Taboola.com Ltd. (TBLA) Q4 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, and thank you for standing by, and welcome to the Taboola fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Rick Hoss, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone, and welcome to Taboola's fourth quarter 2022 earnings conference call. I'm here with Adam Singolda, our Founder and CEO; and Steve Walker, our CFO. We issued our earnings materials today before the market, and they’re available 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.

Thanks, Rick. Good morning, everyone, and thank you all for joining us for our fourth quarter call. We delivered solid financial performance in Q4, which came in in the middle of our guidance on all metrics, while adjusted EBITDA was slightly ahead. For the full year 2022, we achieved $569.6 million of Ex-TAC, $156.7 million of adjusted EBITDA, and positive free cash flow. Overall, 2022 was a challenging year, but also a year of significant accomplishments. I'm very proud of our team at Taboola and the way we were able to manage through the macro environment, keep our heads down, and execute. 2022 was the second best year we've had for signing new publisher partnerships, with over 90% higher new revenue per month than 2020 and 2021. We won a lot. Great new publisher partners joined us, such as Condé Nast, Buzzfeed Japan, Huffington Post, PRISA, Grupo Godó, Network18, United Internet Media, and Dumont. We won back publishers that had previously left us, such as Slate, Kicker, Ouest France, and more. We signed key renewals such as CBSi, Tegna, Fox Sports and BuzzFeed Brazil. As you recall, our strategy is twofold. We want to be recommending anything users may like, content, commerce, overtime apps, tv shows and more. We call that Taboola Anything. The second part of our strategy is called Taboola Anywhere, which is taking our publisher content, technology and advertisers anywhere people spend their time, on OEM devices like Samsung, and Xiaomi as an example, but over time, we want to bring our content to automobiles, home audio devices, and more. On the Taboola Anywhere front, 2022 was the year when Taboola News, our version of Apple News but for Android devices, exceeded $50 million in annual revenue, and it's growing triple digits. We like that type of growth, as well the strategic value it has to our overall core business, as publishers are getting more and more traffic from Taboola News. As part of our Taboola Anything strategy, eCommerce gained meaningful momentum, with Dynamic Creative Optimization, DCO, rolling out, which was the main advertiser success stories for companies like Snap and Meta. Additionally, we recently announced that TIME.com will be launching our new Taboola Turnkey Commerce solution, which I will talk about a little later. We finished the year with an incredible 30-year partnership with Yahoo. This is a three-way partnership. It includes Yahoo advertisers buying Taboola network. It includes building new contextual segments, and lastly, powering native advertising exclusively for nearly 900 million users a month. This is really big. 2023 is assumed to be pre-Yahoo rollout, while 2024 will have partial Yahoo contribution and meaningful gains. In 2023, we’re guiding for 6% lower ex-TAC compared to 2022, adjusted EBITDA of $70 million, and positive free cash flow. There are four reasons for weaker year-over-year results. First, Q1 and H1 of 2022 were uniquely strong as compared to how we ended 2022 due to the war in Europe and macroeconomics hitting the US. As part of that, we’re entering 2023 with $50 million less ex-TAC on a run rate basis than 2022. We expect to return to year-over-year growth in Q3 and Q4 as we lap hard comparables from 2022 H1. Second, we’re investing in a successful Yahoo transition, which will cost us roughly $30 million this year, and it includes people, servers, and infrastructure. Third, we’re investing in performance advertising, eCommerce, and header bidding. We believe these three growth investments will help us double and triple Taboola revenue when Yahoo launches. And fourth, winning market share over time includes a net publisher pre-payment estimate of $15 million this year. Like I mentioned last quarter, we see net pre-payments to publishers being insignificant to none over time as we continue to become even more and more strategic to their entire organization. So, you should assume this is not a permanent part of the financial model. Let me say that while it's hard to accept declines this year, it's very rare that management teams know what the future will look like and are willing to guide for it. 2024 will be a step change in revenue, with Yahoo ramping. We expect to generate at least $200 million in Adjusted EBITDA, and at least $100 million of free cash flow in 2024. And to be conservative, this assumes Yahoo is only being live by June of 2024, and no revenue in 2023. Obviously, we’re working very hard to beat those assumptions we're sharing with you now. That's why we refer to 2023 as an investment year. We're putting in meaningful resources this year for gains we feel strongly are coming next year and beyond. Taking a step back, especially with Google and Meta now being less than 50% of the ad market, and privacy concerns on the rise, advertisers will be looking for contextual advertising partners with scale. With the Yahoo partnership, we’re one step further towards our long-term goal of becoming the largest open web advertising company in the world by revenue. We estimate that we would have had roughly $2.5 billion of revenue in 2022 if Yahoo had been live on our network throughout the year, and we were fully integrated. That would have put us side by side to companies like Twitter, Snap, Pinterest, and The Trade Desk, with mainly Google and Meta and Amazon much bigger than us. And Taboola is the only company to my knowledge at our size that is fully dedicated to the open web, serving both publishers and advertisers directly. I'm convinced that the open web will have a walled garden strong company that is going after our estimated $70 billion TAM, and I believe we’re making meaningful steps towards becoming that vision, with Yahoo launching, as well as our growth engines materializing. Now, let me provide a brief update on those growth engines, performance advertising, eCommerce, and header bidding. These are where we have the most to gain as a company to further drive growth in years to come. Our goal with our investments in performance advertising is to make Taboola the first and best choice for any performance advertisers that want to reach consumers in the open web. We’re currently focusing our investments in four key areas. First, we’re working on our bidding strategies that will help advertisers with different goals to be successful on our network. Previously, we had shared how SmartBid automates the bidding process for our advertising partners. Now, we’re working on enhancements to SmartBid that will allow advertisers to do things like set a target CPA, and allow the algorithm to even set the initial bid, rather than just adjust the bid across the network, as SmartBid did previously, or to maximize conversions, even at the expense of CPA targets. Now, second, we’re working on a new way of finding high intent nuggets of very specific audiences in our supply. Third, we’re investing in new ways to help advertisers drive clicks and conversions, such as with new creative formats and enhanced landing pages. For instance, we’re currently working on generative artificial intelligence that will help advertisers write more creative and appealing headlines and even generate new images from scratch. If you can, please come to see a demo of this amazing generative AI technology at our Yahoo Deal Information Session on March 1. It’s really cool stuff. Fourth, we’re investing in technologies that will be smarter about how to match ads with users, and especially how we ensure that advertisers see results as quickly as possible. I just came back from a trip to Israel, during which I spent time with our R&D teams working on this, and I have to tell you, I was blown away about how passionate our 200-person tech team strong is, and about the future of the Taboola advertising platform. We have so much more that we can do. We continue to see good progress with our investments in eCommerce as well. I mentioned the momentum we're seeing with DCO. Essentially, Connexity retailers automatically place their product libraries on our network. It has allowed us to significantly grow the amount of eCommerce demand that shows up in our traditional Taboola placements, such as in the bottom of article feeds. We recently launched eCommerce circulation widgets to help drive users to commerce pages, which helps our publishers drive traffic from general news pages to high intent commerce pages. We also just announced an exciting new initiative in eCommerce that we call Taboola Turnkey Commerce. This was the missing link to take our eCommerce business to the next level. Every publisher that wants to get into eCommerce, but has little or no content attractive to retailers, can now do that with Taboola. Taboola does all of the work for the publisher, from using our data to know which content makes sense for us to write on behalf of the publisher. We write the content. We drive traffic to it. We monetize it with the relationships with merchants and service providers. And I’ve got to tell you, we’re very, very excited to have announced our two publisher partners for this initiative, Time and Advance Publications through their NJ.com site. I don't know of any other full stack eCommerce solution that can do any of what I just talked about. Now, while it's still new for us, I can tell you, publishers are calling us about this left and right. Look, everyone wants a New York Times Wirecutter service on their website, and we will enable it. Last but not least, we’re investing heavily in header bidding. This is important to our future because this is one of the ways that we’ll expand beyond our traditional bottom of article placements, and continue to grow our share of the open web, which is still dominated by display ads. Header bidding allows us to compete for this supply using our first-party data, our unique CPC demand, and our proprietary technology that is able to predict which ads are likely to perform well, generate a profitable CPM-based bid. We launched this technology with our first partner, Microsoft, in April 2022, and we’re generating hundreds of millions of dollars of revenue from this partnership. Since then, we have started beta testing this technology with an additional 50 plus publisher partners and we’re starting to see traction. For the first time, we're starting to see a few publishers generating a few millions of dollars a year from it on top of our core Taboola partnership, which increases our share of wallet, and our moat as we look to win new partnerships and expand existing relationships. 2023 will be the year of investment in our 30-year partnership to be the exclusive native advertising partner for Yahoo. This is big for us, big for Yahoo, and I think big for the advertising community. It will be very accretive to our financials. As I shared publicly, if this was live in 2022, it would have multiplied our free cash flow five times to north of $100 million of free cash flow, and add $150 million of adjusted EBITDA. We’re full on in planning mode, and 2023 will require a lot of work and investment to make it a successful transition. Just think about thousands of advertisers transitioning, many page types, infrastructure, and more. We expect the transition to occur in three phases. Currently, in Phase 0, we’re designing the technology migration plan. You can think of this phase as designing the plumbing system between the two platforms. So, when completed, advertisers on Yahoo's platform can spend on Taboola's supply, and advertisers on Taboola's platform can spend on Yahoo's supply. Soon, we will move to Phase 1 of the migration, in which we will build the plumbing system and test the pipes by starting to flow small amounts of demand between the platforms, move some of supply, and transition a small number of advertisers to test the experience. We expect Phase 1 to be completed in the second half of 2023. Once we validate the pipes and our transition plans, Phase 2 will begin and will involve transitioning the advertisers and supply from Yahoo to Taboola. At that point, the migration will mostly be blocking and tackling, but we still need to be thoughtful in the process because we want every advertiser making the transition to have a great experience and to thrive and grow on the Taboola platform. We do not want to trade long-term gains for short-term revenue. We expect Phase 2 to begin in the second half of 2023 and be completed mid-2024, at which point we will be fully ramped, and will be able to focus on additional growth opportunities from our partnership with Yahoo. We're building our rockets this year, and 2024 we will have liftoff. We will become bigger and more competitive, and I was never as excited about where we’re as a company and our future. I'll now pass it over to Steve, our CFO, to talk more about our financials.

Thanks, Adam, and good morning, everyone. As Adam noted, our Q4 and full-year 2022 results were within our guidance ranges. All metrics were above the midpoint of our guidance, except ex-TAC gross profit, which came in just below our midpoint. For the full year, we finished 2022 with approximately $1.4 billion in revenue, $570 million in ex-TAC gross profit, and $157 million in adjusted EBITDA. We had a net loss of $12 million and non-GAAP net income of $91.4 million. We also generated positive free cash flow for the year, generating $18.6 million of cash despite the challenging macroeconomic conditions. I would note that 2022 was a banner year for us on the supply side of our business. On average, in 2022, we brought in over 90% more new digital property partner revenue per month than we averaged in 2020 and 2021. Our churn rates for our digital property partners were also at historically low levels. In addition, we gained valuable new supply from Taboola News, as we grew that business to over $50 million in revenue in 2022. For the quarter, our Q4 revenues were approximately $371 million. Our ex-TAC gross profit $159 million, our net income $15.2 million, and our non-GAAP net income $43.3 million. Ex-TAC gross profit declined approximately 6% year-over-year, which included a drag of almost 5% from foreign currency exchange rate headwinds. Revenues were aided by the addition of approximately $35 million of new digital property partners, but were decreased by approximately $71 million decline in our existing digital property partners. The decline in our existing digital property partners, which is a very unusual occurrence for us, was caused by the global macroeconomic weakness, and the result in reductions in advertising budgets by many of our advertising partners. Operating expenses were down around $17 million year-over-year. This decrease was primarily the result of our focus on cost reductions that started with decreased discretionary spending around mid-year, and continued with our cost restructuring program announced in Q3. We generated adjusted EBITDA of $63.5 million in the quarter, and approximately $157 million for the full year, both of which were in line with our expectations. GAAP net income for the quarter of $15.2 million for Q4, and our GAAP net loss of $12 million for the full year, included intangibles of $16 million for the quarter, and $64 million for the year. Share-based compensation expenses, excluding the holdback related to the Connexity acquisition, were $13 million for the quarter, and $64 million for the full year, and restructuring charges of $3 million for the full year, which were excluded from non-GAAP net income. Our non-GAAP net income of approximately $43 million for the quarter, and approximately $91 million for the full year, were both above the high end of our guidance ranges. In terms of cash generation, we had approximately $20 million in operating cash flow in Q4 and approximately $53 million for the full year, with free cash flow of around $14 million for the quarter and $19 million for the full year. That free cash flow was after net publisher prepayments of $3 million in Q4, and $15 million for the full year, as well as $6 million of interest payments on our long-term debt in the quarter, and $21 million for the full year. I would also note that the combined balance of our cash and cash equivalents, plus our short-term investments, declined from approximately $319 million at the end of 2021, to approximately $263 million at the end of 2022. The decline is more than fully explained by our decision to repay approximately $61 million of our long-term debt. We decided to do this in Q4 because of rising interest rates. We have historically kept a relatively large amount of cash on our balance sheet in order to maintain operating flexibility in case certain opportunities came along that required large amounts of cash on short notice. For instance, the acquisition of a distressed asset or a large publisher win that would necessitate a large upfront prepayment. You could think of the upside of this policy as maintaining option value. However, as the cost of maintaining this option has risen with rising interest rates, and given the fact that we now have a revolving credit facility to draw upon as well, we decided to pay down some of our long-term debt. We expect to retire $30 million to $40 million more of the debt in 2024. Now, let me shift to our forward-looking guidance. I should note that our guidance assumes continued weakness in the macro environment at current levels for the rest of 2023, but not a significant worsening of the macro environment. As I mentioned earlier, the decline in our year-over-year revenues and ex-TAC was the result of macroeconomic softness that started in Europe at the end of Q1, and spread to the US and most of the rest of the world at the end of Q2. We had relatively normal seasonality in Q4, so that softness did not worsen, but it does mean that we entered 2023 at a much lower run rate than we had starting 2022. The way to see this is to look at our Q3 2022 numbers. Historically, Q3 contributes almost exactly 25% of our ex-TAC in a given calendar year. So, if you multiply our Q3 ex-TAC by four, that's a good estimate of our run rate entering the subsequent year. In Q3 2022, we had $129.3 million of ex-TAC, which means we entered 2023 with a run rate of around $517 million, over $50 million lower than our 2022 full-year numbers. This lower run rate of $517 million was the starting point for our 2023 projections. After applying our expected growth, we’re guiding to full-year revenues of $1.42 billion to $1.47 billion, and ex-TAC of $526 million to $546 million. This guidance does not currently include revenues or ex-TAC from Yahoo. We’ve chosen not to include Yahoo revenues or Ex-TAC in our guidance because we have not finalized our planning process, and therefore it is too early to accurately forecast when we should start seeing the revenue from that partnership. We will update as we progress through the year and have better visibility into that. To that point, this year will be a significant investment year for us. We did factor in almost $30 million of cost related to Yahoo into our guidance. These expenditures will be required to support the transition of the Yahoo supply and advertiser relationships onto our platform. In addition, we recently announced an initiative called Taboola Turnkey Commerce with Time as our initial partner. We believe this initiative will generate significant returns over time, and meaningfully increase the growth rate of our eCommerce initiatives. We will invest $5 million to $10 million in this initiative in 2023. These investments in Yahoo and Turnkey Commerce are on top of the investments that we’re making in our other top company priorities of performance advertising, header bidding, and other eCommerce initiatives. After the impact of these investments, we’re guiding to $60 million to $80 million of adjusted EBITDA, and a non-GAAP net income range of negative $10 million to positive $10 million. Let me finish by saying that we’re very confident that all of these investments will begin to pay off in 2024, and will continue to drive growth beyond next year. Adam has said many times internally that we’re in a very unique position right now because it is rare for a company to have such a clear picture of what the future looks like, and I agree with him. It is because of that confidence that we’re comfortable guiding to adjusted EBITDA in 2024 of over $200 million and free cash flow of over $100 million. It is also important to note that 2024 will still only be a partial year for Yahoo, as that business will not be fully transitioned until mid-2024. Please come to our Yahoo Deal Information Session on March 1 to hear more about what you can expect from that partnership. You can register on our Investor website under the events tab or by sending an email to investors@Taboola.com. And with that, let's open it up to questions.

[Operator Instructions] And our first question coming from the line of Andrew Boone with JMP Securities. Your line is open.

Hi, guys. Good morning. Thanks so much for taking my questions. I want to touch on the 2023 guide. The Yahoo deal is closed and they've announced the closure of Gemini. Can you help us understand what Yahoo's doing currently and how we think about the guide for 2023 and the incorporation of the Yahoo? And then Adam, what do you need to do to get advertising demand going again? What are you most excited about that can push yield in 2023? And then just one last clarification question for Steve. Just, can you talk about the timing of the paydown of debt and anything else to highlight there? Thanks so much.

Yes. So, let me start with the 2023 guide. So, I think the way to think about our 2023 guidance is that we're entering the year with a lower run rate than we had even entering 2022. And that's basically the macroeconomic effect and the decrease in yield. So, our Q3 and Q4 were softer than they were in 2022. We also had some supply shock in that we added so much supply this year, that with the softness of demand on the macro, that also affected our run rate entering the new year. So, I think those things basically starts us off at a lower base. We do expect to grow off of that base this year, but it's going to be lower growth overall due to the lower starting point. On the cost side, I would say it's an investment year for us. So, we’re going to invest in performance advertising, eCommerce, and header bidding, which we've been investing in up until this point. We’ve decided to continue investing there because we think those are investments that will pay off in the short-term. And then obviously, there's Yahoo, which, for now, what we've assumed in our guidance for Yahoo, is that we will - we've put the cost in. so, we've assumed that we'll have to hire the people that we need to support that to build the pipes, to connect the systems and everything else. But because we don't have good visibility yet into exactly when we'll start migrating advertisers and bringing the supply over, we chose to just exclude the revenue from our guide. So, it's about a $30 million cost hit, but with no associated revenue, just because we're trying to be conservative and trying to avoid adding guidance for something that we don't have clear visibility to. So, that's how to think about our guidance for this year. What we will say is, and it's obviously very unusual that a company would guide for 2024, we're confident enough in these investments that we believe we were confident to guide to 2024 for $200 million plus of adjusted EBITDA and over $100 million dollars of free cash flow. So, we expect them to be - we're not talking about investments that'll pay off five years from now. These are things that we'll see return starting in 2024, which is right around the corner. And by the way, thank you for the clarification question on the debt. I realized as I was listening to that, that I said that we would repay $30 million to $40 million of debt in 2024. I meant 2023. See, I'm already in 2024. So, but yes, so we'll actually be looking to repay $30 million to $40 million of debt this year, and not next year.

And I can drop, Andrew, and thanks for the question about SmartBid and what excites us on the advertising front. I’ll just say, I came back from Israel, and I spent the week with the engineering team. We have about 200 people now working on advertiser success, specifically on the performance side. And I came back uniquely excited just to see all the good work that our people are doing. I would say what's - if I was to summarize 2023 kind of one theme that you should expect, and just this last week, we launched something to GA to about 80% of our advertisers. It's about building strategies. So, up until now, SmartBid was more of - we call it like autonomous car in the sense that advertisers could go to SmartBid, kind of put an initial CPC, and SmartBid would change the CPC based on conversion. As of now, advertisers can go to Taboola and actually also lean in and say, what is the objective they're trying to achieve, as an example with the target CPA. So, just this past week, we brought it to market that advertisers can say, our CPA is $50 or $30. That's how much my product is cost, and SmartBid will optimize using AI to that specific CPA. And that’s a big deal. That's been a lot of hard work for us. And later this year, you should expect us to roll out things like target ROAS, maximize revenue. So, advertisers can really work with us much closely as it relates to their goals, and we'll use AI to do it for them. So, that’s going to be a lot of our efforts this year.

Thank you.

Thank you. One moment please for our next question. Our next question coming from the line of James Kopelman with Cowen. Your line is open.

Hi. Good morning, guys. Thanks for taking the question. Could you provide some additional color on ad market trends into February? And particularly what you're seeing on a region by region basis. Also, can you talk about how much conservatism is baked into your outlook in case we end up with a soft landing in the economy? And finally, maybe any color you could provide on which ad verticals were weaker versus stronger in 4Q and into 2023. Then I have a quick follow-up for Adam.

So, let me start with the advertising market trends and the conservatism in the guide. So, first of all, in terms of the advertising market, what we saw - and I’ve heard a lot of companies talk about this, so I think what we saw is similar. We saw a relatively normal fourth quarter in terms of seasonality for us, which is I think why we were kind of right in the middle of our guidance range, but with a bit of a soft December. So, the year, it almost seemed like advertisers kind of made their goals and then they started pairing things back in December. It's actually similar to what we saw last year. Interestingly, for us, Connexity was the exception to that. So, eCommerce revenues continue to be strong through the end of the year. So, that's generally what we saw at the end of last year. Heading into this year, it's kind of - again, it's been relatively normal seasonality as we've started. So, we haven't seen any acceleration of the softness or any sort of significant changes there. Regionally, same thing. Like we haven't seen EMEA or Europe or the US or any other particular region be particularly different than the others. Everything is looking kind of like normal seasonality to us, but again, off of a lower base that was set up by cuts in budgets earlier last year. So, that's kind of what we're seeing. In terms of our guide and conservatism in the guide, what we're assuming right now is that continued trend. So, things don't get significantly worse, but we also don't see a recovery. I think the bull case for us is definitely that a recovery happens, and we believe that because of the great supply that we brought on in 2022, that in a recovery, we'll see an outsized period of growth as we're able to kind of overcome the, what I referenced earlier as supply shock, bringing on too much supply and not having enough demand for it. We should see a faster than normal growth rate as we - as the demand catches up with the supply in a recovery. Obviously, the bear case would be the macroeconomy gets significantly worse and advertising budgets are cut again. But I think generally for now, we've assumed that things stay as is, which is still soft, but not what it's been. And I apologize, we kind of missed your third question. Can you repeat that?

Yes, sure. I was just curious if you had any advertising verticals that you would call out as being either weaker versus stronger in 4Q and into 2023?

I think one vertical that was stronger was on eCommerce. So, I think Steven mentioned that towards the end of the year and even December specifically, we've seen eCommerce being stronger than usual, specifically with Connexity DCO, which has been a good momentum throughout the year, with retailers that were able to find success on our core Taboola supply. That means that their products were able to find good conversion on traditional publishers news and other types of content on the Taboola network. So, that's been a source of strength. And then more recent with the launch of turnkey eCommerce as we're rolling out high intent content and product review for publishers we announced with time.com and nj.com, which was in my letter, that content actually increases the quality supply that retailers want. So, this has been another source of strengths, and I expect this to be a growing momentum for Taboola as we continue to grow the content that publishers have that retailers want to be attached to.

Great. And then just to follow up, if that's all right, I wondered, Adam, if you could just talk about the progress at Taboola News. Will there be any new partners to call out? Is it still growing at 100%? And how should we think about the size of the business 12 to 18 months from now? Thank you very much.

Yes. So, we’re very excited about it. I've been to some quarterly business reviews in Q4 where publishers showed us that Taboola News is becoming 5% to 10% of their traffic in different regions, which is unbelievable if you think about the power of SEO and social traffic and how much publishers rely on that. So, that was great synergy between Taboola News to our core business. So, that's great news. We have great partnership with Xiaomi and Samsung and others. You should stay tuned for some new formats that we're launching. You can imagine video and commerce and other things that we do on our traditional publishers that we've yet to be doing with OEMs. So, I suspect there's a lot of vertical growth with our existing OEMs that we can do more with them and increase the RPU that we generate for consumer. So, I'm excited. Also, it's still a small business overall, right? We announced it - while it's a startup, organic startup, we started at Taboola, it crossed the $50 million in revenue last year, similar margins to our overall business. And I expect this to be a triple-digit business. We haven't given specific numbers, but I did say feel comfortable saying that this will become north of $100 million business within the foreseen future.

Thank you. And our next question coming from the line of Laura Martin with Needham & Company. Your line is open/

Hi there. A couple things. Adam, could you give us an update on what's going on with your video ad units and revenue? And also, you've been trying to move upmarket, like up the page because you talk about high impact ad units and how that's going. And then in terms of spending, I just - Adam, I'm really struck by the fact that we just keep adding sort of new tasks and new cost centers. So, eCommerce, we had eCommerce and we're doing news and now we're doing Yahoo, and now we're adding. So, I just feel like we keep adding sort of engineers and costs and there's just a lot of complexity. Over the last 24 months, I feel like complexity has doubled or tripled in terms of all the things you're trying to accomplish. Could you talk about managing that, all of those various initiatives, and how you think about return on invested capital? Because it sort of feels like some of these would be better allocated more and maybe cutting off some of these. So, can you just talk about that for us? Thanks.

Hey, good morning, Laura. These are two very good questions. So, let me start with the video one. What we've been doing over the last three or six months as part of kind of like lifetime value approach with publishers to help them drive the maximum amount of value from consumers coming to their site, because some consumers love videos. Some don't. Some like eCommerce. Some don't. So, more and more, we're trying to think holistically about our publisher partnerships as like an amazon.com, whereby different people have different lifetime value and optimized for the long relationships publishers have with users. And video plays a big part in that because some people really like it, but while others don't. So, what we've done, is we've kind of consolidated our recommendation units to sort of - we call it recommendation reels, which could include videos in them. So, many of our publishers now on their homepages in mid-article, especially with the growth of the Homepage For You, which gained a lot of momentum, I mean, it's such an amazing product to put AI on your homepage, it comes with video recommendations. So, it has been a very good source of strength for us. I think, obviously, with brand advertising being softer and performance advertising in 2022, it's more of a supply opportunity into the future where that's going to come back. But we do see publishers integrate our video units more and more specifically on homepages mid-article and our traditional feeds. So, I like it, but what I like the most is how we're consolidating all of these formats into a single recommendation unit that could, to some users, appear as a video, and to other people it appear as an eCommerce recommendation. And that's what publishers buy from Taboola. They buy sort of a holistic lifetime value personalization engine versus the widget or placement. So, video is becoming more and more just a holistic part of our recommendation vision. And we have seen a lot of growth specifically with Homepage For You, which is - it comes with a high impact placement like you mentioned. About the second question, when it relates to just our investment policy, let me say a few things. So, one, I think it's healthy for companies and for Taboola to be free cash flow - positive free cash flow, which is very important to us. So, whether that's in a down-market or upmarket, it's something we as a management team and as a board, pay a lot of attention to. So, that's - as you can see in 2023, while investing significantly in Yahoo and other things which will pay a huge dividend for investor community and ourselves in 2024, we're free cash flow positive with a healthy EBITDA. Now, specifically the way we think about our investment, this is a great opportunity for us. we have an amazing publisher network and a lot of momentum that has grown in 2022. I see an amazing upside. I mean, I can't express what I think will happen if we get performance advertising to be stronger or eCommerce to succeed even more or header bidding. Each one of them can turn into hundreds of millions of dollars or over $1 billion in revenue for Taboola, and will make us stronger. So, I think we're working on the right stuff. Three things that I mention again and again, and obviously Yahoo, which is very accretive to investors and going to make us even stronger. So, specifically about turnkey, which we're adding this here, I feel that this was the missing piece to make eCommerce everything we wish it is or will become, because many publisher partners came to us and said, we love to become bigger in retail and in eCommerce revenue, but they don't have the content. So, they look at the New York Times with Wirecutter. They look at USA Today with review.com, but they don't have the editorial team. They don't have the data, and they don't have the ability to get in the business. So, there's this chasm they want to cross, but they can't do it. So, we said we have the data. Let's build the team, create the content for them, enjoy the authority they have with SEO and consumers, and make this a big, big business. I can tell you, by the way, from what I'm seeing so far, publishers, I mentioned time.com that are getting into turnkey eCommerce, the model for that business and eCommerce overall, for publishers where it's relevant for them, is 5x to 10x our core Taboola business. So, if I look at how I started Taboola, bottom of article feeds and advertising, and I compare that to publishers who will get into the eCommerce business, we can grow that relationship very, very significantly. And then it's a bigger share of wallets. It'll be much harder to fight with Taboola, better margins over time, even better margins. So, I think it's worth it. And on the other side of 2024, you saw what we feel comfortable to guide and I think we're being fairly conservative. So, hopefully, we'll be able to beat this and grow it.

Thank you very much.

Thank you. And our next question coming from the line of Stephen Ju with Credit Suisse. Your line is open.

Okay. Thank you. So, Adam on your prepared remarks, I think you talked about what sounds like an improved matching algorithm to stick the right ad in front of the right user at the right time. So, I guess it's early, but is there any color you can share in terms of the greater accuracy you may be driving in some of the testing there? Thanks.

Yes. So, I mentioned about four tracks in my letter. That has been one of them. And I mentioned earlier on this call our bidding strategies. So, we're spending a lot of our time between creative bidding strategies, matching AI to increase the advertisers’ success and make it easier for advertisers to get the first conversion faster around the target that they're trying to achieve. Specifically with AI, you may have seen also that we've announced generative AI, whereby our advertisers are now able - it's in beta, are now able to get creatives that are driven by past performance of our advertisers, and that can help us basically better match consumers with creative landing pages, images, and things that can help consumers see ads that are predisposed to what they may try to achieve. So, that’s what that is all about. And like I mentioned, we have - it's the biggest investment we have in the company. If I could do one thing at Taboola, that's the one thing I will do, performance advertising, because I think if I compare Taboola, which has about 15,000 advertisers or so, to bigger wall gardens that have hundreds of thousands or millions, the upside here is just massive. So, here, we're investing a lot in AI, generative AI, to make sure that we have also the right landing pages and storytelling for advertisers. And also, there's a benefit of being the biggest, right? Taboola is now, especially with Yahoo, right, you're looking at around $2.5 billion revenue company, side by side companies in revenue, to Twitter, Snap, Pinterest, and others. At that size, we have so much data that we can really help our advertisers kind of leapfrog the cold start they have with advertising companies specifically when you think about smaller companies. So, I'm excited about the scale that we're about to have as we launch Yahoo and make advertisers even more successful.

Thank you.

Thank you. One moment, please for our next question. And our next question coming from the line of Jason Helfstein with Oppenheimer. Your line is open.

Did we lose Jason?

Please check your mute button. All right. One moment please for our next question. and our next question coming from the line of Justin Patterson with KeyBanc. Your line is open.

Great. Thank you. Good morning. We're starting to see more stories of large publishers shutting down internal ad tech divisions, or at least materially cutting the headcount there and leaning more on third parties, the Yahoo relationship a great example of that. How would you characterize the opportunity set to add new publishers and expand with existing ones versus what you've seen in the past? And then secondarily, Adam, you talked a bit about generative AI within the prepared remarks and the letter. Would love to hear how you think about that just impacting the publisher landscape. Is this more opportunity or threat? And how do we think about that potentially rolling into the business over the next few years? Thank you.

Sure. Good morning. Thanks for the question. So, I can start. So, in terms of publishers shutting down internal units, I think Yahoo is a very unique because it's a very big company and they have a variety of different things that they can do from their perspective. I think as an industry, there's a huge opportunity for publishers to partner with I think fewer partners. So, I think what we'll see over the next few years is that publishers want to have less vendors and more partners and maybe less partners, right, so they could go deep with them. The opportunity I see is more about diversity of revenue. I'm hearing that a lot from publishers. Publishers want to have some revenue in eCommerce, some revenue in video, some revenue in native advertising, some header bidding. They want to have diverse - some subscription perhaps, right? So, they want to be less exposed in a single bucket of advertising revenue, and I think that's also what Taboola needs to, and wants to provide, right? So, that's where we invest so much in eCommerce and AI to help drive subscription, which is the value we give at no cost to our publishers with Homepage For You. So, all of those things, I think that's the trend. Publishers will have less companies they work with. They're going to sign longer term agreements so they can truly innovate and lean in on each other. And companies that are more single kind of product, I think will be over time more challenged because it'll be very hard for them to kind of fight with the bundle of different types of advertising mixes. So, that's a trend I'm seeing. And I think we'll see more of that, especially right now when everyone is looking for growth, right? So, that's - I'm excited about that, and I think we're investing in the right stuff. Also, going back to Laura's question, that's why investing in my opinion right now in becoming that partner for publishers, is a good thing. The second thing on generative AI and GPT and all of those things, one, I think it's going to be fantastic for advertisers, because like I said, there's an interesting kind of chasm or a gap for advertisers, a cold start, if you will, whereby they don't know how to begin. If I'm an insurance advertiser, what should be the right title? How should I think about my landing pages? Where should be my buttons? All those questions, over time that becomes a huge actually kind of IP for advertisers as they know how to advertise. But those are just start, they don't know how to begin. So, especially if you're a small advertiser, or if you're a self-service advertiser. So, I think that's going to be really great for companies who have scale and data to prompt that into a GPT-type engine to then come up with new creatives that can help advertiser be successful. And so, that's going to be interesting. I think for the publisher side, I suspect we'll see growth in journalism and writers, because now publishers will have a chance to see what content is missing that users want to read. That can create engagement and subscription and different revenue mix. So, in my opinion, they'll invest in high quality, trusted content driven by AI. So, they'll use the kind of the insights of GPT-type engines to know what's missing and what's missing, not only to engage consumers, but also to drive revenue. So, that's - I think we'll see growth, and of course, as we all know, we'll see growth, I think in productivity and all that stuff, but for advertising and publishers, I think this is a good thing.

Thank you. One moment please for our next question. And our final question coming from the line of Chad Larkin of Oppenheimer. Your line is open.

Hey guys, it's Jason. Can you hear me?

Yes.

Yes.

Yes, I had some technical issues with this PIN. I don't know why, so totally apologize. Okay. So, first, I want to understand, you were originally thinking Yahoo would have an impact in the second half, and obviously that's been pushed a little forward. So, maybe just talk about kind of why that is. And then can you talk some more about DR, how fast did it grow, what percent of the kind of mix is it on maybe a revenue, post-tax? And then just lastly, the comments about moving away from publisher prepayments, just obviously, that doesn't affect the income statement because it’s a prepayment, but just - maybe just talk about what that says about the competitive environment. Thanks.

So, let me start by addressing the Yahoo and the impact of Yahoo on guidance, and I'll also talk about the publisher prepayments. So, I think the Yahoo - we still expect Yahoo to start to show some revenue in the second half, but the problem is that I don't know how to forecast it yet. So, I don't know the degree of the revenue. I don't know exactly when to forecast that it'll start because we're kind of deep in the planning stages right now. So, for conservative reasons, we just decided to exclude it from our guidance for now, and we'll update on that as we get - go through the year, and we'll obviously have a much better view of that by the next time we have our next earnings call. So, I think it was mostly just the fact that we didn't know how to forecast it, is the reason that we excluded it. It's not so much that anything has changed on our timelines. And in a shameless plug, I would invite everyone to come to our Yahoo Deal Information Session next Wednesday, where we'll talk a little bit more about timing and why we're guiding the way we are, and you'll get some ideas of what we have to do, the work we have to do to get to the point where we're generating the revenue. So, that'll probably help. On your question about publisher prepayments, so the - I don't think - publisher prepayments has been part of our business model for years. So, it's not something that's new or different. In fact, I would say, if anything, publisher prepayments are less important to us from a competitive perspective, like just straight up win rate and retention rate of publishers than it was historically. But we do use it very specifically in two specific situations. One, we do use it when it's a publisher that we don't have a history with, who we kind of need to put our money where our mouth is to make them believe that we can do what we tell them we're going to do. So, we do use it in that situation to win new publishers. And that's becoming, frankly, rarer and rarer because - not rarer and rarer in terms of using it in general, but rarer and rarer to use that tool to prove anything to them because they can now talk to other publishers in their market and they hear from those publishers what we can do. But we still do use it in that case where it's a sign of confidence. I think where we're starting to use it more is also to get longer duration deals or other things that we want, like to get publishers to do more with us faster. So, we'll sometimes put a upfront cash to get them to sign a five-year deal instead of a three-year deal, or to sign a 10-year deal instead of a five-year deal, or to do full-feed and mid-article from the outset, rather than do something more conservative initially and then look to expand later. So, we use it to get things we want as well. And it is an advantage that we do have the balance sheet to do that, especially relative to some of our much smaller competitors. So, I think that's the way we think about publisher prepayments. Your last question was around, I think you said DR and whether or not we're seeing progress on that. Can you give us a little bit more about what it is that you're wondering about there?

Yes, I just tried to imagine your DR - the DR-related ads are growing much faster than the brand. So, just if you can give us a sense of how much faster and then what percent of the mix it is on a post-revenue, post-tax basis today?

Yes. So, interestingly, I don't think the overall mix has changed that much. I think, generally speaking, we’re doing a good job of growing our brand advertising business because a lot of our new supply, especially upsells with new publishers, is placements that actually do well for brand advertisers. So, our mid-article, high impact placements, homepage units that we're now getting with Homepage For You, these things are actually driving a lot of supply, a lot of inventory that works well for a brand. So, that's making that part of the business grow faster due to the supply side. I think that our DR or our direct response performance advertising business is definitely performing well and growing, but it's really at a more similar rate. I think, as Adam said earlier, our optimism with DR and performance advertising is that if you asked us what inning we're on right now in terms of that whole ballgame, we're in the second inning. Like, there's so much more we can do. And some of the things that Adam talked about in terms of the new features we're releasing, new targeting technologies, we think that's going to accelerate that business going forward. So, as of now, they're growing at similar rates, but I think we feel that performance advertising is still a big part of our future.

I would just add that in 2024, as we’re fully live with Yahoo, the biggest thing that excites me is that advertisers right now find it very frustrating to work with small companies in the open web. It's very fragmented. It's very - every company has a different technology, different dashboard versus easily buying Google, easily buying Facebook. So, there needs to be a company that generates billions of dollars in revenue in the open web that can make it easy for advertisers to rely on contextual, safe, not cookie risk, all those things. So, we're a year away from getting to the point that the scale is so significant that advertisers can truly say, we have a Google strategy, Facebook strategy, a Taboola strategy, and that's going to be, in my opinion, the biggest needle mover for both performance advertisers, as well as agencies and brand advertisers.

Thank you.

Thank you. I will now turn the call back over to management for any closing remarks.

All right. So, thanks, everyone, for joining us today, and we look forward to spending a lot of time with all of you. So, I'm very excited about the momentum and the future of Taboola. Like I said, I'm excited about winning incredible publishers who choose Taboola and trust us, even ones that have left us and came back. As you know, I have this T-shirt that's always come back and I'm proud of that. To our growth engines that can double Taboola on the other side of it when Yahoo launches and we become $2.5 billion revenue that we mentioned on a full-year basis like last year. We have eCommerce, performance advertising, and header bidding. Each one of them can double the company because these are huge markets, and it's going to make us also more competitive as we continue to win new supply and new advertising business. I'm very, very excited about Yahoo and becoming a must-buy for advertisers, like I just mentioned, and working with the Yahoo team for the next 30 years. And like I said, it's uniquely rare that management companies have seen the future. We're investing this year, and 2024 feels like just one big care bear shining light on our journey. So, I'm super excited. My team is excited. And please join us if you can next Wednesday in New York for a Yahoo Information Session. We're going to host Monica, our newborn member and Yahoo CFO, Jim Lanzone, Yahoo’s CEO, and our executive team. It’s going to be great, and thanks again.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.