Good day, and welcome to Outbrain, Inc. Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I’d like to turn the call over to Outbrain’s Investor Relations. Please go ahead.

Good morning, and thank you for joining us on today’s conference call to discuss Outbrain’s second quarter 2024 results. Joining me on the call today, we have Outbrain’s CEO, David Kostman, and CFO, Jason Kiviat. During this conference call, management will make forward-looking statements based on current expectations and assumptions. These statements are subject to risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. These risk factors are discussed in detail in our Form 10-K filed for the year ended December 31, 2023, as updated in a subsequent reports filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the call’s original date, but we do not undertake any duty to update any such statements. Today’s presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company’s second quarter earnings release for definitional information and reconciliations of the non-GAAP measures to the comparable GAAP financial measures. Our earnings release can be found on our IR website, investors.outbrain.com under news and events. With that, let me turn the call over to David.

Thank you, Sam. Good morning, and thank you for joining us today for our second quarter 2024 earnings call. Last Thursday, we announced a definitive agreement to acquire Teads, combining the 2 companies into a platform that we believe will define the next generation of Open Internet advertising. This is a transformative merger that positions us as one of the largest Open Internet advertising platforms. It dramatically changes our financial profile in terms of profitability and growth opportunities. We believe the combination will deliver significant accretion to our shareholders through synergies and the financial leverage of the transaction. The 2 companies have amazing teams of talented, innovative, driven people that have been instrumental in establishing our 2 companies as category creators and leaders, outwining performance and Teads in branding. Together, we believe we will create a scaled global platform that can deliver outcomes for advertisers currently only rivaled by Walled Garden. We’ve been clear that our vision is to become a true end-to-end full funnel platform for the Open Internet, with the level of service and standards centered on serving brand needs. The news of our merger with Teads allows us to take a massively forward in executing this strategy. The reception we’ve seen from many industry players reinforces our confidence in the merger’s rationale. Many of our partners for media owners to brands and agencies expressed their excitement about the opportunities the new company would create. For example, Peter Wurtenberger, Executive Vice President at Axel Springer wrote to us. This is a significant milestone for both companies, and we are thrilled to see your expanded capabilities. We look forward to seeing the positive impact this partnership will have on the industry and on our collaboration. And another one, Alexandra Chabanne, CEO of GroupM France, one of our agency partners,…

Thanks, David. As David mentioned, we achieved our Q2 guidance for ex-TAC gross profit and exceeded our Q2 guidance for adjusted EBITDA, generating positive free cash flow for the fourth consecutive quarter. And overall, we feel we have made updates to our revenue mix and cost structure that are having a positive impact on our profitability now and expect that to continue in the future. Revenue in Q2 was approximately $214 million, reflecting a decrease of 5% year-over-year. New media partners in the quarter contributed 6 percentage points or approximately $14 million of revenue growth year-over-year. Net revenue retention of our publishers was 89%, which reflects continued headwind from the impact of the demand environment on pricing as well as downward pressure of ad impressions from certain key supply partners as noted in the prior quarter. Consistent with recent quarters, logo retention was 99% for all partners that generated at least $10,000, and our five largest terms amounted to only two combined points but year-over-year headwind on NRR. With respect to advertising demand, pricing remains low relative to our history. And while it remains down year-over-year, we have seen positive trends over the course of Q2, improvement month-over-month. This, along with continued improvements in click-through rates, drove acceleration in RPMs, which have now seen growth year-over-year for the third consecutive quarter. Ex-TAC gross profit was $50 million, an increase of 3% year-over-year, outpacing revenue for the fifth quarter in a row, driven primarily by net favorable change in our revenue mix and improved performance from certain deals. As noted previously, the investment areas we are focused on are largely areas that we expect will drive a higher ex-TAC take rate, and these areas are helping bring that to fruition. While ex-TAC gross profit returned to year-over-year growth in Q2 on…

Thank you. [Operator Instructions] And we’ll take our first question from Andrew Boone from JMP Securities. Please go ahead, Andrew.

Good morning. And thanks very much for taking my questions. You highlighted the growth in RPMs in the quarter. Can you talk about the drivers of that and your confidence that this can continue? And then, Jason, can you wrap that into the implied guidance for 4Q and talk about your confidence, just given the implied acceleration that full year guidance implies for 4Q? And then Dicky, just stepping back, can you talk about the conversations that you’re having with advertisers just in the last week, understood still very new. But what’s the reception been to the announcement of the Teads acquisition? Thanks so much, guys.

Sure. Thanks, Andrew. It’s Jason, and I’ll take the first couple there. So as far as what’s driving RPMs, I mean, it’s the third quarter in a row that we’re seeing yields or RPMs up year-over-year. One constant driver has been the click-through rates, which we’ve been kind of each quarter breaking our previous records as far as just how high those click-through rates are. A lot that goes into that. Obviously, algorithmic improvements, use of additional data signals, optimization, like some of our dynamic placements that we’re using are helping drive higher click-through rates. So click rates have been a good thing for a long time for us and going in the right direction. The one kind of new thing I’d say this quarter was we started to see just a better trend on cost per click, on CPCs, which have been a headwind and remain a headwind for us year-over-year in Q2. But over the course of the quarter, we started to see it going in the right direction as far as just narrowing the headwind year-over-year. So that was a real positive. It comes with maybe some market dynamics and also some changes we made internally as well. So good things there RPMs, and we obviously see it not only driving better revenue but also better margins. And then as far as the confidence in the back half and Q4, we do expect acceleration in Q3 versus Q2 and also Q4 versus Q3 versus, the 3% ex-TAC growth we saw in Q2. We get to, I think, 6% in Q3 at the midpoint and 17% in Q4 at the midpoint. So maybe just a lot of the good things that we see driving the success in Q2 and into Q3, we see continuing into Q4. So that’s definitely a piece of it. But I think a big piece of it and that step-up from the 6% growth to 17% the difference is. A lot of it is coming from year-over-year comps actually. So 8 points of even comps in Q4 is one way to look at it. Last year, we didn’t have a normal Q4. Obviously, it started with the attack on October 7 and the war and the impact on our war-related use page views and just advertising demand. And also just we talk about the key tech partner transition, we did start to see some headwinds on that really in Q4 of last year. So the two of those things combined ease the comps for Q4 and that’s driving, I think, 8 points of improvement as compared to the Q3. And then continued success of the growth drivers that we’re already seeing some success with, obviously, and yes, RPM’s election. So just those are more smaller items they’re flowing for our model, but all that combined.

Andrew, I’ll take the second one. Thanks. So it’s been actually a very exciting week with overwhelmingly positive feedback from players in the industry, both advertisers and BD owners publishers. On the advertiser side, specifically, they really view this as a huge opportunity to have one player that can provide the full funnel solution on the Open Internet. When we talk about full funnel, that means branding, consideration, and conversions on an end-to-end basis due to advantage of the data. So it was overwhelmingly both on the Teads side and on our side, people are expecting as quickly as possible for us to close this and be able to bring them the value proposition we’re talking about, which is really the combination of leaders in performance, which is us and leaders in branding that is Teads. So it’s been great, and it’s been a very exciting week as you can imagine.

Thank you.

Thank you. And we will take our next question from Ygal Arounian from Citi. Please go ahead, Ygal?

Hey, good morning, guys. Here Matt on for Ygal. I guess, first, maybe just start with what you’re seeing in the ad macro. It seems like maybe it’s been a little more mixed. But what you’re seeing now and kind of how you see that playing out through the rest of the year, if there’s anything maybe geographical or vertical to call out?

Sure. And I can start with that. So yes, like I said, we did see continued RPM and CPC gains over the course of Q2, which is a combination of a lot of factors. So it’s hard to know how much of it is macro versus internal or specific to us, but we did see positive things. So that’s a good sign. Geographically, I’d say, we see strength in Europe, particularly Germany, which is our second largest market, and Spain, we’re a couple of our stronger markets throughout the quarter. And yes, I mean, going forward, I think it’s hard to predict anything, I guess, macro wise going forward, but we obviously hope to see the continued acceleration of what we saw through Q2 is what we’re hoping for, but not overly relying that, I’d say, in our guidance.

Okay. Thanks, Jason. That’s helpful. And then maybe just spending a little time on Zemanta. Obviously, some good growth there. Is there anything maybe like specific you have some call out on what’s driving this? And then maybe just kind of a bigger picture when – in a combined company, how do you see Zemanta fitting in with Teads and maybe just with the ex-TAC too as you look to combine, obviously, early days, but maybe just any early thoughts on how you think about combining those going forward.

Sure. So, on Zemanta, it’s been one of our growth drivers for this year has been really to broader share of all on performance advertisers by just delivering superior work to them and also allowing them to spend more on the entirety of the Open Internet, again, in line with our vision, becoming the main gateway for the Open Internet for both brand advertisers and performance. And we started last year to ship some type of clients that just had better performance on the Zemanta platform into that. So, that causes two things. A, they spend more because they still spend on the our brand publisher network, but they also can spend on third-party platforms rather experience so, and then that grows the show puller and then also, for us, it’s a margin enhancer. We have seen – we said 50% growth in the spend on Zemanta and I think that will continue to be one of the main growth drivers for the company standalone. As to the combination with Teads, it’s a little bit early days. We have not yet gone deeply into sort of product planning, etcetera. We just started. I think we mentioned the post-merger integration planning. Generally, I would say the Zemanta platform is very, very focused on performance buyers. So, I believe that will continue to be part of our growth drivers in the future for those type of buyers.

Okay. Great. Thanks guys.

Thank you. And we will take our next question from Laura Martin from Needham. Please go ahead, Laura.

Yes. I also have two. The first one is, when you think about revenue synergies, is it a bigger upside driver that Teads will be able to sell in performance advertising from the Outbrain core business or the reverse, Outbrain ads more upper funnel from the Teads client base?

Hey Laura. It’s actually on both sides. So, what we have heard and also throughout the process, Teads was going sort of to the mid-funnel and to conversions, but again, only with enterprise brand buyers. So, that’s the focus in terms of the customer base, and that customer base also has different objectives on their campaigns. So, we see a huge opportunity and also the Teads management sees the huge opportunity to just drive leveraging our prediction technology algorithms, just better conversions and lower funnel business for the brand advertisers. At the same time, we have about 40% of our business today is with brand and enterprises. They do mostly performance. I mentioned a few campaigns that we have. So, for example, if you look at an automotive client, like Audi, we mentioned it in the call, they can really have us as the partner for the entirety of the funnel. So, I think it’s in both directions. When we gave the synergy number that we – when we announced the deal, the $50 million to $60 million, that doesn’t include minimal top line synergies. It’s mostly just around operating synergies and other opportunities across the two networks.

Okay. Thanks. And then, Jason, for you, the gross revenue came in really light, but the net revenue, which is how we value, came in right in line sort of with our estimates. So, is that related to this unique client that had an impact, and it only had an impact on gross revenue, but not net revenue. Is that how I should take your commentary about the one-time disruption of, I assume it’s Microsoft?

Yes. So yes, so the partner, yes, it definitely impacted both. It’s not just one line or the other line. A lot of the things that we are focusing on right now are things that are higher margin segments or drivers. I think Zemanta DSP business is a good example of that. And the way that works is it’s actually a net revenue business. And the fees that are charged for customers to use the platform and buy media spend are recognized on a net revenue basis. So, it’s just an accounting thing there, and we might see some trade-off in gross revenue in exchange for ex-TAC when we are doing that.

And maybe I just want to add, Laura, on the one partner. So, a strategic partner, they made a transition. We are the first native partner to make a full transition, signed a new agreement with them, but that transition also involves access to new types of supply within Microsoft, like Outlook, in games and others. So, it’s a transition. We were the first to complete it. We see also big upside opportunities potentially down the road, but I think we just need to be cautious with sort of how we scale up our buyers on that.

Thank you.

Thank you. And we will take our next question from James Heaney from Jefferies. Please go ahead, James.

Great. Thank you, guys. Could you just talk about the growth that you saw from Onyx in the quarter? And maybe if you could comment on your pivot from being more of a performance ad platform to servicing more upper funnel objectives? And I have another follow-up.

Yes. So, we are talking about Onyx, we had strong re-bookings. We don’t break it down specifically, but strong re-bookings, good adoption. We launched it in more markets and excited about sort of second half of it. I think that’s actually one part of the business that in the second half may get somewhat impacted by the Teads merger. I mean it is addressing sort of the upper funnel opportunities with large agencies, so that’s Onyx.

Great. And then, Jason, just on your full year EBITDA guide being raised, I am just curious where you are seeing the majority of the cost savings in the business, and then just broadly speaking, how to think about the balanced growth and profitability? Thank you.

Sure. Yes. We have been a bit focused on in the last couple of years on just improving our business model in general. And I think that we have done a lot of that, both in terms of changing our revenue mix and our approach to these investment areas that tend to have higher margins and higher profit margins as well, which I think we have been pretty successful at if you look at the take right now versus where it was a year or 2 years ago, but also with cost structure. And we have been pretty focused on that last year and the year before, and we continue to focus on it this year. And so we have been outperforming our plans on cost and some of that comes with just operating more efficiently, really being hard on ourselves with which areas to invest in and which not, and really scrutinizing our spend on that. We do expect a step up in the second half of the year in costs in some areas. Obviously, some of the hiring we have done for the investment areas happened during Q2. And so we expect that to be a little bit higher in the second half of the year. But we think it’s a nice setup for us to obviously deliver the higher level of EBITDA and remain prudent in our spending.

Thank you. And we will take our next question from Zach Cummins from B. Riley. Please go ahead.

Hi. Good morning. Thanks for taking my questions. Jason, I was curious what are your assumptions that you are baking in for Microsoft in the second half of the year? Are you assuming you are relatively stable from these Q2 levels, or any sort of improvement baked into the second half?

Yes. So, we obviously are looking at this very closely. Again, we believe we are the first native partner to complete this transition, and we have been very focused on driving the rescaling as we said a few months ago. I think right now, what we have seen is just volatility, and that’s really our approach to the forecast for the second half of the year, is accounting for it with just a greater range of variability in our H2 numbers. Because on one hand, we do see upside, on the other hand, we have seen volatility, and so we thought the best approach is to just to confer with a wider range of variability.

Understood. And in terms of just your overall footprint on the Open Internet, I think metrics you shared was 27% on your non-traditional formats on the Open Internet. Could you speak to the ideal mix as you go over time in terms of your footprint just for standalone outbreak? And I am curious how you are continuing to drive that strategy.

We are really trying to build ourselves as the main gateway to the entirety of the Open Internet. We have a strong asset in the bidding technology that we acquired through Zemanta that allows us to really go way beyond just our publisher base. So, ideally, we grow both. I mean we have had some great wins on the premium publisher side this quarter. So, again, we are very, very focused on our core supply base and brand and enterprises on premium. We believe that sort of premium supply drive premium demand also going for performance on third-parties where they are looking for few roll-outs and Zementa is just a great platform to do that. Again, overall, we see ourselves in terms of the organic growth that we delivered to sort of these efforts as sort of outperforming competition on organic growth, and that’s what we are looking at in terms of, again, growing the entire budget base that we can deliver both on our publisher base and on other third-party supply.

Understood. Well, thanks for taking my questions and best luck with the rest of the quarter.

That will conclude the question-and-answer session. I would like to turn the floor back to David Kostman for closing remarks.

Thank you, Karen. Thank you all for joining us today. We appreciate your support and partnership and looking forward to the exciting journey ahead together with all our shareholders. Thank you very much.

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.