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

[ Cowen ]. We're excited to have Adam Singolda, the Founder and CEO of Taboola; and Jen Horsley, Investor Relations, with us today to discuss trends in Taboola as well as a rapidly growing open web or open Internet, which Taboola is taking a leading role in partnering with publishers to deliver 1 trillion monthly recommendations with greater than 500 million daily active users and now greater than 15,000 advertisers.

I'll start. Adam, so thanks for joining us.

Thanks...

I'll start with a couple of big picture questions for investors who are may be new to Taboola. Can you talk about the company's role in developing the open web with a greater than $60 billion total addressable market? And maybe discuss why it's important for consumers to have a choice between walled gardens and open web recommendations? And then remind us, what are the different types of sites and apps in the open web?

Yes. So I think to start by defining what is the open web. The open web is every website, any app game that sits outside of Google, Facebook, Amazon and the likes. It's important for consumers, the open web stays strong because we need a journalistic editorial-driven environment that can help us understand what's important. We do not want our kids in 10 years to discover about the democracy on TikTok. So the open web is important, and we're excited to support that as the market. It's a big market. It's a $64 billion market that is still been driven and monetized by banners. So we think there's a huge opportunity to kind of consolidate a lot of different advertising formats that were invented 30 years ago and transformed that into what feels like the home bridge of Amazon or Instagram feed, which is personalized recommendations that are great for consumers and great for advertisers. So we're on that journey, kind of consolidating that on that market. We're $1.5 billion out of $64 billion, so still a lot of work to go.

So it's still early innings, obviously. And Taboola sits in a unique position in the ad tech space given your exclusive publisher relationships and direct relationships with advertisers, can you explain how this drives a virtuous cycle starting with minimum guarantee? Maybe take us through how that works as you drive higher traffic and yield leading to more publishers and advertisers and then as you like to talk about reinvesting in the platform?

Yes. So our approach to the open web and how we tackle that versus traditional ad tech I think is more of a -- from a publisher perspective, we don't buy inventory, again and again, hoping we'll get it, but rather we develop technology that publishers use and love, editorial platforms, the writers and editors who, we help them get new audiences to their site. So we empower the entire organization, and we're a very important revenue driver. And that relationship helped us get 3, 4, 5 years global exclusive relationships with publishers, which is great for us and our investors because it's very predictable. If we see today on CNBC, we'll see it tomorrow on CNBC. And that is unique to Taboola. So that's on the 1 side, and we reach 0.5 billion people every day that way. On the other side, you work with advertisers primarily direct as well, about 90% of our revenue is driven by advertisers who buy from Taboola Direct, and we use our own AI to optimize for those success. These dynamics are very much similar to a walled garden actually, right? The walled garden in our consumer app that reach people again and again today and then all of the advertiser base buys from them directly. So we're kind of actually the same only we are in the open web. So that helps us to be predictable to grow fast to have a very profitable business and reinvent -- reinvest in the business to keep making sure that we're differentiated for the publishers to keep choosing Taboola.

Shifted gears, I want to ask about last week's announcement to acquire Gravity R&D. Can you talk about how that supports your goal of investing $100 million annually in R&D? And how this leads to a strategic advantage for your platform? Maybe talk about some of the proprietary technology that will come over as part of the Gravity deal?

Yes. So high level, if you're a publisher, there are 3 things we're doing for you that makes Taboola special. One is, from a revenue perspective, we believe we're -- most publishers were top tier revenue sources. So we matter to them. And the reason we're still good at it is we're big and scale matters in terms of data and your ability to monetize. Also in terms of the auction that we operate, we have native advertising. We have Connexity, which is e-commerce. And we have video. So there's a lot of great advertisers to come in. And that makes us very lucrative from a revenue perspective. A lot of times, I say that 70% of Taboola revenue share is like 100% of other companies. So it's very expensive to sort of just complete to that full price. We have pricing advantages of buying power. Beyond that, we invest $100 million a year in R&D so that every person on the publisher side is happy when Taboola is a partner, editorial team, subscription teams. I was just today, I had 1 hour call with a very big publisher in the U.S. and in 1-hour call about personalizing the home page and empowering the editorial team with A/B testing tools, analytics and data. And that conversation would have not happened if it wasn't with Taboola. So Taboola has this offering for the editorial team and to personalize the home page, where other companies don't. So that makes us special. And then lastly, we work with companies like Samsung, Xiaomi, Vivo, ZTE any airport in the U.S., if you fly to New York or JFK or whatever, you'll see an iPad, as your click news, there's news on the iPad powered by Taboola, that helps us to bring people back to the site. So if you're a publisher, you're making more money. Everybody is happy because you get technology that they can use, the editorial team and all those and you get new audience to your site. So that's all part of our investment. And then about the Gravity, I said it on our earnings, there's a huge opportunity for us, specifically around performance advertising. We think that they alone can be grown to 10x in terms of being great for performance advertising they've 15,000. Google, Facebook has 10 million, right? So I have a big aspiration on that one. And Gravity is a milestone on that journey.

You also continue to make significant strides in your anything anywhere strategy, including around Taboola news, greater use of video formats and of course, e-commerce with Connexity, we'll probably take a little bit more time kind of on each 1 of those. But just broadly speaking, how do you feel these initiatives fit into anything anywhere strategy? And how are you thinking about where that goes over the next, say, 12 to 18 months?

So I think the recommend anything, which is really what type of advertisers can we bring by segment. And we always spoke about video as brands and agencies in the segment, e-commerce as a segment. So there are many other segments. You have the apps and games and audio, SMB, small and long term advertisement. So many different segments we haven't even tapped into. So I think we have the right strategy in terms of diversifying the type of advertiser base we have. And every time we become successful for a new type of advertiser base, our yield gets better and better. So I'm very excited about that strategy. Specifically, I'm excited about keep cracking the code on performance advertisers. And the recommend anywhere, the reason it is super cool is because this is where being a recommendation engine company making money from ad versus being an ad-tech company is coming into fruition, right? When you see Taboola on a Samsung device, it's a beautiful integration. You buy a Galaxy device, it's [indiscernible], you see Taboola and we are the Apple news for many of these companies that is not something that an advertising company can do unless they are a recommendation company, and that makes our growth kind of unlimited because we can be anywhere. We should be in every car, we should be on every fridge, we should be on every audio device in your kitchen, surfacing your news. So that keeps me kind of excited as we expand to interact with consumers wherever they may be, not only on publisher websites, on desktop and mobile.

Yes. And you said 10 years from now, you think pretty much everything will be native personalized, customized, recommended obviously, we're still very early innings. I want to drill down a little bit deeper into each 1 of those 3 areas. So with e-commerce, what are some of the learnings and progress from the Connexity acquisition so far and as you make progress towards this $100 million ex-tax synergies, that's within 4 years, what are some of the KPIs that you'll be most closely tracking, whether it's expanding publisher relationships or perhaps new geographies or working with your sales force?

Yes. So first of all, -- just as a reminder, Connexity is basically an e-commerce open web leader that we've acquired end of last year. You've all used Connexity, if you went to Wirecutter or -- of the New York Times or Review.com and you -- where you were looking for something to buy for your house, I just bought a trampoline for the kids. And I know nothing about trampolines, as you can imagine. I mean some of you may know I have an idea which trampoline is a great trampoline. So I read about it on the New York Times, Wirecutter and Review.com and other websites. And I was very happy to have human beings reviewed some of them and eventually click a button and buy the product. So that's a great user experience, especially as we're home more, especially as we become better digital shoppers. I'm convinced that e-commerce will be a strong leg of the open web in the future. We see great examples of success of that with ventures like New York Times and others, but think about any website in the Internet that should get into the e-commerce space. So holistically, I'm excited. We're seeing good match of the cultures between Connexity and Taboola. And I can mention a few things that are awesome. One, from a publisher, selling to more publishers because Connexity was mostly in the U.S. We now sell -- we're selling Connexity solution in 14 countries in EMEA and APAC. So we're using our sales force around the world to basically up-sell our existing publishers with Connexity, so that's 1 thing that's happening, and that's making good progress. The second 1 is on the advertiser side. If you remember, we talked about a quarter ago that we're seeing good success out of China, actually. Our advertisers in China are -- were interested in Connexity to basically reach our consumers in the U.S. Now we have a team in the U.S. with established that is retail focused, and we're pitching advertisers all the time to kind of try it out because, again, Connexity only had 2 ad salespeople. And the third one, which is financially perhaps the most interesting short term, is taking Connexity's advertiser base that they had for the last decade and run them on Taboola existing publisher supply all of our publishers. And that's something that we haven't done yet, but we're -- we had about 50 advertisers in the U.S. of Connexity who said they'd like to try it out. And we have about 200 in the pipeline in EMEA. So that's going to be great because that's going to drive yield up. And that's great for our publishers, great for our advertisers, and that will have financial impact. So all those things are new and progressing since the last time we talked, and I can look forward to seeing it progress.

Another 1 of those is new video formats, high-impact placements. How are they -- and I think you've kind of alluded to helping to drive full funnel marketing campaigns. Any client examples that you could share? And then could you talk about how this helps with agencies and brands, which I think are starting to contribute a greater percentage of your ex-TAC gross profit?

Yes. I mean, so we announced our partnership with Dentsu and other great agencies. And I wrote about that from the letter. If you haven't read it, you guys should check it out. But essentially, the branding agencies opportunity for us is really on our banner replacement strategy. What happens is a lot of times publishers have a mid-article banner or right-throughout banner or in the homepage or section front. Remember, still about 90% of the open web revenue, which is $64 billion, is still banners, right? So -- but that doesn't exist on Twitter, Instagram or Google Search, right? you've never seen a banner on when you search on Google. You're seeing native ad that look like a search result, but they're paid by advertiser. So but banners still exists so many of them on the open web, which is insane. Nevertheless, that's an Opportunity, yes. The way we replace them is we bring in a carousel experience that is in part video, that's branded agencies and in part editorial. And you can see that on E! Online or NBC Sports or Altice or many other great publishers who work with. So that's -- I think that's a big opportunity. Also, I think brand advertisers are looking to diversify sort outside of TV as becomes more digital, outside of YouTube, social. So we see that as a premium demand that will continue to come our way and it supports what publishers are trying to do. So that's on the high-impact placement.

Yes, there's a lot of shift happening here and there are some privacy elements. We'll get into that and how that could be advantageous for you guys as well. I do want to ask about Taboola News, which is just growing. It's been 100% year-over-year grower recently. Even more than 100 million monthly active users. What do you see as the next stage of growth? What does that look like for Taboola News? How big of a contributor, you mentioned it's starting to become meaningful kind of overtime and I guess I want to ask if you plan to add more hardware partners beyond Xiaomi and Samsung or even more geographies?

Yes. So when -- I really love that business. It's our fastest-growing piece at Taboola. We haven't given numbers yet, but it's becoming financially significant and -- or more significant. There's 1 billion Android devices sold every year. There are cars sold, fridges, audio devices, there's such a huge opportunity for us. I think that if you look at Apple services and how important services became to Apple, which essentially means nobody wants to be just a device. You want to offer news and health care services in music and payments. I think Taboola can be the services-as-a-service to all these companies. They will all need news. We have news across all around the world, 50 languages-or-so. So we have such an opportunity to package all those news as a feed and give it at no cost and in fact, make it the revenue opportunities for them. So I think we're still early, early on that journey. But that's great for us to help us diversify our brand to more of a feed and news product versus ad tech.

As we talk about -- I had a question later, but I think as we talk about value-added services, maybe this is a good time to talk about what you -- where you are with homepage for you and Newsroom because that seems like that's kind of a cornerstone of how your relationships are more than just revenue -- it's a partnership?

Yes. So Taboola News is 1 of them because we help you get audiences by putting your content on Samsung. That's good for you as a publisher. But you're right, the new on hopes for you is really what publishers are looking for to empower the editorial team with more than just CPM and revenue, right? So right now, we have -- we've seen on the Investor Day, McClatchy. By the way...

Miami Herald, I think we saw.

Yes. It's beautiful. I mean, it's live on unfortunate traffic now, and it's really -- it's a gorgeous integration, whereby significant part of the home page is driven by editorial decisions married with artificial intelligence. And I think many publishers will eventually realize that their competition is not other publishers, but it's rather TikTok and Twitter for user attention, right? So if you already got someone on your home page, you should not skip the opportunity to use AI to engage that consumer. So we're seeing a lot of good retention and acceptance by publishers to use that. Again, we're still early, but I do think that every home page of the Internet should be personalized. Why should I have a great experience on Amazon.com and when I open the whole page, but not in any other publisher I love? So I do think that will be widely adopted. [ News ] is already used by 2,000 writers or so. So that's -- I mean, it's unbelievable. It's like it's a company that's been used by 2,000 writers and editors...

2,000 editors across a...

Publishers.

Your publisher base. Okay.

Yes. And I mean it's amazing. It's a SaaS company. It's what Adobe analytics do for them, right, but are different and we do that just as a value-added differentiated way to grow the pie and get those publishers. And also as investors, you look at our financials, you see that not only do we win more than we lose, not only do our -- is our gross revenue way more significant than others, our margin is also almost double other companies, which shows you that it's a good proxy for differentiation that's adopted by the market.

I have a couple more on sort of tech-related ventures here, and then we'll move to a couple of macro questions. Smart Bid dimensions was a tool that you rolled out fairly recently last year. Could you just maybe just take us through how that helps advertisers with their campaigns in terms of the granularity they're getting, if they weren't before and how that uses AI to automate some of the process for their campaigns?

Yes. I think I'll just say that Smart Bid is part of our -- and my personal obsession and passion to make performance advertisers successful outside of the walled garden, which has not happened 0 times. In the history of time, no 1 has done it besides those 4 companies to my knowledge: Amazon, Facebook, Snap and Google. No one has ever built a technology that was adopted by hundreds of thousands or millions of performance advertisers. And I want Taboola to be the fifth or the first in open web. So Smart Bid is -- and the only way to do it is with AI and data such that advertisers come to you with the hope that quickly you'll get them conversion, so they can rely on you to drive sales and grow their business, right? So it's an amazing mission, but it's very hard to do. Smart Bid is automatically -- Smart Bid does that, and there's a lot of -- there's a very long road map. But what Smart Bid does is trying to look at your creative, at your objectives and goals and automatically without you doing anything, change your bid based on the quality of or the matchmaking between the publisher and that piece of content to your goals and content. And it looks at a much more granular dimension, that's vertical dimension. So as an example, you might see a general news website or even entertainment website that has an article about insurance. So that article could be fantastic for insurance advertisers that would otherwise never advertise on an entertainment website, Smart Bid will go beyond that election crystal price just for that particular article and will drive a good performance for that advertiser, so which beforehand did not happen. So that's why it's awesome. And then the Gravity acquisition which we've just announced, which is essentially another step forward in that direction of performance advertising in Smart Bid, which is we acquired 35 people strong in Hungary as a way to continue investing in performance advertisers and we could talk about that as well, but that's more on the Smart Bid kind of journey.

So let's switch back for a moment. So I think looking at the trajectory for the second quarter and the full year, given the Ukraine and the broader kind of economic uncertainty, you guys saw some softness at the end of the March quarter and the first few weeks of April, can you walk us through kind of the puts and takes there, how you're managing the Ukraine impact in Europe as that obviously continues to unfold this dynamic? And maybe just explain kind of just high level, the impact from advertisers or in Europe or in Europe, but are bidding globally, actually how that affects the yield?

I mean, Taboola is a very diversified business. So overall, no single account, we believe, can materially impact our business outside of a pandemic like in 2020 or a war right now. So that was kind of like an original pandemic. What happened was the war started and advertisers reacted to it by slowing down and just trying to see what's going to happen, which is similar to what happened back in 15 March 2020. We do believe that our new guidance is inclusive of what has happened in Europe. We don't believe -- we assumed a very slow recovery from that. We did not include some significant upside creation that we can talk about. So I would say from where we are right now, we believe we've kind of accounted for what happened in Europe.

And I think you mentioned just thinking of brand versus performance, obviously, you mentioned recent impact to brand advertisers, but they paused and then as they started spending again, there was some stabilization. Is that sort of remaining stable as you look out in the current environment amid these geopolitical issues and recent cost inflation? And sort of what are you hearing for your advertisers? And how are those conversations going?

Yes. I think initially, -- and it reminds me of the pandemic a lot, the first 90 days, you're seeing this immediate kind of pause starting from the brand advertising. And remember, performance advertisers paused last because that's our oxygen, your bloodline. And the brand advertising, they kind of -- they paused earlier. So we saw people saying that we don't want to advertise next to content, it speaks about the war. We had conversation about those things back in Europe. But now I do feel that we're more stabilizing. People have had enough time to kind of adjust and understand what's happening. And again, we assume actually a slow recovery, though it might be faster. Back in the pandemic in 2020, it was fast recovery, but we do want to be conservative.

And following on that, I wanted to give you a chance to talk about what could be potential upside factors. I mean any time you talk about conservatism baked in, it seems worth discussing, how much improvement in e-commerce, for example, would you contemplate later in the year? And what are your advertisers saying about supply chains as that might feed into the e-commerce side of the business?

Yes, I mean, I would say there's a bunch of upside creation that is not in our guidance. That is interesting and relevant. I think e-commerce is definitely 1 of them. We're spending a lot of energy to make that a very successful part of our business even more than it was before Taboola and Connexity became 1. So again, we're trying to be conservative, but I do think there's upside there that is short term and long term. Also there's a Microsoft bidder that can make Microsoft grow faster than it was in previous years. But even more than that, we have an intention of very soon to up-sell -- with 9,000 publishers, we have an ambition here to up-sell that Microsoft bidder technology is header bidding across our publisher base. So if you can imagine, publishers have header bidding integration with search companies, resident agencies companies, and we can be the native CPC company, I think that's a big business for us potentially. And that's something that is not included in the guidance, but we intend to launch that soon. So there's that. And there's also that slow recovery, we assume, which could be better. So all those things I think are upside creation for investors.

Let me just check for investors in the room. Certainly, if anyone has a question, feel free to raise your hand. Happy to take a question, and we may check back in a minute or 2. Otherwise, I'll keep going with our questions. On -- Adam, on hiring outlook, yes, obviously, it's an investment year, so any change to your hiring outlook given the macro challenges in tight labor market? And then just remind us where you're focused this year in terms of the teams, but also the -- where -- what cities you're looking to add headcount?

I mean, first of all, we're -- we intend to -- we see hiring a lot of engineers. We see that as an investment and it's a very strong ROI for investors in terms of what those engineers can do for us from a competitive advantage perspective and yield growth perspective and financial growth perspective. So we do have very high aspiration to find great talent. April was a good month. Maybe that's a sign that the maintenance of last year is somewhat correcting, which is a good thing for high free cash flow businesses such as Taboola. Also recessions in general and are not good in general, but they're in particularly interesting for companies who are high cash flow businesses, like Taboola. So we're out there looking for great people, great companies. I don't think big companies, but talent is definitely something that now more than ever is an opportunity for us. And we're looking to hire pretty much globally, I would say, from an R&D perspective, we focus on Israel, LA, Taiwan and Hungary now as part of the acquisition.

Let me look out a little bit longer term for a moment. Your long-term model calls for 20%-plus ex-TAC growth and 30%-plus adjusted EBITDA margin. And you expect -- I mean that's 50%, you expect to see it again. What are some of the key drivers that you're most focused on to reach those targets? And maybe how does the Connexity sort of incrementally help you reach those?

I feel comfortable that we can get those numbers by just doing the core work. There's such a huge opportunity for us to up-sell existing publishers and to launch new publishers and advertisers just within the banner world, there's so much to do. So I feel comfortable about those. I think what can help us grow even faster than that and to get to those numbers are, one, the top priorities -- one, the performance advertisers, which I mentioned, that is the 10x bigger opportunity for us. That's a big one. The bidder can be a big. Think of the bidder as a small trade desk that we now have that overnight became 9-digit revenue for us, thanks to Microsoft that now can become even bigger. So that's a big one. Connexity, which is right now still is growing in line with Taboola, but with our investment in Connexity, I expect it to, over time, go even faster. And then with anywhere, I think with OEM integrations and so forth, that can expand the TAM altogether. So I think from an investment point of view, what's good is, I think just the core market, it's very big, and it looks like it looked in 1990, which is not how our kids will experience the Internet when they become 10 and 20. So I think there's such an obvious future, whereby we'll have a little bit less interrupting ad experiences and more of what Instagram and Facebook and Amazon look like with us Taboola. And then beyond that is the recommendation engine, I think we can be anywhere. So that's kind of -- there's a core growth and upside from there.

Let's touch on publishers. You've had a number of recent announced partnerships in the first quarter. Penske was 1 of them, Associated Press was another one. Any sort of commentary there on how many are new renewal -- sorry, how many renewals versus new sign-ups, taking share for competitors essentially? And you mentioned it's expensive to sign away from Taboola publisher, are the conversations becoming easier as you continue to build scale and drive this virtuous cycle?

Yes. So in general, I would say, we're about 60% growth based on existing accounts and 40% based on new. So that's roughly the ratio on an ongoing basis. I'd say it's not -- it's expensive to take a publisher from Taboola, mainly because we would have to lose money more often than not. So you can lose money a few times, you can't lose money all the time, especially in today's world to be in a position where you have $0 cash flow or negative and looking for investors to raise money, I would not want to be in that position now, if I didn't have to. So I think that puts us in a good position because we're -- we have buying power as we generate better yield. So from that perspective, from a revenue perspective, it's already good, but then if you add to that, all of our technology that we give at no cost to publishers, we become publishers' best friends that goes beyond the revenue. So that's usually what I mean. It's okay to lose from time to time, but that happens rarely.

I think we have time for maybe 1 more. I want to just hit on privacy again because it's a big focus of what you guys are doing. Do you continue to view sort of recent trends as potentially driving some of this opportunity towards the open web, where do you think we are and within the context of what's happening in the industry over the last couple of years and certainly this year?

So I mean, one, if you look at Taboola in 2017, when Apple launched ITP and made cookies deprecated, our yield rent the fastest on Safari over time. So you can see that when privacy get stronger, Taboola gets stronger. And the reason is we are very much a contextual driven company, and we have a lot of scale and data. So advertisers that are losing priced out on social networks can succeed with Taboola. So I think overall, that's a good trend for us. I will also say, I don't think it's going away. I think that privacy is only going to get stronger and stronger. It's crazy that we've been -- we've seen companies tracking consumers without ever asking their permission. I don't think that's okay. So I'm happy for consumers to feel safer wherever they may be. And I think for advertisers, Connexity is the future because context is the safest way to advertise. It has nothing to do with who you are, who I am. It's all about my name, my gender, my -- the things you asked me about myself, which in any case, we like to Facebook about ourselves all the time. You post on Instagram the person you wish you were. But you read an open web about the things you really care about. So that's what Taboola sees you. That's the curiosity graph. Looking at user behavior around their curiosity. So I think that's such a huge opportunity for advertisers and people will diversify outside of social networks because they have to.

All right. Unfortunately, I think we're out of time. So once again, I'd like to thank Adam Singolda and Jen Horsley from Taboola for joining us.

Thanks a lot, James.