Taboola.com Ltd. (TBLA) Earnings Call Transcript & Summary

All right. I think we're going to go ahead and get started. It's Stephen Ju from the Credit Suisse Internet Equity Research team. Sitting across from me is Adam Singolda, who is the founder and CEO of Taboola. So welcome, Adam. Thanks for joining us.

Thanks for having us.

All right. Awesome. So, to start with, since Taboola is not a consumer-facing brand. So if you can kind of give us an overview of what Taboola does, how it works, who uses your product, et cetera?

Sure. So, I started Taboola 14 years ago with a vision to help power recommendations for the open web. In many ways, you can think of us as a search engine, but in reverse. You know, you got to search engines, if you know what you want. You can type it and find it. But what happens when you have no idea what you're supposed to be doing next. So to think we only have 24 hours a day. That will never change. So the Company's vision over the next many, many years is to kind of build a reverse version of search engines so that information can find us wherever we may be. And then we started by focusing on working with publishers on the one side and advertisers on the other. If you've been to CNBC, Bloomberg, today.com, The Independent in the U.K. or Sankei in Japan; usually, you'll read an article, and it will say, you may like, recommended you more things from the site that you're on. So we're engaging people with the same site. And then side-by-side to that, we're also showing you paid recommendations. It looks like a feed of recommendations, sort of like an Instagram feed, but on a publisher website. And then right now, we've reached about -- we're reaching about 0.5 billion people every day. People click on Taboola about 30 billion times, that was last year. And we're public for 2 quarters and having a good time.

Yes, awesome. So, I think very recently at least compared to your market cap, you guys did a fairly sizable acquisition in terms of Connexity. So, talk about the rationale for that acquisition and what that does for you?

We've been seeing this amazing trend that on the one side, publishers build this trust with the consumers. If you go to The New York Times and you have a huge trust in things that they tell you as it relates to news. When they bought Wirecutter, it was an amazing extension of their business because now they can kind of carry that trust into offering reviews and products to consumers under the same roof of The New York Times. And same happened with Meredith and Hearst. USA today had reviewed.com. So on the one side, we saw a few publishers kind of extending themselves to have this high intent moments with consumers when they consider buying a product. And by the way, I'm sure many of you listening to this have been through this experience. If you buy something for your kitchen and home, you will never do it before going through all recipes and check if that's a good pan and what do they think about it because you trust the brand. So we saw that as kind of signs of oil on the one side. We also know that e-commerce online in the open web is about $40 billion. So it's a huge market that publishers are not really tapping into it. And then there was a pandemic. We were home. We can't go to a store to buy things as we used to. I'm not sure we'll ever go back to what it was. And we've all kind of experienced e-commerce going up and up, starting with the pandemic of last year. And we've all start seeing more boxes outside of our house as we buy so many things we never need, but we still buy it online. So when you add all those things up and Taboola being such an open web company, publisher-based company, we saw a huge opportunity to kind of bring the power of Amazon and e-commerce to publishers. And as part of that, we were fortunate to be able to acquire a company called Connexity, which is basically Taboola for e-commerce. They have retailers on the one side, publishers on the other side. And now we're integration stages early, but very excited about it.

Yes. And you can do all the due diligence that you want, but I mean, you won't really know until the guys are in the building, right? So, like what have you started to learn as you integrate these guys into your -- the legacy sort of Taboola operations?

No. I mean, we knew Connexity. We knew the space. We've been studying it for years. So we already knew that -- we knew the team, we knew the company, we knew the product. We also -- we spent enough time with them to see that there's a cultural fit, which is obviously the most important thing for us. The management at Connexity has been there for over 10 years. And everybody stayed; CEO stayed, management stayed, which is great to see. We're now kind of 2 months into it. And there's a great juju between the companies. People are working together. London offices, they're already going to the same office. In New York, we'll do that over the next 6 months. And we're starting to see early signs of success. I can give you some examples. First of all, if you remember, Connexity has built roughly $100 million ex-TAC margin business with 2 ad salespeople.

2?

2. They've been owned by a private equity. They've been lean and mean. They've done an amazing job. Taboola has 150 ad salespeople. They're mainly in the U.S., we're very global. So when you see those kind of synergies, opportunities; we get excited. What we didn't see and we're now kind of been surprised by that is we have people in China. We have an office in China. And then what you start seeing is that many -- China obviously is a huge e-commerce zone -- area, and they're asking how they can reach to U.S. through Connexity. So now we're seeing kind of export opportunity coming from China. And that was not on our synergy plan. So I would say, from a culture perspective, we knew them ahead of time, now work together, we're spending a lot of time together. We're merging the offices, and we're starting the upselling opportunity, starting with the advertiser side.

Right. I think one of the things that was pretty clear from when you guys did the presentation around the time of the acquisition was, how Connexity influences the editorial for any given site, right, property et cetera. So I think one of the last sort of like nuances of what Taboola does for its partners is the whole business approach. So can you talk about that a little more bit? It's not just the plug-in that you rollout on to your side. I mean, there are so many different things that you as a company do for your publisher partners.

Right. So let's take a stab at, why do publishers choose Taboola for 3, 4, 5 years? By the way, today we signed the first 10-year partnership with NDTV, which is the largest broadcaster in India. So 10 years, I will be 50 when that gets renewed, right? So why does that happen? And the fundamental difference between Taboola and companies in the advertising space is that we provide publishers with 3 things that are very unique to Taboola that nobody else does. The first one is significant more revenue. So they work with us to get the bottom of article, kind of native advertising recommendation revenue. Now we have mid-article, which is high-impact brand and agencies revenue. We have Connexity that will flow in and retail dollars will come in. So we generate more revenue to publishers. That's one. The second thing is that publishers want less vendors and more partners. So they're asking themselves, if I'm going to bring you in, how can you make my editorial team successful and my product team successful and my subscription teams successful? They don't want just to get a check and see you in a year. And -- so we took a very product-led approach. We invest $100 million a year in R&D, a little bit more than that now. And that means when we work with a publisher, we're able to empower the entire organization. So as an example, The Independent, I just met the Chief Editor a week ago before this bloody new variant. He was able to come to New York. And we did this kind of podcast, and he said -- it was going back in time to the moment we met, me and him. And he said, “You know you and I met 7 years ago over Martinis,” I like Martinis. So we met 7 years ago over Martinis, and I told him -- his name is Christian, I said, “You know, you have this huge gap in your organization.” He said, “What is it?” And I tell him, people who go to The Independent, it's been around for about 40 years. When they leave you, I find on the Taboola network now reaching 0.5 billion people a day that they're reading a lot about parenting and kids, but you don't cover that content. And he told me, “Adam, with all due respect, I've been here for many, many years, please don't tell me what we need to be writing about.” Came back home to London, was curious, invited us to show him the data, integrated newsroom, which is basically the map that shows editors what people who come to your site read on the Taboola network, launched a parenting section. It grew their audience, people stick around more and to engage on The Independent and they generate more revenue. He has now dozens and over a 100 people using the newsroom. So when you think about renewals and why to choose Taboola, it means so much more than money. And then the third one is that we also help publishers get new audiences. Remember, publishers don't fight publishers. They fight Facebook, right. They fight Google. So if you work with Taboola as a publisher, we -- you'll give us the rights to take your content and distribute that content on other platforms. So we have something called Taboola News, which is our version of Apple News. If you buy a Samsung in Brazil or Xiaomi in many, many countries, we're able to take our publishers' content, distribute it back to the OEM, to the device; you buy a Samsung in Brazil, Taboola is on the device. You click on a piece of content, you go to the publisher site. Publishers love it. So for those reasons and now with Connexity, obviously, we were able to build enough with the differentiation, so that publishers not only work with us, they work with us for long time. And if you look at our even gross margin as a percentage, you'll see that it's higher than other companies, and I think it's a good proxy for competitive advantage, right? So, we see us growing and keeping a healthy margin and I think that shows that people appreciate all the things we do for them.

Okay. So, Google is not a competitor. All these other ad display networks are not competitors. SSPs are not really competitors. You bring a completely different offering to your publisher partners?

So yes, and Google, I think, is not really a competitor. We talked about this. I think Google and Facebook right now mainly want to lay low and just hope this craziness ends, whatever they're going through. We do see SSPs somewhat in our competitive landscape. As an example, when NDTV today announced the partnership, including mid-article, high-impact placements or the one last week Future, which is a very successful publishers out of the U.K. or before that NBC Sports announced a mid-article; those integrations and announcements is Taboola replacing a banner. So that's not the bottom of article; these are high visible, large placements on their homepage or the mid-article. Those instances are kind of early stages of Taboola expanding into more traditional banner type business, which obviously is tens of billions of dollars market. But when we come into it, we replace those with half editorial, half sponsored experiences; publishers prefer that.

Right. Got you. Now let's talk about some of the new products. I think you recently introduced Smart Bid Dimensions, right? So -- which offers what I believe are at a more granular signals using the first-party data to match content with conversions. So what is advertiser adoption of Dimension has been so far? What's the adoption rate among the advertisers so far?

So what is -- just what is Smart Bid? To level set, Smart Bid, about 90% of Taboola's revenue, we're guiding for $1.6 billion next year. About 90% of our revenue is direct advertisers working with Taboola. They're using our AI to optimize for their sales and conversions. About 10%, now 15% is programmatic, but that's roughly the business. So most -- the vast majority of that is people working with us direct. When they work with us direct, much like they do with Google and Facebook, we created this technology we called Smart Bid which helps them to succeed. Smart Bid Dimension is this new evolution, which we just announced this past quarter, which allows advertisers to take this kind of autonomous car experience where they can be more -- even more successful with Taboola. So to give you an example, most platforms, if you're an advertiser, you're trying to sell furniture, and you're trying to reach people who buy your furniture on the open web. Most companies in advertising space, you'll have to be fairly sophisticated to succeed. You have to start a campaign in the U.S., campaign for the night time, campaign for the weekend, campaign for mobile, campaign for outside of the U.S., and you have to -- you eventually end up with 50 campaigns. Smart Bid Dimension says, don't do any of it, come to us, well fork your campaign into 40 mini campaigns, and we'll try to see where that's successful. And it's driven by Taboola investing in deep learning for many, many, many years. I think, I always tell, you know when I talk to investors about it, AI is something that we tend to see on every deck, and every company now has AI on it. It almost became like punctuation. But the truth is that AI is really, really, really hard to do. And there's a huge difference between machine learning, ML, artificial intelligence, AI, and bulls***, BS. And I think most companies had machine learning, but not most companies have AI, and we've been investing in this for many, many years and it helps us make advertisers successful and drive better yield so publishers generate more revenue.

So there's a greater opportunity for you to serve as the agent on behalf of the advertisers with minimal input from them. They don't have to live on a bunch of different parameters. So then the optimist in me wants to start dreaming about how the more long-tail advertisers starts adopting Taboola as a destination or for some of their budgets. So I think you have 14,000 or so advertisers right now, right?

Right.

So hey, why can't that be 140,000, 1.4 million, 14 million.

I wanted it -- first of all of all, we're both optimistic to be clear. But -- so first, I do think that it gives me more optimistic kind of view in a sense that, I think with Apple and IDFA and Facebook and Snap, making it harder for them to drive advertiser success. Many advertisers, if you talk to many SMBs and advertisers are being priced out of those platforms. And people need to find other channels where they can succeed. And Taboola is -- we're $1.6 billion out of $64 billion open web market, but we're big enough so that it's worth their time. So I do think there's an opportunity for us to capture a lot of those businesses that cannot be successful anymore with social networks. And that's a good thing. It's a good thing for the open web, for journalism, for our children, for everyone to diversify outside of Facebook and Google. So that's a good thing. I think specifically, the path from 14,000 to 10x is, one, us investing in awareness. I think most advertisers are yet to know Taboola. So we need to do more job, more work on being out there and being exposed to advertisers, so they try us out. We need to continue investing in relationship with the agencies, which we just announced Dentsu and that will open up to even more brands, big and small. I think the ones you mentioned, the very small ones; that really require also more investment in technology that we have yet done, and that is helping hyper local advertisers being successful and things of that nature. And that's when you get the millions, that's something that will be later for us. I think there's a lot for us to chew, even with the biggest advertisers, brand and agencies and even smaller size yet before we go long tail. But we know we're making the right steps towards making them successful. We're partnering with agencies. We get those mid article high-impact placements, brands and agencies love. So we're doing -- we're going in the right direction. And I think that having AI that can help advertisers be successful is key. If you compare Taboola, again, to most companies in our space, most companies in our space are mainly programmatic. It means they don't actually know the client. Someone is buying ads on their platform, they've never met the client. With us, it's 90% of our business. So I think it's critical for us to invest in technology so that we can continue to do a good job for them. And that will unleash the 14,000 to 20,000 and more.

Yes, got it. So seems like as we listen to you talk about Connexity, the R&D budget and on-boarding of, hopefully more advertiser budgets as you make it easier for them, right? So that's on the demand side of the equation. I don't know about the supply, so there's inventory that exists with the publisher. So do you think you have the capability to double, triple revenue with the existing publisher base or do you think you can -- you need to add more publishers over time?

I've said this before, I think that if Taboola just did advertisers success in a good way, we can grow the Taboola for more than a decade with what we have. We reach 0.5 billion people a day. It's a lot. It's more than Snap and Twitter combined. So for us to keep improving yield as a combination of more advertisers, more advertiser success and more optimization on the publisher side, same publisher base, we can grow yield, I think, forever. We're still early, early stage, and we have 14,000 advertiser. Google has 10 million, right? So brands and agencies, and if you think about holistically of our business, about 15% of our business is brands and agencies, mainly video; 15% of our business is now e-commerce, and those are high-yield kind of markets. And there's a lot of demand that's trying to come in. It's always good to see markets when there's more demand than supply, right? So e-commerce is one of them and video is one of them. And then the rest of our business is our core direct-to-consumer kind of performance advertisers. So there's a huge opportunity for us to not only do more of what we already have in front of us, but also get into other segments; games, apps and other things that we can tap into as an advertiser segment. So I think that, that alone can take us into the future. Of course, we want to get all publishers to work with us, too. But I don't think advertiser success is probably good enough.

Got it. Now you have to fight for the right to keep the relationship with your publishers, right, and keep them around. There's the higher yield, there is the consultative approach. And then as you go pitch to some of these new publishers who are not yet with you, right, that's also going to be part of the pitch. So I think in 2019, you guys signed a fairly large deal with a large publisher that ended up being sort of dilutive for net revenue growth for a period of time, but then over time, you made that up. So I think you know where all the RFP buries -- I mean bodies are buried in terms of where the new upcoming contracts are. So are there sort of upcoming opportunities over the next, perhaps maybe 2 or 3 years for larger publisher agreements to roll out through the door?

Yes. So 2019 was interesting. It was just one-time that so many publishers chose Taboola and it was some of the biggest names out there. So that happened overnight, and that was unique. Now, I would say our pipeline looking to 2022 is, we believe, is probably the strongest we've seen it in a very long time. So there's a lot of great publishers who can and should be liberated to work with Taboola globally, so I think in the U.S. and others. So I would say the pipeline is -- looks really healthy. And also, if you think about all the things we can upsell our existing publishers, which is the video Connexity, there's just so much we can do with our existing base. So I think between -- also, if you look at our growth, about 60% comes from existing business and 40% comes from new. So there's just a lot of growth for us with our existing publishers and all the pipeline that we see ahead of us. So definitely stay tuned for some exciting news.

Got you. I think to recommend anything conceptually has always been, I think, for a lot of the investors that we talk to, they don't really ask about it or it's kind of a nebulous concept for them. So can you go into a little bit more detail about what that actually entails?

Yes. So if we think about the open web, which is a $60 billion-plus space, instead of thinking about it as just one big open web, try to think about in segments and then specialize within those segments. So, as an example, brands and agencies want a very specific type of user experience. They don't want to be in the bottom of the article. They want to be in the middle of the page on in the homepage or the section front. They want to be -- have no one around them, they want to be on their own, and they want you to work with third-party companies that validate the quality of traffic and all those things. So they have very specific need that you have to address. And they work sometimes direct, sometimes with agencies, you have to partner with different types of companies. So if you think about brands and agencies, that's a thing that exists in the open web that you have to be specialized in -- so that you can make it work. Same goes for commerce. Retailers, they have -- they need conversions, they pay sometimes CPC, sometimes CPA, they want specific type of content that has high intent so that people convert at a good rate. So the way we think about recommend anything is kind of this segment by segment, industry by industry, that is big enough, billions of dollars industry that we want to be specialized in. And then we use our publisher relationships to upsell that as an opportunity. So with brands and agencies, I mean, it's amazing, you're seeing now publishers who replace banners with Taboola that didn't exist a year ago, right? Now we have brands and agency saying, if you give it to us, we'll buy it. So we upsell, and damn, this is [ sports ] of the world and all of those. And that's a great sign. Publishers want to do more with us and get more share of wallet with Taboola versus having many, many vendors. So I think size matters, and they prefer to have someone they can rely on that can do their video execution, which is part of recommend anything; commerce, which is part of recommending anything; and over time, I think we'll do games, audio, apps and just other types of kind of industries within anything, including small advertisers like you mentioned.

Yes. The Xiaomi deal, and you touched on this earlier, Samsung and Brazil deal. I mean, those were slightly off the grid in terms of what you've done before, but is it really? Should we think about these as being just like any other publisher relationship then?

Yes. So we call it Taboola News. It's part of our recommend anywhere. So if you think about it, we have this amazing asset, which is relationships that are exclusive and long-term with publishers in 22 countries. So I think we're just asking ourselves, where else can we be that people want to discover something and news can be relevant. We saw what Apple had did. Apple is a pretty good company. What they did with services that still ran by Eddy Cue and basically, Apple is proving that to be just a device manufacturer is not good enough. And you need to engage consumers in different layers, news and payments and health care and so forth. So the news piece, which is Apple News, was a great validation coming from the -- from Apple that there's a market fit for consumers to buy devices and see news they may like, powered by Apple. But we have more news than Apple by far, it's more global, and we know how to monetize it because we have a monetization machine that we've built over the last decade. There is about 1 billion Android devices sold every year without a version of Apple News. So we thought there's a huge opportunity for us to bring our publishers to any device that's sold out there because, again, they looked at Apple and they said, we should have an Apple News too. The difference between what we did to Apple, fundamentally, is that when you click on an Apple news piece of content, you stay in Apple. When you click on Taboola News on your Samsung device or Xiaomi, we send it to the publisher site. So we're very friendly to the open web and publishers. Publishers love it because if they stand with Taboola now they get audience for free, which is another differentiation from any company in our space. So you can imagine when Taboola News becomes big, bigger, and we get to the point that suddenly we will send 5% of traffic to publishers or 10% of their audience comes from Taboola News, we become as important as SEO of Google or Facebook traffic to the open web. We'll become -- it's interesting. If you look at Facebook, Google and Twitter market cap and look at how much traffic each company sends to the open web. Just as a proxy of how important they are to the Internet. Google is about 35%, 40% of the Internet's traffic. Facebook is about 30% of the Internet traffic and Twitter is about 1%. Twitter is a great consumer business, but it doesn't move the needle to the open web. If Twitter stops operating, the open web would stay the same. If Google stops sending traffic to the open web, the open web would stop existing. The audience is a huge thing that -- to the revolution when SEO happened with Google and yet again with Facebook, and I think devices will be the next version of SEO. Because there's a billion devices out there. If every person click once a week to go to the open web, you now have 1 billion people who move to the open web. So that's -- there's a huge opportunity. And then you ask yourself where else can you be -- where else should Taboola be? I have a Tesla. Tesla has a Spotify integration, so I can get the music, but I don't have a Taboola integration, which is crazy. How come my Tesla has no Taboola? Like I can get Squawk Box in my car. I can get local podcasts. Things that I love. It's free. It's available, I have it. The fact it's not in my car and I spend hours in my car is a gap. So automobile will be interesting for us. And so there are -- everything is devices and canvases, be the recommendation engine and have all these content agreements, we think will carry us through kind of like other moments of discovery when people want to learn new things.

Right. Now probably hard to pinpoint at this point because it's so new, but you have 500 million users already. What does the Xiaomi and the Samsung, I guess, agreements add in terms of potential audience expansion or is that even the wrong way to look at it? I guess, you'll get theoretically more engagement time anyway?

At some -- at some point, the way to look at this business will be users and ARPU, similar to how telcos look at their business. So at some point, it's going to be mature enough for that you'll say, every person that uses Taboola News generates a certain amount of ARPU, and then you can build the model around that. We're not there yet. But I think it's going to be, I think similar to a telco way of thinking of their business in terms of revenue per user on an annual basis. So yes, users really matter. And the revenue around -- it's probably going to vary by country. But I think it's going to be users, ARPU, and that's going to be the model for that over time.

Got it. The privacy is a big topic these days. So tell us why Taboola is not impacted by anything that Apple might do, what Google might do, right, in the future?

So one, if you look at our -- in even kind of IPO deck, you'll see that Apple started blocking cookies back in 2017. And we show a graph that shows how our yield is going up through that time on Safari, specifically. So in many ways, we're kind of already in the future from that perspective because we've seen that before with Apple. I think it's obvious Google will do the same and everyone will eventually block cookies because privacy is no longer something that general account will speak about. My mom will never buy Facebook camera because she would be freaked out that it's looking at her or something. And so I think privacy is something that human beings and consumers understand. It's not a legal thing anymore. It's a consumer thing. So it's obvious to me that we're going to live in the future that's much more contextual and kind of adjacent versus demographic. Like you shouldn't get to know me so much, but whether people like me. And I think that's where it's going to go. And that's by the way why an open web and Taboola has seen such a -- why we feel so comfortable and why we're able to beat our performance in Q3 and increase our guidance for Q4 because we don't have retargeting at a big portion of our revenue, and we don't use third-party cookies. We have hard coded integration on the page. We see everything that the page is about. And our advertisers are tapping into our data, which is kind of people who read this, also read that. It has nothing to do with Stephen or Adam, but people like us. So if you and I read an article about financial topic this very morning here in this hotel. And we both were on an iPhone, and Hermer came a minute after to an article on a different website, but to the same topic from an iPhone. Taboola might -- would say, we've seen 2 people that have read that on a different publisher. And that's what they've done, maybe he would like to do the same. Kind of the Amazon, people who buy this also bought that. This has nothing to do with me. It has nothing to do with my cookies. It has everything to do with my situation. And in many ways, by the way, I think that many of us have multiple personalities in any case. There is Stephen in the morning on a Friday, at night in your mobile device, on the roads, and each version of you has different needs. So it's much more interesting to kind of think about serendipity and discovery in that way, to look for moments that attach to people in your situation. So that's why for us, it was not a big thing. And while we don't try to be optimistic about the future in that way, it's not in our models, we are optimistic because we're saying “Well, if advertisers can succeed with companies rely on third-party cookies and IDFA, what do they do?” So we hope that it's -- we think it's a great opportunity for us. We think it's a great opportunity for our publishers. And I think it's a great opportunity for the open web. So I'm optimistic about it.

Got it. And I think with that, we'll end it there. Thanks so much, Adam, for joining us.

Thanks for having me.