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

All right. Great. Thanks, everybody, for joining us. I'm Stephen Ju with the UBS U.S. Internet team. Sitting to my left is Mr. Stephen Walker, who is the Chief Financial Officer of Taboola. So welcome back to the conference.

Thank you. Thanks for having us.

Yes. Awesome. Great. So I guess there might be some folks who are not as familiar with Taboola. So if you can kind of give us a brief overview of what you guys do, what the products are, et cetera.

Sure. So we like to call ourselves a discovery engine for the open Internet. What that means is we help advertisers find consumers who might be interested in their products and services and help them -- help consumers discover those products and services. We also work with publishers to help them surface their content so that consumers can find their content. So in essence, we work on both sides directly with publishers. We provide a set of software tools that help them run their business, recommend content on their site, personalize their home page, give their editorial staffs tools to understand what consumers want to read about, so that they can produce the best content possible and generate audience and stay engaged with their readers. Because of all the tools we provide to publishers, we get long-term exclusive agreements with those publishers. So our average publisher duration of our agreements are over 3 years. So if you come back to CNBC for the next -- actually, that's a 5-year deal for the next 5 years, we'll be on the site, we'll be helping them power their site. On the advertiser side, we basically help performance advertisers primarily. So about 90% of our revenue [indiscernible] sell services. And that's -- we basically -- that's where we generate our revenue is from having direct advertiser relationships. They have accounts on our system. We help them meet those goals. And then we share that revenue with the publishers. So 2-sided marketplace revenue comes from the advertisers. We share that with the publishers, and we help both of them meet kind of their business goals. That's Taboola in a nutshell.

Got it. Now there are certain places on a publisher site, where Taboola content as well as Taboola ads appear. Generally, who do you run up against in the marketplace from a competition point of view? Because I would imagine publishers have some options in terms of which partners to pick.

Yes. So I mean, various parts of our business. So when it comes to working with publishers, we run up against a combination of companies that look like us, like Outbrain is one who looks like us, who's another public company, similar business model. We also run up against kind of vertical tool vendors.

Yes.

So for instance, the editorial tools that we provide to publishers, we compete with Chartbeat and companies like that. When it comes to recommending content on the site, there's various vertical tools that the publishers can use, or they do it themselves. So different parts of our business, we have different competitors. On the advertising side, we kind of compete with anybody who works with performance advertisers. So frankly, Facebook is probably one of the best in the world at it. They help consumers discover new products and services just like we do. We also compete with Google, who does performance advertising and then a whole host of smaller companies. I think what's unique about Taboola when it comes to working with advertisers is if you want to reach consumers in the open Internet, meaning outside of Google and Facebook, which advertisers do, they always are looking for a way to diversify away from just Google and Facebook. So if you want to reach consumers in the open Internet, there's not really a scaled way to do that, and it's kind of a confusing mess of companies that you have to work with. Our goal at Taboola is to provide kind of a one-stop shop so that they can come to one place, reach consumers on the open Internet. We reached 600 million consumers a month globally. So basically reach them all in one place and meet your goals of helping consumers discover your products and services in one place.

Got it. So that's not a small audience to think about 600 million daily active users -- monthly active users.

It's daily active.

Okay. Noted. Now I think the topic of one particular large publisher is an unavoidable thing because it's a pretty transformative deal for you guys. So let's talk about Yahoo!. And I guess from -- I think it's been a couple of years since you had the Investor Day highlighting sort of the path to getting everything implemented. So from a practical like workflow procedural standpoint, what is there left to do from the -- I guess, piping nuts and bolts, however, which way you want to call it?

Yes. Yes. So interestingly, it's almost 2 years exactly since we announced the deal. So it was about 2 years ago this time. So -- and for those of you who don't know, we signed a 30-year agreement with Yahoo! to basically power their native advertising across all their properties. So Yahoo! Sports, Yahoo! News, Yahoo! Homepage, Yahoo! Mail, all the other properties they own like the rival sites and various other properties that they own. So a 30-year agreement, obviously, very exciting for us. They're huge. I mean their reach among consumers is still very impressive and a big reach. I think what's really exciting about the deal to us to kind of step back for a moment is -- it's huge amounts of data that we get because they reach so many consumers and their consumers are very engaged. So they tend to come back to Yahoo! properties 30, 40 times a day in many cases. So it's unbelievable the engagement they have. So that provides a lot of data for us about what do consumers clicking on, what are they reading? What are they doing on the Internet. So the data is one thing that's very valuable to us. Obviously, they have incredibly valuable supply. So when you have consumers that engaged with your supply, that gives us an incredible opportunity to really dive deep with consumers and help them discover new products and services. And then on top of all that, in this case, which is unusual, it actually came with demand. So Yahoo! had their own native advertising business. They basically transferred that to us as part of the deal. So any advertiser who is spending on native ads with them previously are now spending through us. They now have accounts on our platform and everything. And frankly, that was -- you asked where we are in the kind of development, that was what we called Phase 1 was basically getting all of the supply set up, so we had access to the supply through our platform and then transferring those advertiser relationships so that they had accounts directly on our system. We completed that in June. So now all the supply is available through Taboola's platform. All the advertiser accounts have been transitioned. And that's what's helping us drive 25% plus ex-TAC growth, doubling EBITDA this year, doubling free cash flow. So that's driving great performance, but we actually think there's a lot more potential here. So now our job is to take all those assets that we've gotten from Yahoo! and really grow them from here. And growing them from here means getting more advertiser budgets, showing them that our technology is working better than what they had before and getting them to spend more with us on both Yahoo! Properties and frankly, across the Taboola network.

Yes. No offense, but why did Yahoo! pick you?

Yes. So I mean...

What they see in you?

Yes, exactly. First of all, it was all for me. No. So I think it's basically it was a best-of-breed choice. So they had their own native advertising business. And in fact, they used to compete with us in the market for other publishers. So they used to be -- we would see Outbrain, we'd see Yahoo! Gemini, it was called. We would have our own. Google within the market for a little while. And then there were a bunch of smaller players. Yahoo! basically kind of lost in the open marketplace and ended up with basically servicing their own properties, which they did a good job of, but they decided that it just wasn't core to what they wanted to be. So for those of you who don't know the whole story, Apollo bought them out of Verizon, took them private and obviously probably hoping on bringing them public again at some point. And what they've been doing is they've been saying, what's core to what Yahoo! is and what's not core. And they decided this wasn't core. They said, let's pick a partner who's best of breed in this particular area, native advertising, and they found us. And we knew Jim Lanzone, who is running it now from his days of running CBS Interactive. He knew and trusted us because he had worked with us. They were a big partner of ours. So I think it was just a matter of they knew that it wasn't core to them, and they wanted to go with the best, and they decided that was us.

Got it. All right. So I think at the time you signed the deal, I think you set a goal for about $1 billion in revenue with Yahoo!. I think on the first quarter earnings report, I think you disclosed sort of a run rate of about 100-ish in terms of gross revenue. So just kind of simple annualization math with the understanding that the fourth quarter is better, et cetera. We're still pretty far away from that goal. So what needs to happen -- what else needs to happen? Because I guess all the plumbing and everything else is in.

Right.

So what else needs to happen from a business perspective?

Yes. So -- and we think that the potential for $1 billion or more from the deal is still very much realistic. I think what needs to happen now is, like I mentioned, what we've done so far is we've basically taken what they were doing, and we've transferred it to our platform.

Yes.

That's basically just the blocking and tackling, right? That's just saying, okay, you had this much revenue, let's get it over here. You always in any sort of transition, you lose some of it, but you -- it was well within the bounds of what we expected. So now our job is to basically show those advertisers, you're using our technology now, you should be spending more because you're getting better conversions. And we published case studies on this, where the Hulu's, Verizon, Samsungs of the world that came over in this process are showing much better cost per acquisition. So now if you're getting better cost per acquisition, you should be spending more because we should be more competitive than other areas where you're spending money. So that's our job. It's now a sales process of going out there, showing them the performance, getting them to spend more and growing that revenue. And by the way, that's both on the Yahoo! supply, which will grow kind of how much we make on the Yahoo! supply, but then also showing them that we've got all this other great supply that they should also be spending on. So NBC News and CNBC and USA Today and the Guardian and all these others, you should also be spending on that. And so now we need to expand what they're doing with us across our whole platform.

So simplistically, I guess, if -- I don't know all the different things that are going on behind the scenes from an engineering and product development perspective. But should I be thinking, okay, so as other publishers who used to be with somebody else, not Taboola as they switched over to you guys, there's sort of a rise in yield that they're seeing, right? So the current run rate of Yahoo! was x. Based on other examples that you've seen from other publishers, it should be x plus, something greater amount. That's basically the...

Exactly. And I think that's why Yahoo!, again, they said it wasn't core, but they also expect us to do better for them over time or else they wouldn't have done it. Like -- and that's why any publisher picks Taboola is because they expect to make more with us than they will with someone else. They also pick us for all the other tools we bring, which most of our competitors don't. At the end of the day, you've got to at least pay them as much as others are going to or they pick you. So yes, we expect to see an uplift from that.

Okay. You said the word native a few times in a couple of the answers. So I think versus the type of ad inventory and the type of content that Taboola has been known for historically, how has the perception of the company among advertisers changed at the Yahoo! deal? I guess the nature of where you show up on the page is different now.

Yes. So I think it's interesting. We started our journey as basically a company that worked on the bottom of the article, native advertising with publishers. So if you went -- if you go to CNBC today, you'll still see the Taboola feed below an article, every article you're on, you'll see it down there. I think over time, we're kind of expanding out of that. So Yahoo!, for instance, doesn't even do below article native front page imminent [indiscernible].

Yes.

And so where we are on Yahoo!, interestingly enough is in the feed of content on the homepage. Actually, they do native advertising in their mail. So if you're on their Yahoo! Mail, you'll see native advertising. So it's actually in a lot of places that historically we haven't been. And that's kind of part of our journey now. So we started bottom of article, but now we're homepage, we're section fronts. We're actually now with nontraditional publishers. So we announced the deal in March, Apple News, where we're actually powering the native advertising on Apple News and Apple stocks. So that's actually and that's not really bottom of article at all. It's actually in the Apple News feed, and it's in mid-article and Apple News and within the articles. So it's a very different setup for us. And we're doing more and more of that. So I think what you're seeing is us transitioning from being a bottom of article recommendation engine for publishers to more of a performance advertising wherever performance advertising exists.

Interesting. So Yahoo! saw fit to allocate, I guess, there's risk for them because it's not just bottom of feed anymore, it's interspersed with other content that they have in there. So there's -- so the proof points from this should be showing up for you to go back to some of the other publishers and say, hey, we're appearing at the bottom of the page. Look, what we're doing with Yahoo!, shouldn't we get different placement with you guys?

Yes. And it's -- we've actually announced some products around that. So we have a product that we announced, I guess, about 1.5 years ago now called Homepage For You, which basically uses our AI engine to fully personalize a homepage at a publisher site, so we can help them engage more of their users. We've shown that using our AI engine and the personalization it provides can increase clicks off the homepage 40%, so that's something that's meaningful to publishers, especially as they face kind of headwinds from everything that Google and generative AI is doing, engaging with their users and keeping their core audience is more and more important, and we have tools to help them with that. See, I think we've moved from being that kind of bottom of the article more to other parts of the site and helping them in more ways.

So arguably, higher quality inventory without saying anything negative connotation about what you were doing before, but you're now in a place where you're offering advertisers theoretically higher quality inventory. So that has to change the perspective of advertisers as well?

Yes. So it's -- first of all, for performance advertisers, bottom of article is great because if you're a performance advertiser, let's say you're Ooni Pizza, since it's my favorite example, Jessica is laughing because I use it all the time. But Ooni Pizza Ovens is a company trying to sell pizza ovens to consumers. They don't -- they're not trying to build an Ooni brand. It's not like they're sitting they were saying, I have to have the premier position on a site. I don't want Super Bowl ads. They want to sell pizza oven.

Yes.

So if you're trying to sell pizza oven, if a consumer is coming to the end of an article, and let's say, they were reading about -- who knows pizza. They're reading about restaurants or whatever, they're reading about something. They come to the end of an article, that consumer is now thinking, what do I want to do next? It's a perfect time to hit them with a, hey, you just read about pizza tours in New York. Why don't she think about buying a pizza oven. So it's high quality, but for a specific type of advertiser. To your point, now we're moving up page, homepage, other places. that's important for a different type of advertiser. So like with Yahoo! -- yahoo!, because of the way they focus their native advertising, they had better relationships with Hulu, Samsung, Verizon companies that care -- they care about selling phones or selling their video service, but they also care a lot about their brand, and they like to have 100% share of voice. They like when you see their ad to have no other ads around it. So that works better for them. So -- and in fact, that's something we're kind of learning in this process of working with Yahoo! is they like that. We're trying to do more of that with our own inventory, too, and that's bringing those higher kind of Tier 1 advertisers over more and more.

And you mentioned, I guess, porting over the advertiser relationships to the Taboola platform as well. So through -- with the Yahoo agreement, so I suppose that's opening up new conversations with new advertisers for you.

Yes. In fact, so I mentioned Hulu and Verizon and Samsung. Those are the 3 that we've mentioned in our case studies and things before. But yes, so now previously, Hulu would say, well, gosh, I get it your performance. And yes, I do want to sell my video on-demand services. But I don't know that I want to be down there in that feed. Now we can show them that, well, we've got all this inventory from Yahoo. We've actually carved out what we call Taboola Select, which is all of our positions where they can get 100% share of voice across all of our properties. So it's Microsoft, it's Yahoo!, it's all of our publishers where we've got mid-article and the like. So -- and we're showing them that there's lots of places you can do that with Taboola, and it's one of our lessons learned, and it is changing the conversation with those folks quite a bit.

Okay. So historically, I think you've talked about, call it, 15,000, 16,000 advertisers. These new advertisers are probably, like you say, Hulu and some of these others, much bigger with presumably bigger paychecks for you to sign.

Yes, it's interesting. So there -- some of our largest advertisers are bigger than even a Hulu because if you -- Ooni Pizza Ovens would not be an example of that because that's a little bit more concentrated. But we've had advertisers historically like Dollar Shave Club, who's trying to reach -- initially, they were trying to reach men and then eventually, they realize they should be trying to reach women too. So they're basically trying to reach everybody. And they can spend a lot. But yes, getting into that top tier, it opens up budgets that are not -- they don't exist at a lot of places. So it is a bigger advertiser as well.

Got it. You touched on this earlier, but speaking of doing different things versus what Taboola traditionally has been known for, let's talk about the Apple deal. What are you doing there?

Yes. So basically, we are powering native advertising or basically performance advertising across Apple News and Apple stocks. So if you swipe right on your iPhone, you'll get an Apple News feed. If you click on one of the articles and look in the article, we'll actually be mid-article there with advertising. In addition to that, if you go back to the feed and in the feed, there will be ads, we'll be powering those ads as well. So basically -- and that was -- I think that's something that kind of came out of our relationship with Yahoo!. I think Apple said, well, gosh -- and by the way, it took -- it was a years-long process of getting this with Apple. They're very picky about their partners. But they -- I think they realized that if Yahoo! is going to outsource their whole business to a company like Taboola, maybe we can work with them, too. So now we are working everywhere that Apple News and Apple stocks is where they operate it, which is 4 markets globally, where they're partner. They will also still be selling their own or at least their -- sorry, I can't confirm exactly what they're doing. But according to an article that came out recently, which seemed reasonable to me, they'll also be selling branding advertising. But when it comes to performance advertising, they rely on us for that.

Okay. Got it. And speaking of, I guess, how you now look like to large publishers, Yahoo! as well as now Apple. I guess we can regard Apple as a publisher also -- that certainly has to change the discourse with some of your current publisher partners and some of these others who are with other people, right? So how should we be thinking about new deals with other publishers? I don't know, honestly, I think you're probably pulling away from the competition.

Yes. I mean -- so first of all, I think you and I have talked about this before, but for those of you who haven't had a lot of conversations with us, there is kind of a natural network effect in our business. The way it works is the bigger you get, the more often you see consumers, the more often you see consumers, the more data you get about what they do in particular context, what -- in a particular context, what are they likely to click on, what are they likely to read? And based on that, you can do a better job of targeting ads. The better job you can do of targeting ads, the more revenue per engagement with that user you get, the more you can pay the publisher. The more you can pay the publisher, the more likely you are to win the next one and then it's a self-reinforcing kind of network effect. So there is that effect, and I do feel like we're kind of pulling away. I also think the other thing that this -- between Yahoo! and Apple, what it's doing for us is it's also opening other companies to the idea that, hey, Taboola is not just a traditional publisher company. So if you're a ride share service like an Uber or a Lyft and both of them are getting into advertising now, now they would probably think, okay, why did Apple work with Taboola, okay? Because it's performance advertising, and that's a specialty. That's something that Uber can sell their own brand ads. Selling brand ads is not that hard. You just have to find somebody who likes your audience and wants to target your audience. But doing performance is a specialty. Tracking the results, knowing how much you made, what the CPA was for your advertiser, being able to show that to them, knowing which data to use to target the right ad to the right consumer in the right context. It's much more specialized. I think now we're opening ourselves to working with more of those types of companies for their performance advertising.

So other potential app developers, publishers on mobile who have a presence and they want to make some more money from performance advertising?

Exactly, or engage their users, and they also need to figure out how to engage their users. So for instance, we have Taboola News, as you know. So Taboola News, by the way, is -- it's like Apple News but for Android devices, and we provide this for some of the leading OEMs in the world. So Xiaomi just renewed with us and expanded what they're doing with us. They're the #3 cell phone manufacturer in the world, and they provide an Apple News-like experience powered by Taboola. We can also go to, say, let's say, a Lyft or somebody like that and say, hey, if you want to engage with somebody who just used your app to hail a ride, one way to do it is provide them a news feed and say, hey, you're sitting here watching, waiting for your car to come. Why don't you read some news? And here's news that is either personalized to the user or local to where they are or something along those lines. And so we have a lot of opportunities now to help companies to engage with their users and monetize their users using performance advertising that I think is fairly unique to Taboola.

Got it. Now switching gears a little bit. Google's AIO reviews and what Facebook has done with traffic being sent over new sites, everything else, the topic of where publishers are getting their traffic from, that's unavoidable. So should we be thinking about Taboola, and should we be worrying about your publishing ecosystem and the traffic levels that they're seeing because that ultimately has an impact on what you can do for them from a monetization perspective.

Yes. So I guess a couple of different thoughts on that. So first of all, this is just a continuation in my mind of what's been happening for years and years. So Google, many years ago, started to answer questions directly in the Google feed. So if you go out and say, who are the Yankees playing tonight, you used to have to click on the first result feed and go to ESPN and you'd get the answer there. Now Google just tells you. they're playing whoever tonight. So it's -- that's -- this is just a continuation of that. So generative AI is another step in that progression. But the walled gardens, Google and Facebook and some of the other big tech companies have, for years, been trying to keep people on their platform. So I don't think it's any -- generative AI is just another tool to do that and frankly, is replacing some of what they've already done. We're fortunate enough at Taboola to work with brand name publishers where I don't think -- if you're -- if you want to read about sports, you go to ESPN, you go to Yahoo! Sports, you go to CBS Sports, you go to our partners. Like that is -- I don't see that changing. Is it a headwind? Yes, it's a bit of a headwind, but I don't think it's going to change in a major way. And fortunately, we work with the types of publishers that are going to be here in one form or another for many years, and it's really just a matter of how they keep their audience. And frankly, that's where it's an opportunity for us. As I said earlier, like now the opportunity is to go talk to ESPN and say, hey, you got some headwinds from Google answering questions directly on the Google search engine. Why don't you work with us on personalizing your home page so that you get more engagement with your users when they get there? Why don't you work with us on our editorial tools that can tell you what are the questions that consumers are asking that maybe Google doesn't answer that well. So I think it's an opportunity for us to engage with them and work with them more. I think the other thing is we're -- as I said, we're also then looking at where else do we go to work with kind of not traditional publishers, a new type of supply that we can work with, such as the apps that we've talked about. Apple News is a good example, things along those lines.

Got it. We only have about a month left in the year, right? So I guess not as high stakes versus offering a prognostication earlier in the year. But how do you feel like the ad market is progressing as we close out the year? And you must also be having conversations with folks in terms of what the market looks like next year, what the budget outlook looks like. So can you just kind of give us a top-down overview of how things are progressing for the ad market?

Yes. So I think we've been saying for probably the last 6 or 7 quarters that we call -- what I call the ad market right now is soft but stable, meaning it's not robust like it was in 2021 when companies were really out there trying to reach consumers in an aggressive way. They've kind of stepped back off of that, and it's -- they're cautious. They're still spending. It's still fairly stable, but they're more cautious than what they were. But we haven't seen any further step back. We haven't seen any more leaning in yet. I think I'm cautiously optimistic that 2025 and beyond is going to get better because I think a lot of uncertainty has been taken off the table now. So whether you like him or hate him, Trump is going to be President. So we know that now. We know that -- or at least it appears that there's going to be a soft landing or at least not a major recession. The economy looks a little bit more defined. So I think we're getting to a point now where businesses are going to have to say, okay, there's not uncertainty, let's go run our business. So hopefully, it turns a corner sometime in 2025. Right now, it's fairly stable, like I said, soft but stable. The one wrinkle I'll throw out there is it's a very unusual Q4 in that Thanksgiving happened on the last possible day that it could -- that it usually can happen. And that is unusual for the shopping season. So it is a late advertising Q4. So it will be interesting to see kind of what happens because of that. But it's -- that's just -- that's something that only happens every 5 or 6 years.

Yes. Remind me, do you have political ad dollar exposure?

We do, but it's minor. So most political dollars are video, and video is less than 10% of our revenue. So we get some of it, and there is some benefit there, but it's fairly small for us, definitely relative to anybody who's in CTV or any of those areas.

Got it. I think we're effectively out of time. But I guess I'll ask the usual question of we're sitting here a year from now in these seats, what do you think we'll be talking about in terms of what you've accomplished in the trailing 12 months?

Yes. So I think if I think forward to what I want Taboola to be in a year and where I want to -- what I want us to be talking about, I'm hopeful that what we'll be talking about is how we've made the transition from being a kind of more of a publisher-focused companies in many ways to being the performance advertising platform for the open web. We're the first place that advertisers come when they want to reach consumers outside of Facebook and Google that we've made that transition that you're starting to see us working with a lot more companies beyond just traditional publishers that we're doing more. We're not bottom of article native anymore. Maybe native doesn't come up in our conversation at all, but we're just talking about performance advertising. We're talking about the new supply that we're working with the unusual companies that have signed partnerships with us. That would be my hope is that we're really focused on Taboola as the performance advertising platform for the open Internet.

Got it. We'll wrap it there. Thanks again for attending.

Great. Thanks for hosting.