a linear shift to CTV. This is a crucial part of our story. Even in a down market for advertising, we can still grow because of our favorable secular trends in CTV and the critical nature of what we provide for our customers.

We continue to have a great deal of success adding new customers. Our core client growth exceeded 12% on a pro forma basis year-over-year.

We expect that when the ad market bounces back, we'll see a growth multiplier effect as our larger customer base runs back up, and we deepen our relationships as they can activate more products and our cross-sell efforts pay off. To be clear, the overall advertising market is still challenged.

While we saw some indications of modest firming in Q1, our visibility is still limited, and some of our existing customers have pulled back ad spending due to macro concerns. Specifically, looking at verticals, we've seen strength in telecom, CPG and auto, and weakness in tech, financial and insurance and consumer electronics.

Importantly, advertising verticals tend to move in cyclical fashion. So we expect the slower growth areas to pick up as a macro trend improved. Now for a few additional quarter highlights. We continue to see success in adding new logos to our platforms. Exciting recent wins and expansions include PadSquad, [indiscernible].

We also announced several new partnerships, most notably with Walmart DSP. Looking ahead through the rest of 2023, we're focused on cross-selling for additional upside. I'm thrilled to report that we renewed and expanded our relationship with Verizon, continuing our partnership with video ad-serving, and DCO and adding InnovidXP measurement.

We also recently expanded our relationship with Disney, building on our multiyear Hulu relationship to enhance measurement for more than 60 advertisers and [indiscernible] including travel, telco and e-commerce across Disney addressable footprint.

We're excited that Disney and others are adopting Innovid measurement solutions to further enhance their streaming strategies. For Innovid, scaling up further in measurement is a key long-term component of our strategy.

More than a brand advertisers need a centralized platform and measurement capabilities to help them navigate this complex environment and its lack of standardization. For us, this is fantastic. It is aligned with our value proposition across ad-serving, measurement and personalization.

And our continued growth in core clients shows just how much customers value what we bring to the table. In summary, we had a solid quarter, including some key client wins and expansions and experienced some ad industry firming. We exited Q1 still cautious but are a bit more optimistic about the remainder of 2023.

We remain confident in our position as the clear leader in building the critical technology infrastructure for the future of TV advertising and specifically CTV. I'll now hand the call over to our CFO, Tanya Andreev-Kaspin, to discuss our first quarter results and updated guidance.

Tanya?.

Thank you, Zvika, and good morning, everyone. We are happy to report our Q1 results and are pleased with our outperformance. We beat the top range of the initial revenue guide by 5% and delivered positive adjusted EBITDA. Q1 revenue grew 18% year-over-year to $30.5 million on a reported basis or 1% on a pro forma basis.

Measurement grew 1% on a pro forma basis and represented 23% of total revenue in Q1. Ad-serving and personalization services were up 1% year-over-year and represented 77% of total revenue in Q1. Innovid ad-serving and personalization revenue closely relates with ad impressions volume served through our platform.

Q1 CTV volume grew 13% year-over-year and represented 54% of all video impressions, up from 49% in the first quarter of 2022. Mobile volume decreased by 9% and represented 34% of all video impressions, while desktop volume decreased by 10% and was 12% of all video impressions.

CTV demonstrated resilience and generated growth, while desktop and mobile, most acceptable to the challenging macro backdrop declined in the first quarter. We expect the growth of the CTV business to continue to outpace other channels, gaining even more share of total video impressions. On to our geographic breakdown. In Q1, U.S.

revenue grew 18% on a reported basis and represented 91% of the total revenue. International revenue grew 14% year-over-year and represented 9% of quarterly revenue compared to 10% in Q1 last year. Now moving on to expenses. Cost of revenues increased by $2.3 million year-over-year in Q1.

The increase is primarily attributed to the TVSquared acquisition and stock-based compensation. Revenue less cost of revenues was 73% of revenue in Q1, down from 77% in Q1 of 2022, again, impacted mainly by TVSquared. We expect the legacy TVSquared business to eventually operate at or close to our pre-acquisition margin level.

Q1 operating expenses, excluding depreciation and amortization, were $36.7 million, up $1.7 million or 5% year-over-year.

Most of the increase is due to the increase in stock-based compensation and the TVSquared acquisition, primarily offset by a reduction in onetime expenses, particularly the $4.4 million acquisition and IPO-related expenses we incurred in Q1 last year.

Employee count at quarter end after Q1 reduction in force was 465, a 16% decrease compared to the previous year on a pro forma basis. Q1 net loss was $8.6 million or a per share loss of $0.06. Q1 adjusted EBITDA was positive $0.1 million, representing 0.5% of positive adjusted EBITDA margin versus a negative 12% in the first quarter last year.

Now on to cash and capital allocation. We are comfortable with our cash position and liquidity and expect our focus on profitable growth in 2023 to reduce our already modest cash burn and support our overall liquidity position.

We ended the quarter with $45 million in cash and cash equivalents and $20 million in debt with an additional $30 million available on our revolver. Quarter-end common stock outstanding was 136.6 million shares. Finally, I would like to discuss our outlook.

We are encouraged by our Q1 performance and are projecting a modestly improved outlook for the full year. For the second quarter of 2023, we expect total revenue in the range of $31 million to $33 million, representing negative 6% to 0% year-over-year growth. We expect Q2 adjusted EBITDA in the range of 0 to positive $2 million.

Two additional reminders. First, our outlook includes the full expense benefit of our recent 10% headcount reduction completed in Q1. Second, beginning in Q2, we will no longer be breaking out as reported versus pro forma as we will be letting a full year since the TVSquared acquisition. Full year outlook.

We are increasing our revenue guidance for the full year to slightly higher than year-over-year versus our previous guidance of flat year-over-year. We expect a full year adjusted EBITDA margin of at least 5%, an improvement versus our previous full year guidance.

We're encouraged by the current business momentum and in the economic environment improves, we believe we could exceed the profitability expectations we have already factored into our guidance. In conclusion, we are pleased with our first quarter results and remain focused on driving profitable growth.

Innovid is well positioned strategically and financially to continue building the critical technology infrastructure for the future of TV advertising and driving value for our customers and shareholders. Thank you again for joining the call. Zvika, Tal and I are now ready to answer your questions. Operator, please begin the Q&A session..

Thank you. [Operator Instructions] Our first question comes from the line of Laura Martin with Needham..

I guess I have a couple. I guess I'm most interested, Zvika, in generative AI. I think that's all the raise right now.

I'm very interested in how you think generative AI affects your business -- investments in terms of the cost side, but also how you think it a revenue growth and productivity over the next several years?.

Sure, Laura. Thanks for the question. Generative AI, as you remember, I think you also attended our investor -- New York Stock Exchange Investor Day back, I believe, in November, where we already presented before generative AI was all the range, where AI fits into our platform and how it's actually already in production improving results.

What's unique about Innovid, AI operates on data, right? Data patterns, inputs and outputs. So basically, because of the ad server, we deliver all the CTV ads through creative optimization and creative, we can change the creative as we serve it.

And then, of course, measurement, we see how many households will reach at what frequency and most importantly, the outcome. What's exciting is when you connect the three pieces of the system with a brand that can see what's going on and based on the customers' goals, can optimize the performance.

That is something not just by targeting, which is the medium part, but actually optimizing the creative, optimizing reach and frequency.

So this is something that's already in the system, obviously, generative AI in terms of the next generation that we're seeing now can help with the creative, creative versioning, creative -- generating both text and images for our [indiscernible]. And some exciting ideas that we're looking at right now on the measurement side, insights.

So overall, it's an excellent thing that's going to push us further and make the job of our customers much more efficient..

Fantastic. And then I heard you talk about the Verizon went on measurement and the Disney comments on measurement.

Could you talk about what you are learning now in terms of companies that are adopting your measurement solution? What do they like? What do they need? What kinds of things get to change? Can you tell us -- just bring us up to date on what you're learning about measurements and where you have to go from here in terms of integrating measurements into your go-to-market strategy?.

Sure. So basically, what drove our TVSquared acquisition a few months after we went public, was years of working together with our largest customers, the largest brands out there, and Verizon is definitely a great example.

And what they told us back then is while they love our CTV Insight, the data that we generate from the ad server and they can see a lot of insights around the CTV portion, what they really wanted to see is cross-platform, looking both linear because linear television broadcast TV ads are here to stay for at least another 5, 10, 15 years.

And as people migrate to CTV. So the big view that they wanted to see is a combined view of both the linear television and the connected TV. And that's what drove the acquisition. It was more than a year ago.

Since then we integrated the teams, integrated the product and launched InnovidXP, which is in a single platform that you can see, reach frequency, how many households you reach and what frequency and of course, the more important point is the outcome, what outcome that grow.

So that's the promise of InnovidXP and this is exactly what the Verizon is -- what -- if you recall, TVSquared was a company that was focusing more on direct-to-consumer smaller-type customers. And with Innovid, we came and refocus on the largest TV advertisers out there and again Verizon is a good example.

That took some time in terms of introducing the product and then testing and now it's in fully in production. So that the conviction was there years ago, and now we're delivering in that promise and Verizon using not just our ad server and DCO, but also adding the measurement component is kind of the Holy Grail.

This is what we would love to see from all of our customers. And this is, by the way, arising directly, and it deals with Verizon. Disney is another great example on the sales side. So the Disney is actually a publisher, one of the largest media owners in the world, looking to do the same thing. Cross-platform plus outcome.

It's a very unique integration because it's always on and it's connected to the first-party data that is very unique. And a pause there because they're still a long -- but both of these are very, I would say, from Innovid perspective, very iconic large deals, and we expect to see more like this throughout the year..

Our next question comes from the line of Andrew Boone with JMP Securities..

Matt, on for Andrew. Maybe first, just taking a step back, can you guys just talk to us long term about your philosophy around pricing? And then also great to see positive adjusted EBITDA in 1Q guide calling for expanding margins in 2Q.

Can you guys just talk about cost controls and how you're thinking about investments for the remainder of the year?.

So on the -- on pricing, we definitely feel that there is room for us to explore unique and different and can further expand our pricing currently from the history of the ad server, this is where we started, it's a very, I would say, rigid fixed price that was actually set by Google many, many years ago as kind of almost the standard at the lowest level possible.

So we started from there as we gain more and more market share. But as we're now CTV becomes a bigger part of the company as we're investing in innovation in DCO and measurement, we definitely feel we can present a more flexible pricing structure and then in some cases, also rewarding minimum commitments, annual committed deals and things like that.

Definitely in the mindset of -- you mentioned the margins, the free cash flow and all that stuff.

So we believe as our deals with large brands become -- are entering in the millions, the multimillions a year with as we transact more and more with brands directly, we believe there are more models that come from the enterprise software world that we can introduce that are somewhat different than the models of that media companies is with agency.

So that's on the pricing. On the EBITDA, we are very proud of this. I mean we always said that we have a long-term goal to get to 30%, 35% EBITDA within a couple of years.

Obviously, the acquisition in the down market last year was -- made it more challenging to see our focus on the EBITDA, and we're very happy there in Q1, and we'll expect to see it in Q2, and we expect to see the improvement throughout the year is constantly controlling our cost and giving very clear KPIs in terms of how we progress on both EBITDA and free cash flow.

While ideally, the top line grows, what you should see is that a lot of that growth is going to go all the way to the bottom line and improve EBITDA. As Tanya mentioned, we made about a 10% headcount reduction in -- earlier in the year. This is opposed to acquisitions so it's the right thing to do anyway.

And what we're making sure is the control continues to control that cost. We already have 3 products. They were in market, in production. We're focusing more on existing customers and upsell like Disney and Verizon, both of them are existing.

All of these things will ideally allow us to grow the top line but definitely maintain the growth on the bottom line..

Our next question comes from the line of Shweta Khajuria with Evercore..

This is [indiscernible] asking a question for Shweta Khajuria.

Could you elaborate a little bit more on how did advertisers demand trend through the quarter? And then what are you hearing from advertisers as you think about the rest of the year?.

Can you repeat the question? Is that advertiser something through the quarter, I couldn't hear..

Advertiser demand trend..

You mentioned through the quarter and the second question?.

And I'm just wondering what are you hearing from advertisers when you think about the rest of the year? What's your expectation?.

So this is -- what we're seeing is especially and as you can see also from the results, and we're now more optimistic than we were a couple of months ago.

I mean we're definitely in an economical -- challenging economical environment, that we see that in Innovid and other companies at the same time, we're definitely seeing improvement throughout the quarter, and we're seeing that improvement going into Q2. So it's definitely not going back to normal.

So that's why we're being cautious with our guidance because situation can change. But we're definitely feeling a more -- slightly more optimistic based on what we're seeing. The customer demand, so this is just -- this is specifically on spend. The actual demand for our products has never stopped.

As you heard, we closed on the ad server new customers like UPS and other existing customers buy more products from us. And overall, people spend more on CTV. So while overall media spend is shrinking because of the growth of CTV that even in this difficult environment, grew 13% in Q1.

And now it's more than -- for the first time, it's more than half of the company. So half the 54% of all the ads we delivered in Q1 were on CTV. So CTV continues to grow. Customers continue to buy ad servers or additional products from us. So from that perspective, we're very optimistic.

I would say to your question about advertising in general, like any other business, people are -- companies are cautious and are spending very diligently and where they actually see a return, and we believe that's a great thing for adopting our platform..

Our next question comes from the line of Shyam Patil with Susquehanna..

This is Jared on for Shyam. Thanks for taking the question. Thanks for all the color on how you're thinking about profitability for the year and managing the cost base. Towards the end of the prepared remarks, Tanya, you mentioned that we could see a potential acceleration in growth in the second half flowing through to EBITDA margin expansion.

How are you thinking through the trade-off there between margin expansion and areas of potential stepped up investment expense areas that you might want to lean back into to the extent that we do see an improving environment..

Thank you for the question. Great question. So when we prepared the plan for 2023, we set a very clear financial goal for the year to be focused on profitable growth. In the economical growth in an uncertain macro situation as we are all experiencing right now, we believe we need to focus on what we can control.

And those are our investments, our investments in R&D, our investments in sales and marketing, but we have to make it in the most efficient way. And that's what we are seeing.

We already delivered Q1, which is profitable, and we indicated to the market that we will be improving our profitability for the year, delivering 5% at least adjusted EBITDA margin. And that what we're absolutely staying focused on right now. We don't want to be distracted by the economical downturn and such.

We think that, that's what's important for us. And as you could see in our P&L, we still invest quite substantially in R&D and new technology..

Great. And then one more, if I may.

I was hoping that we could just dig in a bit further on how you guys are thinking about the retail media opportunity broadly at this point? And then that recently announced Walmart partnership, how you're thinking through the various elements from personalization to ad-serving and anything else that you might call out there?.

Sure. I'll have Tal, our CTO, take that. We're definitely seeing really great progress on that front.

Tal?.

Sure. Thanks, Jared. So yes, we definitely see retail media as a massive opportunity. I think in general, if you follow the industry, and I'm sure you do. Connected Television is the main focus and the main growth driver along with retail media as a tremendous opportunity.

We think that there's a couple of ways that we play in the retail media space, a lot around ad-serving and allowing marketers to really buy media everywhere across all places and leverage data.

And the second one is using creative personalization, which plays a massive role when you talk to consumer packaged goods or other type of advertisers that have multiple products in their portfolio and can leverage retail media networks as data to optimize the creative and align the message to specific users.

So we think that -- so far, we've seen a lot of progress on retail media in the industry around targeting, and we think that the next generation a lot that we would see right now, this is where we put a lot of efforts is around creative messaging and personalization.

We're very excited about our partnership with Walmart DSP that we announced this quarter. And we think that -- but again, as I said, the retail media networks is retail media in general, is a massive opportunity for our industry and for us to capitalize on..

And our next question comes from the line of Matthew Cost with Morgan Stanley..

When we look at the first quarter and just the top line beat, you mentioned the macro situation firming up, but there's still real uncertainty into the rest of the year.

Is -- was the outperformance versus your guidance in the first quarter, a function of kind of that firming up macro? Or were there some key products that outperformed or some wins that you would call out as kind of the driver of the beat. And then just secondly, thinking out to the rest of the year and the full year guidance.

When we think about the competitive landscape, do you -- does your guidance for the year as you see market growth this year imply maintaining share, gaining share or maybe seeding some share?.

Sure. So in terms of driving the outperformance, it's definitely the performance of the company, the KPIs and what's -- what basically brought it to the level of is, it's kind of the softness in the market. But we're definitely adding more.

If you think about it, just -- and I'll give you kind of a high-level overview, almost all the KPIs that drive our business that are CTV-related are up into the right, right? So it's like a bigger part of the company is CTV and a smaller part of the company's mobile and desktop video.

We have -- there are more -- there's more content out there that is ad based. People are watching more ad-based content. So overall, the supply, the impressions out there are constantly increasing. Brands spend more while brands are cutting overall budgets in many cases, they spend more money on CTV because more people. So you have two factors.

One is maybe calling down, but the other one is increasing fast in that CTV. So that's causing the CTV to grow 13%. So all of Innovid was 100% CTV, you'll see a much faster growth. And this will happen over time. On top of it, as we added today, we added, we were gaining share.

So especially around the ad server where we gain share out of Google from Google Campaign Manager that for the last 5 years did not change. It all goes mostly in one direction. We gained share. Overall, we gained share constantly and it's usually out of the platform of Google.

So there's no reason that in the foreseeable future from our perspective, we don't expect to see a dramatic change in trend. So you should expect every quarter to hear about more and more customers that join our platform and more and more customers that are using more than one product in Innovid. So all this in the model is fixed volume based.

So all this joy should create a much faster growth on the top line. What's calling that is the overall macroeconomic environment and spend. Our cost is not there because that's the one thing we don't control. We control all the other factors, and we are very bullish on them, and we keep investing on them.

The -- what we're looking for is once the market starts to recover, much steeper growth on the top line that will flow to the bottom line. So that's basically what we're looking for. But in terms of share expansion and selling more products to more customers, that did not change and continues to grow.

In terms of the competitive landscape, can you repeat the question? I wrote it here, but I'm not sure I got the full question..

Yes. The question was -- you really kind of answered it on [indiscernible] perspective. Yes..

Yes. Yes. So that's -- from a platform perspective, we don't see a reason why we will see a change in trend. In a way, actually difficult environments like this, encourage customers, brands to look at every dollar they spend and try and look to optimize it. And if I'm connected to the question lower asked about AI, Generative AI.

We're just using technology. Technology is a great way to understand the outcomes, what are you getting when you're spending $100 million on a campaign in television? How many household it, what frequency, what type of action it created and constantly optimize.

So in an environment like this, is actually good for closing new business and absolutely new product. It's less good in terms of overall spend, but we all know that this is a temporary thing. So it will go up dramatically..

[Operator Instructions] And it looks like we have reached the end of the question-and-answer session. And this also concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation..