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

Good day, and welcome to the investor conference call. [Operator Instructions] As a reminder, this call may be recorded. I would like to turn the call over to [ Renee Johnson ], Investor Relations. You may begin.

Thank you and good morning, everyone, and welcome to Taboola's November 28, 2022 Investor Conference Call. I'm here with Adam Singolda, our Founder and CEO; and Steve Walker, our CFO. We issued a press release and investor deck earlier today, and it is available on the Investors section of our website. Now, I'll quickly cover the Safe Harbor. Certain statements today, including projections or estimates regarding the impact of the proposed transaction on the company's future financial or operating performance, 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 today's transaction press release. Future events could differ materially and adversely from those anticipated. During the call, we will use terms that you'll find in today's press release and refer to non-GAAP financial measures. Please refer to the press release and investor deck for explanations information regarding reconciliation to GAAP. And with that, I'll turn the call over to Adam.

Thank you so much, and hey everyone, thanks for joining us. I hope you all had a great Thanksgiving. There's no doubt, I had a lot to be thankful on this time. So I have to be here sharing this one of a kind of partnership with all of you. It's obviously very special for us, and probably one of the most special partnerships in the history of the Internet, in my opinion. It has a very positive effect of all of the communities we care about, our shareholders as it relates to the metrics we care about. We'll speak about that today, our advertisers and publishers. We prepared a deck for you, so let's get to it so we can give us enough time for questions. Next slide, please. So this is one of the most historic relationships that Taboola has ever done. A different unique publisher, advertiser and contextual data opportunity. This is Yahoo! and Taboola partnering announced today. Yahoo! is an Internet hero. I mean, we all love Yahoo!. It's a privilege for me and us to partner with this iconic brand, a truly e-mail provider. About almost 900 million people a month go to Yahoo!, they trust Yahoo!. And if you look at the top websites across so many verticals, you'll see Yahoo!. They're trusted by consumers, whether it's sports or news or finance and others. Just advertisers who buy Yahoo!, they'll let you know that because the trust consumers have with the brand, the conversion and the quality of that advertiser experience is just incredible. So that opportunity is very unique for us and Yahoo! into the future. Next slide. What we're announcing today is essentially the longest publisher partnership we've ever made. We will be powering native advertising for Yahoo! for the next 30 years. I'd joke if we will be taking day trips tomorrow when this gets renewed. But what it means is that there's a lot of great things that will happen here to Yahoo! and Taboola, to advertisers, publishers and our shareholders. And this is just a screenshot of what is the native ads currently present at Yahoo! which many of us are using all the time. Next slide. So let's review some of the details, and then we'll go into the financials. So 30 years mean essentially predictability for advertisers. It means even close to partnership innovation on the advertising experience, and there's so much that I think that can be done there. I will also say the lead time of IDSA and third-party cookies going away, and all of us as consumers in a strong opinion that there needs to be an Internet we can trust, a safe place for consumers to interact, and for advertisers to succeed, I believe the next few decades will all be around context, and we will bring to market the largest first-party contextual-based advertising capability. This is really big in my opinion. Now, we're not stopping there. Advertisers who currently buy from Yahoo! DSP, which is one of the leading DSPs in the market, will be able to have a single access to all of Yahoo! but now all of Taboola as well. So this is great for advertisers from a context perspective, scale perspective, [ width ] perspective and so forth. It's also great for shareholders. We're adding approximately $1 billion in annual revenue. We're growing our revenue per share at 32%, estimated EBITDA per share of 43%. And while we don't guide for free cash flow, we expect it to grow nearly 5x and Stephen will speak more about those in a bit. But obviously, this is very accretive to our shareholders. Now taking a step back, when I look at the industry, walled garden has made it very easy because there was a scale and it worked. And in Open Web, while it's a big market, a $54 billion-plus market, it's just very fragmented and it's difficult to buy. So this partnership is a big step forward to our vision to create a company that is dedicated to publishers and Open Web, creating scale for advertisers. Lastly, as part of this meaningful commercial partnership, we're honored to have Yahoo! joined our Board and owning almost 25% of our company. And before I pass to Steve, our CFO, I'll just say that I'm excited not only about what's in front of me, but I feel it's just so much growth. Everywhere I look, and I talked to the New York Times and I said, everywhere I look, I see a rocket ship and between Yahoo! and Taboola, and it's all around the key things that we talk about on earnings calls in the past: eCommerce, header bidding, performance advertising, video. All of those things can be supercharged over the next few decades. And with that, I'll pass it to Steve Walker, our CFO.

Thanks, Adam. So you can tell that Adam is excited about this opportunity for our customers, for our -- both advertisers and publishers, for consumers in the Open Web. This is the slide that gets me excited, though. This is truly a financially transformative deal for us. So what we did here is we ran some numbers to show all of you what Taboola would have looked like in 2022 if this deal was launched before the year began, and we had fully ramped it up before the year started. So you can see that we would have expected to add about $1 billion of gross revenue. We would have expected to almost double our adjusted EBITDA, and we would have expected to add over $80 million of free cash flow from the deal. So this is truly transformative for us. It gives us a chance to really operate at a whole new level. And as Adam had referred to in the press release, this -- we set a goal of getting to $1 billion of ex-TAC by 2025. This is super powering us towards that goal, so we're excited about that. I think it's also important to understand that this is highly accretive on a per-share basis as well. So on the left, you see what Taboola in 2022 will look like on a per-share basis. This is issued in outstanding shares on a revenue and adjusted EBITDA basis per share. On the right-hand side, you can see that once we factor in the 25%, 24.9% of shares that Yahoo! is getting as part of this transaction, we would still expect our revenue per share to be up 32% and our adjusted EBITDA per share to be up over 40%. And that's -- and as Adam mentioned, while we don't really measure free cash flow per share, our free cash flow will be up 5x and our shares are only up 25%, so that also is highly accretive. So this is a highly accretive deal, almost any level that you measure that, so it really is going to change our financial dynamic quite a bit here. I will mention from a timing perspective that the previous slide, we were looking at the deal as though it had closed before 2022 began and was [ wise ] the whole year. In reality, the benefits of this will start to materialize in the second half of 2023 and will continue into 2024, and that's because we need to basically close the deal. So we expect the deal to close in Q1 of 2023. And then after close, we need to basically ramp up the partnership. So it will take us until about second half of next year to start to see the benefits of this, and then like I said, it will continue into 2024. I'd like to note, we're not giving guidance for 2023 as of now. We will do that obviously in February, but for now, we're not guiding to anything. I also wanted to mention that the numbers on the previous slide, those were not based on some of the growth opportunities that Adam mentioned. So like eCommerce connects the works very closely with Yahoo! on various eCommerce initiatives. There's a chance to supercharge those. They have a Search business that we think there's opportunities to work with. Video, header video and displays Adam mentioned, so those are not factored into those previous estimates that we showed. And I mentioned that the deal will close in Q1 of 2023. I will also mention that we'll have a more of a complete deal information session once we close the deal, which we hope will be sometime in Q1. So we'll keep you updated when we are ready to have that session. And with that, I'm going to turn it back to Adam to talk a little bit about why -- how this partnership came about.

So when we think about the main reason that we believe Yahoo! was selected over other, 3 reasons. The first one is a technological advantage, and appreciating the investments in R&D we've been making over the years and which we were speaking a lot since we went public and primarily around things such as revenue growth, engagement and how we can help publishers go beyond just the revenue as well as audience growth. So all of those things that are part of our, if not, tech investments, lots of something which I appreciate it. The second thing is global and opportunity to do something in a much bigger global way. I mentioned earlier that if you're an advertiser now buying from Yahoo!, happily buying from Yahoo!, on the other side of this, you'll be able to get a global access. As you know, Taboola have offices in more than 20 countries. We operate globally, and that's a huge opportunity for advertisers [ trench ] working with Yahoo! to expand to work with Taboola. And thirdly, last but not least, and perhaps one of the things that I always I think is the most important, is people and cultural fit. I think the time we spend together thinking about the opportunity to work together for the next 30 years, it just reinforced how much we can trust each other, rely on each other and innovate into the future. So those are the 3 reasons that we believe Yahoo! chose us.

So with that, let's open it up to questions.

[Operator Instructions] Our first question comes from Jason Helfstein with Oppenheimer.

Congratulations on the deal. Just a few, to the extent you can answer, just help us better understand how to think about it. So do you -- so I'll just list them off. So one, do you have 100% coverage across all of their ad inventory? Like yes or no, and if not 100%, like what's excluded? And then when you came up with the kind of $1 billion run rate estimate, like what type of -- what percent coverage would that assume? Obviously, we don't know Yahoo!'s financials, so if you could just kind of help us understand. Then I think this is probably a broad question, what percent of Yahoo! today is performance versus brand? I think most people perceive it as probably mostly brand. But just given what you've done with Connexity in eCommerce, I would imagine as an opportunity, but like what's the starting point today? And then just lastly, and I apologize, but just I think everyone's benefit from all these questions. Expand on the Search opportunity, you have a strong relationship with Microsoft, like what's the potential opportunity there?

Steve, you want to start?

Yes, I can start. So first of all, in terms of the business itself, so we will be 100% exclusive on their native ads. So on the Yahoo! site, Yahoo! Finance, Yahoo! News, Yahoo! Sports, Yahoo! Mail, if you go there, there are certain ad spots that are native in-stream ad spots that you'll see. Those are going to be exclusively us. They also run certain display spots outside of that. Those will not be us, that -- they're going to continue to sell those directly through their DSP, but we'll be 100% exclusive for all of the native spots. So that -- and that, by the way, they break it out that way themselves. So the assumptions in our model, to your second question, we assume that all of those spots would be us, and we obviously have good data from them on how many ad placements we're talking about and impressions and everything else. So that's what was assumed in our model for 2022 that we showed. We also assumed a relatively modest uplift that we believe we can provide on those ad placements. So we think we can drive higher revenue, and that was assumed in there as well. We did not in those numbers, though, assume all the growth opportunities that Adam mentioned. So that's upside to that. In terms of their advertisers today, so a lot of their native advertisers are performance. So they have a lot of performance advertisers just like we do. But I think they are a little bit more heavily weighted towards brand, which is one of the opportunities of this deal is to give those advertisers now access to the full Taboola network. So we are bringing on a new set of advertisers which will have access to our full network that Yahoo! has that we don't today. That's one of the things that we're excited about as an opportunity here. Adam, did you want to add to that and maybe talk about the Search opportunity?

So I think you touched on everything. But -- I mean, most of it. But just to add that in terms of the opportunities, specifically with regards to eCommerce, header bidding, video, high-impact placements and contextual signals as it relates to consumers' patterns. All of those can become significant growth drivers to all of us and provide value to advertisers. So while -- none of those are assumed a model now what you've seen in the presentation, so these are outside opportunities, but there are significant potential. So I'm not sure if that answers the question, but...

Our next question comes from Andrew Boone with JMP.

Two please. You guys talked about the integration with the Yahoo! DSP. Can you just help us better understand who's selling the inventory and how you guys are going to manage your own sales force versus Yahoo!'s? Just any more information there would be helpful. And then help us understand the additional data that you're able to access via this partnership, right? Like what does this do to your own models? What is this group targeting? Just please flesh out kind of the data aspect of the deal.

Adam, did you want to take that or do you want me to?

So Andrew. So on the DSP front, like I mentioned, Yahoo! has a very successful DSP with sort of an omnichannel offering to different types of ad formats and placements and things of that nature, and it's a very successful one. What's going to happen here is that for advertisers who buy omni and get native advertising supply, today on Yahoo! will get it through Taboola and Yahoo! in addition to the Taboola networks. That's one thing that's going to happen. And additionally, to make some native-only advertisers debt to come in and they'll get, again, Yahoo! supply as relative to Taboola supply. So from that perspective, the experience is quite seamless to the advertisers. They're going to get a great offering in one spot as they do now only with more scale, and I'll get to the data piece in a bit. So that's on the DSP front. With regards to the data, what I can say is that there's a lot of user base that's now between -- so Yahoo! which is 900 people a month, we reach 500 million people a day, and there's a lot of readership consumption that's taking place in the first-party manner, right? So we know if you come back again tomorrow, we know you're you by -- not by existing, but what you're reading about. So if you think about the scale of what that can create, it can create its first-party contextual signal that can help advertisers, rich consumers in a safe environment, but very successful for conversion. And Stephen mentioned that I would say Yahoo! already is a great environment for advertisers of all types. Commerce, bottom of the funnel as well, top of the funnel. And I think when you combine the readership, the contextual data and what this can do for advertisers, we think this can become -- and as for Smart Bid, which I know we've been talking a lot about, and how it drives conversions. Especially as I believe millions of advertisers will look for new home as they will not be able to be successful in social networks over the next few years. And so one, I think the Open Web will be that home, and specifically, this can be something that can help advertisers to succeed.

Our next question comes from Stephen Ju with Credit Suisse.

Adam, Steve, congratulations on this deal. So I guess you guys mentioned certain regulatory approvals in front of the deal flow, so what would be the scope of what the regulators might be looking at? And also, [indiscernible], in the past, when you guys have talked about onboarding large publisher deals, I guess none of them were there besides Yahoo!. But in the past when you had large publisher deals, there has been some gyrations to attack. So can we talk about how things might play out as you start seeing a larger contribution from Yahoo! next year?

Sure, I can jump on this one. So first of all, in terms of approvals needed, so we will file in Israel for an approval from the antitrust authority there even though this is a commercial deal, and it's really just a long-term publisher relationship with a demand aspect and tighter relationship than we might have. Because of the equity issuance, we have to file for antitrust in Israel. So that's the regulatory approval that we need here, and that's the only one as of now. So that's where we are on the regulatory approvals. And like we said, we expect that to be approved by sometime in early 2023, Q1. In terms of the TAC and the effect that this will have on our financials, so obviously, we feel like it's financially transformative as you saw in the numbers that we presented. One of the reasons that we don't expect this to really start showing up in our numbers though until second half is because there is both a demand and a supply side to this. So Yahoo! advertisers who advertise on native spots are going to start advertising across the Taboola network. But we also -- because this is such a massive new amount of supply, we need to bring the supply and the demand over in tandem. Like we can't just bring over all the supply at once and then hope the advertisers follow, we need to kind of bring both in tandem with each other. So that's why we'll be doing a more controlled step-by-step rollout of this and working with the advertisers, customers to make sure that this works really well for them. So that's why it will be second half as opposed to in a normal publisher deal, we would have it up and running within a couple of weeks to a month or so. This is going to take longer because of that. But the good thing about that is, unlike if we brought in this amount of supply without any demand that is coming with it, that would have had an impact on our TAC and our margins. This one, we don't expect to have that negative impact because we have the demand as well. So I think we'll talk more about specific guidance for 2023 and 2024 when we get there in Q1. So we're not guiding yet, but we don't expect this to have a -- we expect to have a very positive impact on our financials. Nothing negative.

Understood. And is there any context you can provide us to the size of whether it's going to be advertisers or any other type of metric that you can help us think about? The size of the network will be the newly onboarded demand in Yahoo!?

Yes. So I think what we can say is that the $1 billion of estimated additional revenue that we think this deal can add, they have enough demand to fill that themselves, although we do think our advertisers will participate as well and the like. But I mean, that's the type of scale that we're talking about. Adam, I don't know if you released any information or disclosed any information about the impression volume or anything along those lines, just so you have a sense of scale?

I don't know that we did.

Okay.

Our next question comes from James Kopelman with Cowen.

Congratulations on the announcement. First question is for Adam. As you think about the key drivers that led to the partnership, how important were the improvements you've made to your own platform and value-added services over the last couple of years versus simply more of the scale benefit that comes from combining these 2 large platforms and adding to Open Web share over time? And then I have a quick follow-up for Steve.

So just to make sure, you're asking how important are the investments we made in our technology as part of Yahoo!, which Taboola have?

Exactly. In other words, as you thought about the drivers of -- and the strategic rationale for the deal, how important were the improvements of the platform over simply adding scale?

Yes. I mean, look, I think whenever you see people talking about the next 30 years, I think so much of it goes into the opportunity to be product-first. But I think Jim Lanzone, every time you speak with him, you'll see that he's really a product guy, right? And he's thinking about 2030. And I think for us, it was an opportunity to get us think about the long term and kind of assess that we share the same vision and culture as it relates to investing in technology and products. Taboola invest around $100 million a year in R&D, and those investments we know it relates to engagement of consumers, editorial tools, analytics, native advertising and AV testing of different formats, optimizing for performance advertisers, high-impact placements, eCommerce. All of the things that we've been doing, many of them since we went public, just I think sit exactly on the road map and how Yahoo! also sees the future. So I think a lot of it was important. And especially when we think about the long term, and in this case, 30 years, these things play even a bigger role, and so that's one. And the tune of the scale is just something that, in my opinion, one of the biggest gaps the Open Web has and advertisers have when it comes to buying from the Open Web versus buying from Google, which is scale, right? You want to be advertisers that goes to a single place and be able to find success from a conversion perspective, acquisition cost perspective, metrics, analytics and get scale like you do with today, walled gardens. So again, to me, scale is one of the biggest gaps in the Open Web that the industry has, and this is $1 billion a year step forward.

Great. And then for Steve, just a quick follow-up. How should we think about the longer-term ex-TAC margin benefit from the greater scale, for example? Can you maybe talk us through again how having greater scale benefits the flywheel of obviously better data, more advertisers and publishers, and presumably higher yield over time, as you've demonstrated pretty consistently over the last couple of years? I understand there's no guidance, but any color in terms of how the significant new scale might benefit that flywheel?

Yes, so thanks, James. That -- it's a good point. And so I think we talked a little bit earlier about kind of the data benefits of this partnership, and one of the ways to think about that is simply the scale that we bring. So Yahoo! has a very large number of log and users on a daily basis and frequent visitors. So what that does for us is as we see those users on a regular basis, we're going to now expand how much data we have about what consumers are doing on the Internet and what their interests are. So what that will do for us is more data means that we'll have a better ability to target ads more effectively to users. Being able to target those ads more effectively will then drive higher ad rates. And having higher ad rates will then turn around and let us win our next publishers more profitably and improve the margins and the revenue for our existing publishers. I think you're right, it has a very beneficial effect to that kind of network effect, the flywheel of our business and should drive higher margins over a longer period of time. I'll also mention that we talked about this a little bit earlier, but it's also extremely transformative from the perspective of kind of the EBITDA margins of our business because of the fact that this will be a very profitable -- it will be a profitable deal and one that doesn't take the same level of cost to support because it's a very massive publisher in and of itself. It's a very profitable deal at an EBITDA margin as well. So it's transformative both in terms of our ability to drive higher revenues and higher margins at the ex-TAC level, but especially our ability to drive kind of higher EBITDA margins and higher free cash flow over time.

And our last question comes from Justin Patterson with KeyBanc.

Great. Congratulations on the deal. For Adam, could you talk about any minimum performance requirements in there around native and what the steps are to get that incremental inventory, the non-native ads going through Taboola? And then for Steve, I appreciate the comments you just made on margins. If I take the illustrative example, it looks like there's only a modest uplift on an EBITDA margin, at least against gross revenue. I recognize you're not guiding and still working through things at this point, but I appreciate any color on how we should think about just investment ramping up potentially before monetization?

I can start to take -- so I want to make sure that I get your question. With regards to any specifics about the deal and things of that nature, I think the closest we can get right now with that slide that shows you what would happen if Taboola was to power Yahoo! throughout 2022, I think those that can give you sort of an illustration about the financials of that. So that -- that's probably the closest you can get to much to single the deal. As you can see, it's very accretive to our financial. So obviously, we're very much comfortable with that. I think from a demand perspective, there's a huge opportunity to creating a great option for advertisers across all of the net inventory between Yahoo! and Taboola. And I think that is relevant for video advertisers, eCommerce advertisers, performance advertisers which, as you know, is our #1 priority as a company. So all of those types of advertisers looking for -- targeting at different moments in the purchase funnel will be relevant for all of its inventory. So step 1 is -- and again, there's so much more to do and to discuss, it will take time, so you're going to have to be patient with us. But I can tell you, there's so much more than what we see today that can be done here from an advertiser success and optimizing performance.

And then to your question about how do we think about EBITDA margins going forward, so we've always said that our long-term model here with Taboola is to be a profitable growth company. And we've said that what that means to us is to be able to grow ex-TAC 20% per year, ex-TAC dollars 20% per year, and to grow and to basically have an EBITDA margin 30% plus. That to us is a profitable growth company. I think this -- first of all, it will certainly supercharge that growth over the next couple of years as this deal ramps up. So that will help us on the growth side. I think, especially if we get out of some of the macro softness that we're seeing now, I think you'll see this is another publisher that we're adding that is going to help accelerate our growth when we come out of this. We already had a record year in terms of new publishers added, and now we just added the largest publisher in our history. So this is going to really accelerate that growth as we head out of kind of this macro softness, but I think it will also help that margin. So the 30% adjusted EBITDA margin target that we've always had, I think there's opportunity to grow that over time with this deal because it is a profitable deal for us. So I think it's going to -- we called it transformative on a financial basis. That's why we think it can be transformative for us.

There are no further questions. I'd like to turn the call over to Adam Singolda for closing remarks.

Thank you. So I want to thank everyone for joining on a short notice. This is a big win for us, for the Open Web to -- it's a win for the good guys. Yahoo! is an Internet hero, it's a privilege to partner with this iconic brand and have Apollo as a sponsor of this journey for the next 30 years. Over the next 30 years, we believe this is very accretive to everyone we care about, our shareholders, our publishers, our advertisers. And there's a lot going on, so be patient with that. We look forward to spending time with many of you. And sometimes post closing, we will organize Information Day, allowing us to take a deeper dive about our plans and all the opportunities we have with us. So thanks, everyone, for joining. Today is a good day, and we look forward to spending more time with you.

This concludes the program. Thank you for your participation. You may now disconnect. Everyone, have a great day.