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

Anyway, I'm Stephen Ju with the UBS Internet Equity Research team. I'm here with Adam Singolda, Founder and CEO of Taboola. So I said, welcome back, and glad to have you join us once again.

Thanks for having me.

Awesome. So all right. So probably the most important topic for you as a company right now. About a year ago, you signed a 30-year deal with Yahoo. So can you give us a recap of what this means for Taboola? What this means for advertisers? And where are you in the implementation process because there was a timeline that you had laid out at the Investor Day. So interested in catching up with you in terms of where you are.

I think overall, the main reason we're excited about the partnership with Yahoo!, which is just -- taking a step back, is strategic on multiple levels. The first one is -- it has 3 legs to it. The first one is the data piece, which will combine our contextual signals, which is very important to advertisers, especially its privacy and all the things. We can talk about that later, but the data advantage that will help both companies on the other side of it, combining our kind of reach, which is massive, is important. Two, the advertiser migration, which I'll get to that as well. And the third one is just access to the publisher, Yahoo Finance, Yahoo News and Mail and all those things. The reason it's important to us and why I'm excited the most about it is mainly about what I think is missing the most in this industry, specifically the OpenWeb, right? You have Google for search, Facebook for social and those are massively must buy categories. Advertisers, 9 million to 10 million advertisers work with both Facebook and, or Meta, and Google and Amazon is growing fast, as we know, on the retail front. So those are all must buy categories. And then you have the OpenWeb, many of which companies you cover and others review. And in the OpenWeb, even though it's a $75 billion market, growing 8% to 12% a year, there is no must buys. There's no one company that advertisers can say, "We'll do a search with Google, Meta for social, Amazon for commerce and OpenWeb, this will be our chosen one. There is no chosen one for the OpenWeb, and that's a problem because advertisers can rely on 30 small AdTech companies. So size matters and with Yahoo!, we've mentioned that if we were alive in 2022 with Yahoo, we would have been about $2.5 billion in run rate. We expect that by Q3 of 2024, we'll capture the run rate to mature -- the entirety of the maturity of this partnership on a run rate basis. That gets us to be bigger than X in revenue, not bad, almost around Pinterest, almost as the size of Snap. This is a better neighborhood for Taboola as the first kind of like must buy OpenWeb. So that's what excites me the most. We've done a great job to date with the team, the culture between the companies and the management and the people doing the work, it's fantastic. Jim was texting me this morning. So we're very excited, both of us, about how big this can be and how important it is to both of us. And then [ supply ] is accessible to 100% of [ Yahoo ]. So now if you work with Taboola, you can get to any one of Yahoo's properties, somewhere around the world. And the biggest focus we have right now is migrating advertisers. So migrating Yahoo's ESP as an omnichannel mix into the native of Taboola and the native-only clients. That's the main focus we have right now.

Okay. Got you. I think you previously mentioned that I think you expected revenue contributions from Yahoo! to start ramping in the fourth quarter, right? So we're not 2/3 through the quarter? So just wondering what you can share with us in terms of the advertiser behavior as you're migrating?

Yes. So one thing that I think derisks the deal for investors and for us as management is we did share that in Q4, we expect to be in the low tens of millions of dollars in revenue from Yahoo. And it's -- there is a -- while it's still small, right? Out of the bigger number we talked about, the reason it's great is because we are seeing advertiser success as they spend dollars through Taboola. So our technology on Yahoo, and both Yahoo and Taboola can now compare. Because if you -- if the same advertiser spends on -- before Taboola, what was the performance and how does it look now? And also Taboola can do the same. Taboola can say, when we look at the Taboola network, which is huge, and we look at Yahoo! as a source of supply, what's the conversion index? Like what works? And we're seeing that it's awesome, like it's very, very strong. And now it's strong at -- again, it's not $1 billion, but it's low tens of millions. That's enough for us to say we can drive yield growth on Yahoo! as compared to what it was before, we believe and we can drive better performance for advertisers, which, like I said, is our key initiative for the company. So the revenue side, as I mentioned, is low tens of million. The indication from advertisers that it's doing better. And we even have this case study of this travel advertiser that said [ tense ] integration with Taboola, they are not spending on us more than they spend on Meta. It's a quite significant travel advertiser. So we're seeing kind of good results and that excites us.

Without putting words in your mouth, though, if you're talking about better results, higher conversion rate, theoretically higher ROI versus what they would have been doing before if the companies were separate, should we assume that these are the more performance-oriented advertisers? Or is there a specific type of vertical? You mentioned travel or specific type in terms of campaign goals that we should be thinking about?

It's mostly mid-funnel performance advertisers, which is most of our revenue right now. If you recall, about 90% of Taboola's revenue is driven by our advertisers, about 10% is programmatic. So Taboola is very much like a walled garden, like a platform in the sense that most of our revenue, we have full control over that revenue. It's our clients, our paper, our technology, our account manager. So -- and then most of that 90% is performance advertising. About 5%, 10% is -- tends to be brand advertising, video, but the rest is performance advertising. So the same flows to Yahoo. And in general, I expect that performance advertising will -- as I think about the industry will always be the vast majority of the industry. If you look at Meta, obviously, Amazon, which is commerce, it's the most performance. But Google, it's 80%, 90% performance advertising. Even YouTube which is the TV play for Google became mostly performance advertising company because the value of advertising -- advertisers ramping when things are working, is so lucrative to companies like us and Google and Facebook. So yes, the short of that is, yes, it's performance advertising. And I suspect that over time, even though we may work with bigger brands, they'll spend mostly performance advertising with us.

Great to hear. Yes. Now since this Yahoo! deal was announced, right? If I'm a publisher who is currently not with Taboola, I have to be thinking about, wow, like something is going on over there, there's going to be greater amount of traffic liquidity. It's going to be a better place for advertisers. So I would imagine they're taking notice of the deal. But how is the current environment right now for new publisher deals? Is it getting easier? I just noticed that you guys renewed with NBC and Universal.

This morning.

Yes, this morning. So are the churn rates down? Are deals getting easier?

We never really got into specific on that front. I would say what we feel over the last many, many years. Remember, we've been doing this for quite some time. So we love competition. We appreciate competition, and we like winning. So what we're seeing now is that our strategy with publishers of being more than just money that they can rely on us for editorial tools. They can rely on us to personalize their homepage, with homepage for you, especially with generative AI and ChatGPT and Bard. They're saying our home page has to be better. Who's going to help us personalize the home page, right? It feels like TikTok but with editorial values. So all those initiatives Taboola News, publishers now are saying, well, if we sign with someone for 3 or 5 years, most companies in this space, good companies. They offer money. That's why the industry that we're still part of which I hope to break out of is called AdTech, right? Because it's an advertising-driven industry. However, our strategy for the last 7 years has been to provide, to invest more in technology. So our R&D investment is higher, but the ROI on that is much higher as well. So we give publishers a whole slew of technologies that they want to work with us in exchange, by the way, not only do we get 3-, 4-, 5-, 10-year relationships. We're also able to capture margin that is attractive for us as a company and I think for investors who are following us. So this is a technology-driven success, and with Yahoo!, a lot of goodness comes on top of what I just said. Because you should expect yields to go up, right? I always said that 60% revenue share from Taboola equates to a lot of times more than 100% of revenue share from someone else. And this is before Yahoo was ramping up. When Taboola gets to $2.5 billion and $3 billion in revenue, we'll be so much bigger than anyone else in our space, we will have so much more diversity of advertisers. That yield should be even higher and publishers will make more money with us. And then there's traffic opportunities and engagement opportunities. So I love that. We dedicated our life to publishers and journalism and OpenWeb and what a better time to be working at Taboola than now when the world needs trusted information curated by people. So I think we have a lot of momentum already. But the Yahoo thing will get us even stronger.

So it will be an accelerator to the virtual cycle that you're already seeing?

I believe so. I mean, I think it's going to be irresponsible for someone who competes with us. I mean it's already, I think, for large deals because we lose from time to time, but when we lose, it's uniquely expensive for someone else to take it. That's okay from my perspective. I'm okay with you losing a lot of money to take a publisher from us because it's not a sustainable strategy. It doesn't happen a lot, but when it happens, that's the only reason. And then with Yahoo!, it's going to become even harder and harder, especially for those large enterprise partnerships that are worth a lot more.

Yes. Understood. In the third quarter, you released max conversions for general availability. And I think you guys shared that it's about 30% of revenue is from adopters of the technology, right? So turning into '24, I think, you guys mentioned that you expect the majority of your revenue will be driven by max conversion. So can you talk about what this product does and who are these early adopters? And what does this product do in terms of -- I mean, if there's this much adoption, it has to be solving some sort of a key pain point for everybody. So can you walk through what this product does and what problems it solves.

So the topic you're raising first of all, it all sits under advertisers success and yield expansion. From that perspective, and it's important to know and to align even with how we see our company's future. Advertiser success and yield expansion on their own can double and triple Taboola. As in, I believe we can get Taboola to $5 billion or $7 billion in revenue by just doing that really well. That alone is huge. I mean it's -- there's so much meat around the bone here for us to tap into. So to execute on that journey, first of all, what we're doing is we're investing half of our R&D investment, about 200 engineers are working on that. That's huge. The second thing is that we're focusing on 2 leading indicators, churn rates and NDRs. That means we want people to be able to churn less and see conversions as fast as possible. Put yourself in the shoes of an advertiser, you're trying a platform. It could be Taboola, it could be someone else, it could be Google. It's very emotional for advertisers to see that it works even if the acquisition cost is higher than they expect. So if I want to sell this cup and my acquisition cost that I can afford is $0.20 and I don't get any conversion within the first 2 weeks. I'm just -- I am going to churn. Even if you got me some cups at good margin, but not enough. I'm not going to stick around it, I need this to scale. So AI initiatives such as max conversion and others coming up. Basically, what they do is they create this notion to advertisers that's very fast, they see Taboola as a successful channel. So that's the churn -- leading indicator. The second one is NDRs. We want you, that once you cross the bridge into the Taboola system and you're now spending. We want to see your spend going up over time. Max conversion, and that's within my letter, we saw double-digit improvement percentages of NDRs for the same advertisers who spent on max conversion versus not that's great. Double digit is always good. So -- and I just talked to my team yesterday, we're focusing more and more on max conversion and max rollouts and other things of that nature. So our focus became even higher to make sure that advertisers churn less and increase their budget and eventually -- our CFO is here in the audience -- we have yield expansion goals for 2024. We -- I don't want to say, ignore the macro because obviously the world matters, and we've seen 2022. However, we believe we have what we need to execute. And we have our engineers be part of the budgeting process where they say, well, we're going to improve yield by that amount. And it's conservative because we always want to be conservative. But I would say as opposed to historic the last few years, when the yield went down, we expect it to go up. So I -- that was an important initiative, yield expansion and advertiser success because this can double Taboola. And then once Yahoo is launching, it can maybe double Yahoo. So we like what we see. And I hope to continue to update people with such good news.

Understood. Sticking with the AI theme. I think your Gen AI offering launched in July, and I think you said that it makes up for about 2% of revenue from ads, but a higher percentage, I think 25% of the new ad creatives?

For self-service.

Yes. So the technology, so once again, who are these early adopters. And this has gone from 0 to 25% fairly quickly, right? So somebody is seeing benefits, right? So I guess there's a higher click-through rate or there's some benefit that they're seeing. So can you talk about the positive benefits of this?

Yes. First of all, what's great about -- Gen AI has been such a -- it's a good title for any PR. However, the Taboola way, we make -- we mobilize these opportunities into action. The way we always do. We're a very data-driven company. We're a very technology-driven company. And we ask ourselves very quickly how can our clients benefit from this in a way that will drive the metrics we measure the company beyond just speaking about Gen AI and AI in general. So one, let me just break it into 2 things. AI, the biggest impact I see for Taboola will come from deep learning, which is actually more relevant to the previous topic we had, max conversion and max for us. This is the core AI deep learning. This is the superpower of truly companies like Google and Facebook. Gen AI which is around generation of creative has an impact, but the biggest impact will come from the hardest thing to do, which is deep learning. Now Gen AI can create value to both advertisers and publishers. With advertisers what we've done, we've put it to work and said, well, if you're a small advertiser and you don't have a creative agency on your side, you probably would benefit from having titles automatically created for you, some mails, maybe AB test different things, automatically for you, and we've seen great adoption for that. So right, look, 1 in 4 ad-creative is using Gen AI. That's good. And then it's 2% of our -- 2-plus percent of our revenue, which is also great. And we're seeing that people keep using that. Another benefit that is worth bringing up as it relates to Gen AI is that a lot of advertisers, they don't know we have a very strict policy. What is allowed to say and visualize as you create a campaign. So if you're an advertiser and you don't know what's allowed and what's not because you work with amazing publishers like Disney and NBC and CBS and all -- independent and so there's a very strict policy about what's allowed. Gen AI already has our policy embedded in it. So it's -- you're enjoying not only the process of quickly launching creative. You also enjoying the benefit of Gen AI being educative. It's our best student to know what works and what's not and what's allowed and what's not. So the whole interaction with the policy team is automatic. So you don't have this, you try something and it doesn't work. So we're seeing productivity, we're seeing good performance. And I think specifically for self service, which is an important pillar of our business, about 1/3 of our revenue came from self-service is enjoying Gen AI.

Got it. I mean, interesting you bring that up in self-service because I think other companies have mentioned this as well, the use of AI and helping along the ad creation process as well as, I guess, the management part of the campaign process. You do all that heavy lifting on behalf of the advertisers and you've talked about 10 million advertisers on the other platforms, right? I mean it sounds like to me that this could be the catalyst for you to be able to tap into the longer tail of advertisers and someday get to hopefully millions of advertisers.

Gen AI on its own, I don't think will unlock that because the biggest gap to get into the long tail, which companies like Google and Facebook did such a good job is the deep learning piece. When you have someone that's saying, "I only have $500" which is a small spend, finally leads, it's magic. It's alien work, which Google and Meta did. And that's the level I want Taboola to get to. I want to get to the point that if Taboola doesn't work for you as an advertiser, you have a bad business. And I want to get to the point that if you give us your money and we can't find you clients, you have no clients. And to get to that level, it's mainly a deep learning investment, which is the 200 engineers I mentioned earlier. Gen AI will make it easier assuming the rest works to get it going. So even though we're seeing this Gen AI adoption, it's still similar mid-funnel advertisers who were able to spend $5,000, $10,000. It's yet to be the small $500, $100 advertisers.

Understood. We talked about AI-driven efforts for the advertiser. But there's another stakeholder in this equation, right? And that's the consumer. So is there anything you can share in terms of consumer-facing AI-driven products as well?

So I mean, we don't interact with consumers directly. We do through our publishers. So with publishers, we're imagining a bunch of opportunities. This can be helpful. First of all, on the e-commerce front with turnkey where we create content for the publisher. This is very helpful. We'll never replace a human being with Gen AI because the level of clout and trust that is needed is very high. However, we can use it to be more productive and save time and do more with the same resources we have. So this is an opportunity to be more productive. So if you go to time.com stamped, which is an e-commerce and financial services website that we're working with time and we are powering. We're using Gen AI to do a better job creating high-quality content and more and faster. That is already in place. We've talked about -- we haven't done it yet, perhaps creating an opportunity for publishers to offer newsletters that are driven by Gen AI. So today, newsletter is a very heavy lifting process for publishers, many don't even have that. So imagine you can do it automatically, and you can have maybe a user that just for me and based on -- catering to my -- things I like. So there's an opportunity to perhaps create a deeper relationship with consumers by notifications that are relevant and personalized newsletters. And I think this whole dynamic of search engines kind of like threatening traffic to the OpenWeb or having this dynamic. Publishers are looking for more direct-to-consumer relationships. So I think this might happen. We talked about it, we haven't done it yet, but this is an interesting opportunity, I think, in the future.

Got it. Now speaking of bringing more traffic to your publisher partners. I think Taboola News grew double digits last quarter. I think 2 years ago, I think you said you were serving 5% of any given publisher's traffic, right? So how has this number changed since then? I assume it's up significantly as part of the overall mix. And how much of the overall advertiser traffic in terms of their buying now originates with news, and how has news helped in terms of accelerating the yield that you're unlocking for your publisher partners?

So the Taboola News is such an amazing business. We work with OEMs of the likes of Samsung and Xiaomi and OPPO and others and [ Opera ]. So it's a different type of partnerships, deeper partnerships, perhaps because of the nature of these companies. The handset is such a sensitive and important part of their business. And we are pre-installed as the news provider for those devices. We're seeing 2 growth engines that made Taboola double its revenue this year, and I hope it will continue to grow fast over the next many years. I did -- I think this business could become hundreds of billions of -- hundreds of millions of dollars in business. And I tasked the team will present to me $1 billion revenue a year plan. So I definitely think it could be big. So to date, we've seen 2 growth engines to Taboola News. The first one is just ARPU. So there are many ways we can generate revenue per user, different touch points, lock screen, wake screen, [ minus one ], notification, browser, a native app. There are many ways and many of these OEM partnerships, they're so early, they tend to test first and then they do more. So the ARPU expansion is -- there's more to do, but that was a significant improvement to the revenue for that business. And the second one was more consumers which does affect the traffic we can send to publishers. So I wouldn't now -- I want to be more -- I wouldn't want to be too specific about how much traffic we send to each publisher because it varies by region and it varies by -- it's too -- even though it's almost a $100 million business. For us, it's a tiny start-up. We want us to be much bigger. I do think that when this gets to hundreds of millions and perhaps to $1 billion. This will completely change our core business in the sense that if we get to be 10% plus of most of our publishers' traffic I'm not sure there's any money someone can pay to take a publisher from Taboola at that stage. But because traffic is so -- it's the oxygen to get to send users to a publisher in a repeated way is essentially search. It's essentially Google. You just define what made Google, Google. So I like that synergy between those businesses, but it has to be much bigger to really benefit from that moat. However, this is where it's going. In some markets, we've already seen that -- those benefits. In Asia Pacific in some markets, we've seen that. Not yet in other markets where I want to see it. So there's a lot of growth there, and it's very synergistic to Taboola.

Got it. Now heading into 2024, Chrome cookie deprecation has been on everybody's mind. So how will Taboola be impacted, if at all?

Look, if Karl Marx was right and history tends to repeat itself, then in 2017, when Apple deprecated cookies, it was a source of strength for Taboola because of our first party cookie, which will never go away. And our -- we -- because the way we work with publishers, which is very different than SSPs and DSPs, we are part of -- we are the publisher. We're rendered alongside the page. So we're not beating -- we're not doing an [ ILB ] placement -- we are first party. We have about 600 million daily active users across our network and that's before Yahoo. So because of that, for us, we have a good relationship, knowing that if you come to ESPN tomorrow, we know you're you. We've don't know your name and gender, but you know what you read, what you click on. And that is very important data signal that we have, we can continue to use what advertisers are trying to perform in Taboola. That is not going away. So again, I don't want to be -- I want to be conservative and tell you, I don't know that it will go again up like it did on Safari, but I think we feel good about the downside protection from that perspective. And there's an opportunity for advertisers who fail to buy SSPs and DSPs to say, how do we get those budgets to work on publisher site, if they don't work on banners, and they don't work through the programmatic pipes, should we just go to Taboola and stay in those budgets, which I hope we'll see. And remember, with e-commerce becoming such a bigger, bigger portion of our business, this is a super -- it's the most contextual business you can have, right? So -- and that's about 20% of our [ X tax ]. I love that business so much. And so between our core first party to the e-commerce business, we feel good about the transition of the industry to a more privacy and safe place for consumers.

Got it. We're almost out of time. So let's hop in a time machine. Once again, I think, I asked you this question last year, too. But here we are 2024 once again. We're at the UBS Global Technology Conference. And you're up on stage once again with me. And what do you think we'll be talking about in terms of what you've accomplished in the trailing 12 months?

I do think we'll talk about AI will probably continue to be relevant. But from our perspective, the biggest topic is, were we able to liberate the OpenWeb to be a place where advertisers can spend money on and turn that into a search type category, a blue chip category. This is to me the only trophy that matters. Otherwise, we're just all working hard on neutral. So to me, this is where it's going. Did we discover the Robin Hood of the OpenWeb? Is there one company that can truly transform this AdTech industry into what's the next Trade Desk, but for the OpenWeb. Like the Trade Desk 7 years ago, probably was on stage with someone and said we're going to be the DSP, but everyone is going to work with us. We're going to have -- everyone will give some of their money to us. And this was the time when DSP didn't have a great reputation. This is us now. We're -- Taboola is almost there. The OpenWeb has this epic reputation, but someone will become the next Trade Desk for the OpenWeb or bigger. And that's to me the topic.

Awesome. All right. Adam, thank you so much for joining us once again.

Thanks for having me.

All right.