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.

Thank you, Jen, good morning, everyone, and thank you all for joining us today. This is our very first earnings call after going public, and we're excited to share our results with you and update you on our business. Before I get to our second quarter I want to take a moment to remind you and everyone why Taboola exists, our vision and where we fit. Taboola power recommendations for the open web, helping people discover things they may love but never knew existed. You've all seen us before. If you have visited sites you love like CNBC, NBC News, the Independent in the UK or Sankei in Japan, you will discover things you might like to read powered by Taboola. The open web, as many of you know, is the term for all of the websites and publishers out there that are not Facebook, Amazon, Google, Apple or the like. The open web is really important, even essential, because it is free and diverse and it doesn't belong to any one giant company; it belongs to all of us, everyone. Think about every website you love, every game, app on a mobile device or app on your connected TV that lives outside of the walled garden, that's where Taboola fits. Taboola has established long-term partnerships with some of the top publishers and digital properties in the world. We have a proprietary deep running recommendation engine that is able to infer what a user might be interested in based on context and not third-party cookie. A knowledge of what other users have liked in a similar situation. Through our publisher partners we reach 0.5 billion people every single day and we invest $100 million a year in R&D to provide our partners with a platform and technology they need to…

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…

[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…

[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…

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.