Outbrain Inc. (NASDAQ:OB) Q4 2023 Earnings Call Transcript
Outbrain Inc. (NASDAQ:OB) Q4 2023 Earnings Call Transcript February 29, 2024
Outbrain Inc. reports earnings inline with expectations. Reported EPS is $0.09 EPS, expectations were $0.09. Outbrain Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to Outbrain Incorporated Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would like to turn the call over to Outbrain's Investor Relations. Please go ahead.
Unidentified Company Representative: Good morning and thank you for joining us on today's conference call to discuss Outbrain's fourth quarter 2023 results. Joining me on the call today, we have Outbrain's Co-Founder and Co-CEO, Yaron Galai; Co-CEO, David Kostman; and CFO, Jason Kiviat. During this conference call, management will make forward-looking statements based on current expectations and assumptions. These statements are subject to risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. These risk factors are discussed in detail in our Form 10-K filed for the year ended December 31st, 2022, as updated in our Form 10-Q and in subsequent reports filed with the Securities and Exchange Commission.
Forward-looking statements speak only as of the call's original date and we do not undertake any duty to update any such statement. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's fourth quarter earnings release for definitional information and reconciliations of non-GAAP measures to the comparable GAAP financial measures. Our earnings release can be found on our investor relations website, investors.outbrain.com, under News and Events. With that, let me turn the call over to David.
David Kostman: Thank you, Jackie and good morning and thank you for joining us. Before going into the specifics of the year, I wanted to acknowledge the challenging events that faced us on a geopolitical level. The events of October 7 and the ensuing war are devastating and continue to impact so many of us. I want to take a moment to acknowledge our team in Israel and thank them for their unwavering commitment and our global team for their ongoing support. Over the past couple of years, there have been massive changes to how audiences consume content and how the advertising industry functions as a result. We believe the unique foundational assets we own give us a strong opportunity to capitalize on these changes. We are looking at 2024 as a year of return to growth, expect margin expansion, and investment in new growth areas.
We believe this will result in growth this year as well as double-digit growth and a 20% plus EBITDA margin in 2025. With that said, we would like to update you on our long-term vision and strategic investment areas. Before we dive into the details, I'm going to provide a perspective on the Open Internet, which is estimated to be $100 billion advertising market and the opportunities it presents. The Open Internet provides access to an increasingly valuable resource, journalistic non-user-generated editorial content. In addition, the Open Internet also provides access to expanding an emerging environments such as mobile apps, CTV and retail media. These environments create deep engagement and attention opportunities not found within walled garden, and they provide unique value to advertisers.
And while walled gardens continue to grow, advertisers are seeking to diversify their ad spend across channels that can provide incremental audience moments and efficient reach. Outbrain is well-positioned to capitalize on this opportunity, providing a single access point for advertisers. We have an excellent starting point due to our foundational business assets and core AI prediction technology, which has been developed over the last 17 years. First, we are one of the very few companies on the Open Internet with a critical mass of exclusive code on page inventory across some 8,000 publishers. This yields valuable proprietary data around consumer interest and engagement. This data, coupled with our core prediction technology fuels our successful performance advertising business.
We've been able to develop new applications of our data and technology with offerings like Keystone, optimizing total publisher revenue initiatives, including subscriptions and e-commerce and Onyx. As third-party cookies decline, we believe that our approach to predicting consumer attention based on their editorial interest and the content will be a strong solution for a range of advertiser objectives. Second, we operate a true end-to-end supply chain and two-sided platform. Our owned and operated SSP, DSP and Navy bad platform provide transparent, direct access to our critical mass of inventory. We tools tailored to a range of advertiser objectives. As the industry continues to focus on supply path optimization, owning a direct route to unique consumer moments and inventory is more critical than ever.
In addition, we believe that these tools give us unique bidding capabilities that drive ROAs for performance advertisers across the Open Internet. This is especially differentiated in the programmatic ecosystem. So, in 2024, we plan to lean on this core asset to expand in three strategic growth pillars. The first pillar is growing our share of all at grid advertisers. We plan to do so by, first, expanding our programmatic branding solutions with Onyx and second, further developing our performance suite to serve a diverse range of advertisers. Onyx has enabled us to grow our business with enterprise brands and agencies, significantly expanding our total demand addressable market. Onyx applies our prediction technology to maximize attention with video and high-impact experiences across a dedicated environment of viewable and article inventory.
In 2024, we will be focused on scaling Onyx to directly address ecosystem opportunities around supply path optimization and programmatic media effectiveness with attention. We have a strong foundation of working with enterprise brands through our performance offering with a client base that includes companies such as BMW, GSK, Paramount+, Colgate-Palmolive and others, spending more than $200 million with us in 2023. We believe this presents a large opportunity to tap into new branding budgets across our existing client base, driving impactful results across the funnel. We will also continue investing in our performance business, expanding the types of customers we can service with our two unique platforms. Investment into our proprietary DSP Zemanta will enable us to provide advanced controls and bespoke service offerings for large-scale advertisers seeking to drive engagement in ROAS across the Open Internet.
Total spend on our DSP in 2023 was approximately $125 million, representing a CAGR of approximately 20% over the last two years. It is important to mention that we don't recognize this amount as part of our gross revenue, but keep a service fee from that spend, which is part of our Ex-TAC gross profit. We expect that our focus on driving strategic key accounts to leverage our DSP will result in significantly higher budgets from these advertisers through access to the new Open Internet supply beyond Outbrain. Both of these strategies create incremental margin opportunities for us. At the same time, we believe that our proprietary native ad platform, Amplify, enables us to drive results for customers of all sizes. We will continue to focus on new uses of AI and automation to provide these customers with ROAS at scale.
While AI has been at the core of our prediction engine for over a decade, this year, we have developed new users of generative AI in our native ad platform to reduce market legwork and improve creative performance with dynamic titles. We've seen great success with adoption of our key automated bidding product, Conversion Bid Strategy. Today, 73% of our native ad platform customers use Conversion Bid Strategy. Through new uses of AI and automation, we plan to further grow our core performance customer base. The second pillar is: expanding our supply footprint to reach consumers across the entirety of the Open Internet beyond traditional feeds. As audience consumption habits shift, we're expanding our access to audiences beyond web publishing.
We plan to continue bringing our core technology and demand offering to mobile apps, OEMs and platforms. We expect that the engagement-based bidding capabilities on our DSP will enable us to drive differentiated performance and outcomes across this new supply, providing a single access point to Open Internet consumers while driving outcomes in ROAS. In 2023, advertiser spend that was incremental to our core publisher feed inventory accounted for over 20% of the total advertiser spend with Outbrain. We plan to grow this supply in 2024 and beyond to expand advertiser access to engage audiences at scale. Now, to our third pillar, continuing to grow our premium publisher partnerships. Bringing advertising dollars back to news by better exhibiting the value of these audiences is more critical than ever as authentic reporting is so essential to democracy.
Journalistic content will only become more valuable and differentiated. We are continuing to invest in enhancements to our core prediction engine in an effort to drive higher yield for our publisher partners. In 2023, we saw continued CTR improvements with double-digit improvements in H2. This prediction engine underpins our core publisher and advertiser offerings with the goal of infusing publishers with sustainable year-round revenue and critical audience development solutions. As mentioned, Keystone remains a key area of investment, providing publishers with a customizable SaaS platform that optimizes total publisher revenue across subscriptions, e-commerce and more. And finally, Onyx also enables our publisher partners to benefit from a new demand offering, monetizing new in-article video inventory for us.
At the end of 2023, we secured access to more than 1,000 in-article placements. Coupled with our existing performance offering, publishers can now benefit from a total full page monetization offering with one partner. Let me now recap our Q4 performance. First, I am pleased that we achieved our guidance both on Ex-TAC gross profit and adjusted EBITDA. I want to refer to some of the highlights for Q4, which reflect the investments we have already made in each of the areas I just mentioned. We've seen great market reception to the launch of Onyx in June 2023, with more than 150 accounts running on the Onyx platform in H2. We hit our initial expectations of $10 million to $20 million in Onyx revenue just six months after launching in the second half of the year.
Onyx enables us to expand our demand offering for brands with solutions from brand building to performance. Toyota is a good example of this opportunity. Toyota leveraged Onyx for the pilot of its new Toyota C-HR model using Onyx's contextual pre-roll video format to drive incremental high attention moments, building stronger awareness and consideration with its target audience. Toyota then harnessed the top of funnel successes to fuel the performance campaigns they run via Outbrain's performance suite. With Onyx, Toyota achieved 82% viewability, 70% video completion rate, and outperformed ad-like [ph] attention management by 41%. With our performance suite, Toyota managed to drive efficient qualified visits to Toyota's dedicated landing page advertising offers for the new car model.
This is a true cross-funnel opportunity. We also continued to secure strategic publisher partners, which is a testament to the value of our full page monetization and our total revenue offering. In Q4, we continued our momentum of premium publishers switching from competitors, securing a long-term partnership with News Corp Australia. This marquee deal was signed early January. Additional wins from competition in Q4 include Huffington Post, Webedia Spain, Sports 1, Border International and others. These Q4 wins complement our premium publisher wins in the last two years, demonstrating the strategic value and our relative advantage in the market. We also renewed long-term partnerships with leading premium publishers, including Dotdash Meredith, Vocento, Le Parisien, [indiscernible] Digital and Handelsblad.
Adoption of Keystone increased across our existing and new publisher base with launches on CNN, Entrepreneur and The Telegraph and was a key factor in our News Corp deal. To sum it up, we are confident that our investment strategy, started in H2 2023 and continuing into 2024, will strengthen our strategic value as a leading cross-funnel platform for the Open Internet. We believe this will drive substantial growth and profitability in the coming years. As a result, we're also providing a high-level outlook for 2025, where we expect to achieve Ex-TAC growth of 10% to 15% and an EBITDA margin of at least 20%. I'm personally very excited about the decisions we've made and the speed in which we are executing them. As you may have seen in the release this morning, Yaron will be stepping down from the Co-CEO role.
I want to take this opportunity to thank Yaron, a close personal friend and a truly amazing business partner. We have accomplished an incredible amount over our six years working together and I'm privileged to be part of the amazing company he founded. With that, I'll turn it over to Yaron to talk about the future and what's next for him.
Yaron Galai: Thanks David. I appreciate the kind words. 17 years ago, I recognized that consumers needed better personalization of their content and ad experiences. The publishers needed better ways to engage people and monetize and that advertisers needed great ROAS on the Open Internet. That's when I decided together with Ori Lahav, my Co-Founder, to create Outbrain and pioneer many of the things that inspired other companies over the years. Since then, we have generated over $5 billion for our partners, which has been a crucial way for many of the world's best publishers to keep journalists, editors and fact checkers employed, which, as we all know, are so crucial for our functioning democracies now more than ever. Today, many of Outbrain's innovations are taken for granted as this is obviously how things are done.
As a founder, I'm tremendously proud about that. It's every founder's dream to move from untested, widely doubted ideas to forming multibillion-dollar markets where their fundamentals are taken for granted. Before I talk about the CEO transition, I want to acknowledge the shifts in our industry and the opportunities they present to Outbrain as the company evolves into its next chapter. Advertisers are moving through paradigm shifts, both because of consumer habit changes and traditional ad targeting methods, which are evolving with the decline of third-party cookies. Accordingly, publishers on the Open Internet are also challenged on both ad monetization and audience developments. I strongly believe in the points that David has raised about Outbrain's ability to provide compelling solutions for both advertisers and publishers amidst these industry changes.
Through the combination of Outbrain's expanded performance suite and our entirely new branding platform, Onyx, advertisers will be able to connect the steps of the consumer journey across the Open Internet. This has the potential to create huge value for our publisher partners, giving them one reliable partner to provide sustainable year-round monetization from both brand and performance budgets. As we look to the future, we're focused on utilizing the core prediction technology that has enabled us to recommend relevant editorial and paid experience for over 17 years to new supply environments and new publisher revenue goals. Through Keystone, we enable partners to both diversify their revenues on top of that and to enhance their audience development at a time where search and social are no longer as reliable as they were in the past.
And I believe Outbrain will only become a more critical partner for publishers as we use new solutions like Onyx to bring even more advertising dollars back to news. But beyond products like Onyx and Keystone, what gives me the most confidence about Outbrain's future is the incredible leadership team we've grown over the years. The average tenure of both our executive team as well as the key employees driving business each day is over 10-plus years. And that's a real rarity in tech. And for the past several years, Outbrain's management team has been receiving amongst the highest scores in our company-wide engagement surveys. Of everything I've built over the years at Outbrain, it's our team of people at Outbrain that I am most proud of and it's this incredible quality of talent, which gives me tremendous confidence and comfort in the future of Outbrain through this transition.
So, for all these reasons, I feel now is the right time to phase out of my role as Co-CEO. It's clear that Outbrain is entering a new and exciting era, applying the best parts of our business to new areas as the industry around us changes. As an entrepreneur, I view times of change as times of opportunities for companies like Outbrain and therefore, I'm very excited about the company's prospects to do this. CEO transitions can be difficult for companies, especially after a tenure as long as 17 years. In Outbrain's case, we've had the privilege of our next CEO, David Kostman, already operating as Co-CEO together with me for the past six years. David is greatly respected at all levels of the company and is deeply trusted by our customers and our shareholders.
And for all these reasons, I'm confident that our CEO transition will be as smooth as can be. On a personal note, I look forward to continuing as Chairman of the Board and serving as an Advisor to the company. I have no plans for a new or next company upon departing Outbrain, and I look forward to this next chapter after 17 amazing years. And with that, for my last time, I'll hand it over to Jason to cover the financials.
Jason Kiviat: Thanks Yaron. As David mentioned, we achieved our Q4 guidance for both Ex-TAC gross profit and adjusted EBITDA. From a demand perspective, I had mentioned last quarter that October has shown a flatter pattern than the seasonal lift we historically see that time of year, which we believe was driven by transient factors, the delaying or reducing of budgets in the early part of the quarter, resulting from geopolitical and macro uncertainties, along with lower monetization from the war-related news that dominated much of our large publisher partners content in October. We then saw recovery into November, particularly around Black Friday and Cyber Monday. Despite the softer October, Q4 saw a recovery of yields or RPM, which returned to year-over-year growth for the first quarter since Q1 2022.
Notably, as demand levels remained soft relative to our supply levels, the yield growth was driven by higher click-through rates, benefiting from algorithm and optimization improvements. Revenue in Q4 was approximately $248 million, reflecting a decrease of 4% year-over-year. New media partners in the quarter contributed 4 percentage points or approximately $11 million of revenue growth year-over-year. Net revenue retention of our publishers was 91%, which reflects the continued headwind from the impact of the demand environment on pricing, which remains the consistent factor driving pressure on our revenue and on our net revenue retention. We did also experience a decline year-over-year of ad impressions also contributing to the retention being below 100%, driven largely by page view volatility from certain supply sources and platforms as opposed to churn.
Consistent with recent quarters, churn has remained at similarly low levels with logo retention of 96% for all partners that generated at least $10,000 and our five largest churns amounted to only three combined points of year-over-year headwind in Q4. Into Q1, we have seen a slightly higher seasonal step-down from Q4. While yields remain up year-over-year, continuing the momentum from Q4, the supply volatility from certain partners and platforms has driven ad impressions to be down year-over-year. Based on what we've experienced, we also see opportunity for growth from these sources into late Q1 and beyond. In our guidance, we applied a wider range of outcomes, reflecting the volatility. Ex-TAC gross profit was $63.8 million, an increase of 8% year-over-year, outpacing revenue for the third quarter in a row, driven primarily by improved deal performance on certain media partners and the net impact of revenue mix.
Moving to expenses. Operating expenses decreased approximately 8% year-over-year to $47.5 million in the quarter as we continued to exercise discipline around spending. The largest component of this is compensation-related expenses, which were down approximately $4 million or 11% year-over-year. We began 2024 with a headcount of approximately 870 FTEs, which is down about 11% from January 2023 as we have focused our attention on driving greater efficiency in our operations and now on redeploying resources towards higher confidence growth areas that David mentioned. As a result of our cost management and growth of Ex-TAC gross profit displaying the leverage in our model, adjusted EBITDA was $14 million in Q4, approximately doubling year-over-year.
Moving to liquidity. Free cash flow, which, as a reminder, we define as cash from operating activities, less CapEx and capitalized software costs, was approximately $21 million in the fourth quarter, benefiting from higher profitability and seasonal working capital benefits. While we are pleased to have such strong free cash flow in the quarter, we still see pressures on working capital, particularly around collections with elevated DSO levels remaining from Q2 into Q4. Considering free cash flow for the full year 2023, we saw a net use of cash of approximately $6 million, which excludes a $4 million benefit from our investment portfolio that benefits cash from investing activities as opposed to free cash flow. As a result, we ended the quarter with $231 million of cash, cash equivalents, and investments in marketable securities on the balance sheet and $118 million of long-term convertible debt.
In December 2022, the company's board of directors authorized the $30 million share repurchase program, incremental to the $30 million program fully executed in 2022. In 2023, we purchased approximately 3.7 million shares for $17.8 million. In total, in 2022 and 2023, we have reduced our outstanding share count by approximately 12%. We continue to believe it's an attractive way to enhance shareholder value under current market conditions. Now, turning to our outlook. As discussed today and in prior quarters, visibility to advertising budgets remains limited. In our guidance, we assume that current macro conditions persist with no material deterioration or improvements and regular seasonality. With that context, we have provided the following guidance for Q1 and full year 2024.
For Q1, we expect ex-tech gross profit of $50.5 million to $53.5 million. and we expect adjusted EBITDA of negative $1 million to positive $1 million. For full year 2024, we expect ex-tech gross profit of $238 million to $248 million, and we expect adjusted EBITDA of $30 million to $35 million. To provide additional context to how we see 2024, our expectation is that we begin to see more meaningful year-over-year growth of ex-TAC gross profit over the course of the year, while expenses increase slightly sequentially over the year. For ex-TAC, we expect mid-single-digit percentage growth year-over-year in Q2 and Q3, followed by double-digit growth in Q4, driven by returns from our focused investment areas David touched on. Expanding our supply beyond our traditional fees growing enterprise brand and agency spend, growing performance advertiser spend, and growing and optimizing publisher revenues.
Notably, many of the areas were focused on are areas where we expect that we can drive extra gross profit growth that outpaces revenue growth. As we assume a flat macro environment with no material lifts from pricing improvements, our assumed growth over the course of the year is driven by our execution of these investment areas, contributing more meaningfully in the second half of the year. Now, I'll turn it back to the operator for Q&A.
See also 20 Cities with the Worst Roads in the US and 15 Countries with the Most Attack Helicopters in the World.
To continue reading the Q&A session, please click here.
