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…

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…

[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…

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…

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…

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.