Teads Holding Co. (TEAD) Earnings Call Transcript & Summary

Good morning and welcome to the Outbrain and Teads Completed Acquisition Call. It is now my pleasure to turn the call over to David Kostman, CEO of Outbrain.

Good morning, everyone, and thank you for joining us on short notice. It is my pleasure to welcome you, as you can see, to the new Teads. Today is a truly exciting day as we embark on a new chapter in the amazing journey of both Outbrain and Teads. As we announced this morning, we closed the acquisition of Teads, a transaction we signed and announced in August. This milestone marks the start of a transformative chapter where we combine the strength of 2 open Internet category leaders with deep expertise in branding and performance. The combined company will operate under the name Teads, uniting 2 incredibly complementary solutions to create the omnichannel outcomes platform for the open Internet. Together, we're creating a single access point to deliver elevated outcomes from awareness to consideration, to sales. Through this transformational merger, we will become one of the largest players on the open Internet with about $1.7 billion of advertising dollars and an estimated $230 million of combined adjusted EBITDA. Let me start with a few details about the transaction and for our new investors on this call, a quick overview of what each company brings to the table. Teads is the pioneer and leader in video and in the last couple of years, expanded into CTV, leveraging its omnichannel capabilities and the strategic long-term relationships it has with the most premium brands of the world, including companies like Apple, Louis Vuitton, Heineken and many others, providing them primarily with branding solutions. Outbrain is a leader in performance marketing, working with more than 20,000 advertisers, about half brands and agencies and the other half direct response buyers. Both companies have strategic exclusive relationships on the supply side with the most premium media companies of the world, such as CNN, Fox, Le Monde, Axel Springer; and on the CTV side, LG, Hisense and others. Together, we'll be opening in 50-plus markets. To the transaction itself, the transaction is valued at approximately $900 million with cash of $625 million and 43.75 million shares of common stock that will be issued to Altice, the parent company of Teads. As you can see, this is an adjustment to the transaction we announced in August, resulting in a reduction of $125 million of cash and really simplifying the capital structure by eliminating convertible preferred equity and converting it to common equity. This was done to reflect the share price appreciation of our brand since the announcement and a softer Q4 for Teads. Jason will go into the details, but we believe that the softness stems from onetime events and primarily reasons related to distraction from the merger. So we're very pleased with the adjustment made to the transaction that also improved some of our credit metrics. Altice, the seller, will be benefiting from the potential equity upside as they own approximately 47% of the combined company. Altice will be appointing 2 out of 10 directors. I will remain as the CEO of the new Teads, and the Co-CEOs of Teads, Bertrand Quesada and Jeremy Arditi, are staying to lead the commercial side of the business. You will soon hear from Jeremy. This transaction is not just transformative from an industry perspective but also from a financial point of view. The new Teads will grow our ex TAC revenue by a factor of 2.5x and grow our EBITDA by a factor of 6x when taking into account the full year synergies we expect by 2026. Also, Teads has a history of generating very strong cash flows. You can see from the 68% cash flow conversion on this chart. One unique aspect of this combination is that we had 6 months of planning while we were awaiting regulatory clearances. This allowed us to put in place detailed strategic and tactical execution plans, which we started executing on this morning. So while generally at this stage, you have people talking about expectations and conviction, we are actually in a position with a fully baked new organization strategic plans and tactical readiness. As you can see, we're talking about significant operating synergies around head count reductions and offices and other G&A overlap. We're talking about connecting the 2 platforms, which will bring immediate benefit to the performance of the new combined company from day one. Very importantly, we've had tremendously favorable customer reaction and have very high confidence on the cross-sell opportunities and on solidifying our position with our strategic partners on the supply and the demand side. The combination of data and engineering teams is going to allow us to invest more in innovation and leverage the data signals of each company and our unique combined contextual capabilities to deliver better outcomes for advertisers. Very important for me, I feel great about the cultural fit and how the teams will work together, which is one of the most important factors of success in such mergers. I want to turn into the strategic logic of the combination, and then Jeremy will take you through the unique value proposition we will bring to market. The combination with Teads is a natural evolution on steroids of the strategy we announced when we launched Onyx to become the end-to-end, full-funnel platform for advertisers on the open Internet. The open Internet needs a platform that provides direct connections between advertisers and media properties. The new Teads will be the only end-to-end platform that will provide such direct connections and deliver better results across the funnel to advertisers from branding campaigns to consideration and down to actual sales. And we will do so across screens anywhere and at huge scale. With that, let me turn it over to my friend and our new business partner, Jeremy Arditi.

Thank you, David. We're excited to be here on this day one. We want to take everyone through the high-level value proposition and what makes the Teads -- the new Teads such a unique company with some unique assets to serve our customers and our media owner partners. At the foundation, what we provide starts with exceptional reach. Reach is the fundamental currency that advertisers are focused on. We say exceptional reach because the combination of these companies brings massive scale with access to over 2.2 billion unique visitors monthly, reaching around 96% of the open Internet. We have a deep focus on premium media owners. Both companies have a history of partnering with some of the biggest publishers and media owners across the web and connected TV, and we have a high share of exclusive inventory. All of this is presented to advertisers in a very direct supply path for the majority of the inventory that we now have as part of the new Teads. Now we also say the reach is exceptional because we're not just operating within standard ad placements that are available in the general programmatic ecosystem. But we operate within a number of highly attractive nonstandard ad placements across the editorial web that's often in the middle of editorial pages or articles or at the bottom of an article page. And within the connected TV space, it's not just in the video ad break, but it's also within what we call CTV-native placements like the mastheads you might see on a homescreen. The level of control that we have across these placements allows us to synchronize campaigns across these different formats in ways that are just not feasible through the standard programmatic pipes available in the ecosystem. You could see examples of some of the combinations that we're able to do across all of the screens. Now beyond exceptional reach, the new Teads also is very focused on building stunning creative that is built for outcomes. More than 2/3 of the success of a media campaign comes down to the creative. That's why we believe it's critical to deliver beautiful creatives that engage users and that are optimized to deliver on the KPIs of advertisers. Our platform and our creative teams work with customers to optimize their assets for the open Internet and for connected TV. And we optimize well over 75,000 creative assets every year. We've built a deep expertise in doing this across screens from mobile to desktop to connected TV in ways that enable use across screens, when someone is engaged on their mobile device while they're watching television, as an example. So we're focused in the new Teads on connecting premium brands to the most premium editorial and CTV properties and by allowing brands to capitalize on some of the assets that I've just described. One of the key things that we're excited about for the new Teads is our expansive omnichannel graph. We have a vast footprint that allows us to have a deep understanding of what people are not just reading across the open Internet, but what they're watching on connected TVs. And we can leverage those signals across screens so that the topics that people are reading about online can help inform what ads we'll serve to them on connected TVs. The new Teads has deep capabilities and scale across contextual audience and purchase-based targeting. We also operate a high portion of the business without the use of third-party cookies. Now this expansive omnichannel graph is built on unique data assets. Because of our footprint with media owners consists of deep integrations, code on page, we're able to see and utilize many more signals that are available in a typical programmatic vid stream. Your average DSP may only have access to a handful of parameters. But our code-on-page integrations across many of our media owner partnerships give us access to many more signals. And we leverage these signals to build machine learning, deep learning-based models that enable us to deliver and often guarantee specific outcomes that advertisers are interested in beyond just selling impressions. We're now delivering outcomes across the entirety of the funnel from viewable impressions all the way down to conversions and many key performance indicators for advertisers in between. And we will begin to connect those in quite unique ways as we build bridges across the company's tech stack. Now this expansive reach done in creative, our omnichannel graph capabilities and data assets and AI are really coming together to deliver on what we've called elevated outcomes. The 2 legacy companies have built very deep technical capabilities across branding and performance with 2 independent tech stacks, where the teams have been already hard at work in building bridges between the 2 so that we can seamlessly deliver against the full-funnel KPIs that our advertiser customers are looking for. And we're excited about the new products that the teams are building as we speak. I want to double-click a little bit on CTV since this is a meaningful catalyst to our business and also plays into our omni video strategy. Our current CTV business has had a lot of investment in R&D and successful partnerships in the last several months. We recently launched capabilities to allow buyers to deliver incremental reach versus linear television. We've entered into or renewed partnerships or expanded partnerships with some of the leading OEMs and many of these partnerships on an exclusive basis. We've reached an important milestone of delivering over 1,000 campaigns through our CTV-native solutions. These are the homescreen mastheads that I referred to earlier. And all of this and more has resulted in a 3x revenue growth between 2024 and 2023 for our CTV business. But obviously, with the new teams continuing to invest meaningfully in this area of the business, we're expanding our CTV solutions with more proprietary and unique native ad formats beyond just the homescreen. We're building solutions to serve small and medium enterprise segment that Outbrain has been focused on historically. And we're innovating in optimization and measurement to utilize CTV for performance marketers as well. We see this as not only driving CTV revenue but also expanding our average campaign size for our overall video solutions. When we combine omni video with our legacy upstream business and CTV, we see a significant increase in average spend for customers. So with that, I'll turn it over to Jason, who will give the financial overview.

Thanks, Jeremy. So as an update and refresher on what we shared in August, this combination is transformational for our financial profile. In terms of scale, you've got over $1.7 billion in ad spend from a diverse set of customers across the 2 businesses on an annual basis. So out of the box, we become one of the largest platforms in open Internet advertising. In terms of growth, Teads is fast growing in CTV. As Jeremy noted, they've got proprietary solutions, and it's now up to more than 10% of their stand-alone revenues in Q4, which is more than doubling year-over-year. So lots of momentum there. And also Outbrain has shown a steady acceleration of growth over 2024 through driving higher yields, higher click-through rates through better use of data and optimizations as well as growth from our Outbrain DSP business and supply outside of publisher fees. So together, we expect to drive overall growth through our combined product offerings, leveraging our combined scale, data assets and deep trusted partnerships. Combination is also highly accretive to our profitability, especially when you consider the rapid margin expansion from the highly visible synergy opportunities that we are immediately addressing post closing. Teads is a very reliable cash flow producer that generated free cash flow to EBITDA percentage of over 60% historically, and we expect to enhance that through synergies. And lastly, the transaction is very attractive also from a financial structure point of view, using leverage to finance the majority of the acquisition value at a reasonably low level of less than 2.5x net leverage when considering the annual synergies we expect to achieve in 2026. So let's double-click into the synergies. We spent several months between the management teams preparing to capture synergies immediately post closing, and we feel very ready to do so with detailed work completed across each of these areas touched on here. In total, we estimate synergies of about $65 million to $75 million to be impacting adjusted EBITDA in 2026. This is an increase from what we previously estimated by $15 million. The increase is owed to the time we spent together preparing and planning for integration, allowing for higher confidence and faster capture than we previously estimated. We break it into a few categories here between revenue, compensation and other costs. So let me go through them. Compensation, we expect $45 million expected to be realized in 2026 savings with approximately 70% of this amount actioned in the first weeks following closing. In terms of other costs, we expect $15 million to be realized in 2026, and this includes both noncompensation operating expenses and traffic acquisition costs. Noncomp is typical items related to the lower head count and other redundancies, such as office leases, software licenses, professional fees, et cetera. Traffic acquisition costs, or TAC, paid to media owners is the largest combined cost of the 2 companies at around $1 billion annually. We are prepared to begin optimizing our combined network on day one today to better match supply and demand, particularly where there is unsold or undermonetized supply due to purchase guarantees. We feel the opportunity for this is significant in terms of size and scale. We remain conservative in our estimates, estimating around 1% of the total cost being achieved by 2026. And revenue synergies, which we feel is the biggest long-term synergy opportunity, but we cautiously are sharing an expectation of $5 million to $15 million in terms of the EBITDA impact by 2026 from the benefits of cross-selling, upselling, leveraging combined data and capabilities and penetrating non-overlap geographies. We're keeping this estimates fairly low for now, representing 1% or 2% of our ex TAC growth from these revenue synergies. So we see this opportunity as far greater than this and look forward to sharing more of our vision and our progress on upcoming calls. Now we can go back to the combined financials, where the preliminary reported numbers show the significant scale and operating leverage opportunity when you layer in the expected 2026 synergies. So Outbrain is preliminarily reporting Q4 results which are in line with our previously issued guidance, and we'll provide more details in our upcoming Q4 earnings call. We're also showing Teads preliminary reported results, which reflect a softer-than-expected Q4 following a very stable year-over-year revenues Q3 year-to-date due primarily to 2 identified and temporary headwinds on the business. One, political instability in France, which caused several customers to push budgets out of Q4 and drove 25% of the overall year-over-year revenue decline. We view this as temporary and one-off as Q1 has seen the benefit of some of those budget deferrals already was January seeing strong year-over-year revenue growth. Number two, the pending merger announced in August, paired with a temporary pause in hiring, led to management and employee distraction and higher-than-usual employee turnover. The most significant impact was felt in the U.S., which is Teads' largest market and contributed more than half of the year-over-year revenue decline globally. U.S. revenue declined over 20% year-over-year, while the number of quota-carrying sales reps in the U.S. also declined 20% on a year-over-year basis. Following months of planning, we feel confident about the quality, motivation and size of the combined company to execute successfully post merging. And with that, I'll hand it back to David.

Thank you, Jason. As you can see, we are very excited about the combination about the new Teads, the impact we can have on the industry, the impact it will have for our amazing teams across the globe, and hopefully, also for you, our shareholders. With that, we'll open it up to questions.

[Operator Instructions] Our first question comes from the line of Ygal Arounian with Citi.

Congrats on closing the deal, and good luck with the integration and all of that. Excited to see how it all plays out. So 2 questions. One, on the technical integration of the 2 platforms, if you could expand on that a little bit more. David, you talked about the tactical readiness here. What's involved? How long does it take? What are the complexities around this? And what's your level of confidence that it all goes as planned? And then given the growth in CTV at the old Teads and the integration of the performance capabilities with -- from Outbrain, can you talk a little bit more about how -- as you integrate these 2 platforms, what the opportunity is with kind of driving performance budgets on to CTV and how you can differentiate there kind of as we move from more [ brand ] CTV to more performance-based and -- that's been a big theme and what that opportunity is?

Ygal, thank you. It's David. So I'll take the first one, in terms of the integration. So as we said, we are very advanced. I've been involved in many of these over the years. I've never felt better about sort of day one, so we're executing a lot of the plans. On the technical side, there's a few aspects to it. So we will be combining the 2 platforms, actually day one, from a programmatic point of view. So demand from Teads flowing into the right placements at our brand, the right demand from our brands flowing into some of the right places for Teads. That's not combining the whole 2 side of the platform, but this is going to be already impacting significantly, as Jason mentioned, part of the synergy on the top line and ex TAC is destination. We are looking at tremendous cross-sell opportunities primarily selling Teads customers performance solutions. They are very excited about it. They have been talking for the last 6 months, explaining how this comes together. So we, in select markets, will be starting around the cross-selling opportunities and also selling video to some of our brands and agencies on our side. So this is another benefit on the revenue side. The real integration of Teads as manager in our platforms, I mean, these processes take more time. And I think that's something that we have sort of detailed road map planned out. But this is sort of a matter of, I would say, 12-plus months to really integrate the platforms. But from a customer point of view, I think we have in place a good setup to make it seamless for them to be able to buy sort of a full-funnel outcome campaign from the new Teads. And for them, it will be seamless and over time, sort of the back end of integration to allow for that will be done. Jeremy, you want to take the CTV?

Sure. Thanks, David. Ygal, so on the CTV combined with the performance capabilities, it's an area that we are already active in the stand-alone Teads has already built a solution there that is up and running with customers. We're combining our CTV inventory and campaign delivery capabilities with the fact that we have pixels and measurement capabilities across thousands of advertiser websites. And we're looking at direct correlation between CTV ad exposure and traffic or conversions. We think that on a combined basis now, the new Teads has the ability to bring lower-funnel web-based solutions run in concert with CTV campaigns to optimize against specific lower-funnel outcomes, be they leads or conversions. So we think that proposition is attractive, in particular to the small and medium enterprise segment that Outbrain has been very successful in. And so this opens up a new area of business for us beyond just the enterprise customers that we already work with.

[Operator Instructions] Our next question comes from the line of Zach Cummins with B. Riley Securities.

Congrats on closing the merger. My question is really geared towards the Teads performance that we saw in Q4. I know you outlined a few of the reasons for some of the underperformance that we saw on that side. But can you just dive in a little bit more? So in terms of the confidence of stabilizing, especially the U.S. region for Teads and how you feel about this -- just the overall synergies, especially on the cross-selling side with the combined company together?

Jason, you want to start and then I'll take it?

Sure. Yes. I laid out those 2 idiosyncratic drivers, and we truly believe, obviously, that they are not repeating -- the France one, I think it kind of speaks for itself. And then in the U.S., which contributed about 55% of the overall decline, so more than half, we really did see kind of as a one-off in Q4 and coinciding with the timing of the announcement and with the timing of the hiring freeze and turnover of key people there. So it certainly is something that we believe is onetime in nature. Obviously, we're closing the combination today, and a lot of excitement from our town hall this morning and things we have planned for the next week or so. So we feel very good and confident about the team going forward. And obviously, the cross-selling of the products, maybe I'll defer to Jeremy or David.

Yes. I want to add, I mean, there's -- I've spent a lot of time with the teams over the last few months, visiting offices across the globe. I think the company was -- Teads, all Teads, was impacted sort of by this transaction. They've been sort of in the market for a long time. I think under the ownership of -- at Teads, there were different constraints input on them in terms of incentives and other things. And I think they feel sort of now that sort of true excitement -- once we sort of had clear sight to the closing, I could see the change in sort of the dynamic, the energy. So if you look -- I mean we've -- I think one of the numbers, I mean, the U.S., I mean, they also sort of had in terms of quota-carrying salespeople a significantly less amount of people in Q4 versus last year since the announcement of the merger. There was sort of a hiring freeze. So there's a lot of, I would say, organizational things. So highly confident that sort of we have the plans in place. The team is very energized and motivated, and we put the right incentive structure in place to ensure that we go back to growth. Specifically on the France slowdown in Q4, it was related to sort of political upheaval in France in the political system that's just impacted spend of advertisers. The good news is, I mean, we're obviously tracking that. And January, we were positive, so way more than double-digit growth in France versus the prior year. Again, Zach, it's 1 month, so I want to be cautious. But I mean we saw some of these budgets that were held back in December in -- coming to -- in January. So I -- we have no concerns about sort of this Q4 trend. And I think we have the plans in place to really start delivering on, a, for the businesses to sort of -- the Teads business to come back to its traditional trajectory that we saw until Q3 or hopefully better even, and we expect better. And I think on the -- you asked about the synergy side. We see significant opportunities. We gave the number that Jason gave. I will tell you it is a conservative number. It's primarily on the cost side. Sort of what we sort of are guiding here with the number is primarily driven by the cost side. In our plans, we're seeing significant more upside on the revenue side. And I think these numbers -- when we talked in August, I think we talked about the excitement about the upselling opportunities, cross-selling and top line. Our numbers right now look even better. Obviously, it depends on execution, but I'm very excited about these opportunities.

Understood. And just my one quick follow-up. I mean what's the change in terms of the cash upfront required for the transaction. Jason, I was just curious in terms of the time line to hitting your leverage target, and ultimately, what you feel is the appropriate leverage target for this combined business.

Maybe I'll take that. So as you can see, obviously, the reduction of $125 million of cash consideration has significantly improved our credit metrics. And looking sort of from a deleveraging profile, right now, we're starting at less than 2.5x. Our goal is to be at 1 to 1.25x leverage. We think it's reasonable. Even what we have today, I think it's very prudent in terms of when you look at the cash flow generation ability, particularly of Teads that has been consistent over the years, generating close to around $100 million-plus of cash flow. So I feel that sort of these levels are very prudent. I think the way we structured the deal and sort of the new terms that you see, I think, will significantly also enhance the potential for shareholder value creation here. So I think it's a very good outcome for us.

Our next question comes from the line of Laura Martin with Needham & Company.

Okay. I have 2. So David, for you, one of the things Stagwell is doing really good work looking at the fact that increasingly, brands are cutting budgets out of news, which is creating buying opportunities. And I'm very interested in, in your core business, are you seeing your captive buyers allocate less to your news sites, especially in a political year, like they just happened in France just now? Or are you not seeing what Stagwell is talking about, which is basically entire budgets being pulled out of news? And then for Jeremy, I mean, I think there is a consensus view that performance connected television is going to be the driver of connected television upside in 2025. However, generally, when Wall Street thinks about performance, we think about it tied to purchase, so like a retail media network. And we -- I think small and medium businesses require that kind of precision in the definition of performance. My question is, when you say they're going to do performance connected television and you're going to target small and medium businesses, do you have access? Can you tie things to an actual purchase like a retail media network? Or what are you thinking about when you say the word performance?

Laura, I know it's early for you, so sorry for the short notice on the call.

No problem.

So on the news, I mean, obviously, we are aware of Stagwell, there's other efforts around this. I mean we haven't seen any real changes on this topic. I think that if you ask me philosophically, I think there's -- we should see less of some of this blocking. But overall, I mean, we haven't really seen a change. There are different industry efforts with the agencies and the brands to sort of facilitate more of a sort of increase of ability of inventory. And I think the technologies of today where you can through AI, and we do that and others do that, be much stronger around the contextual content and understanding given understanding to the brands of what the context is, I think, will help with that. Overall, if you look at actually the Stagwell research also shows that I think the performance of brands, there's no difference when they are near a sports page or a news page. And actually, overall, we believe, and it's also based on a lot of studies and, for example, the delivery of better attention metrics that both Teads and Outbrain do compared to social is that when you put an ad near a professionally produced, trustworthy, authentic content, the likelihood of the audience to see also the ad as something that is more trustworthy is higher. So we are -- we feel good about sort of where we are. And obviously, our network and platform works with many more sites and CTV providers that are not just news. But on this one, I think no change. And actually, we think that technology improvements can improve the situation quite dramatically.

And Laura, to your question on CTV and performance and what kind of performance we are delivering and plan to deliver in the future, the answer depends a little bit on the needs of customers and the specific verticals. So while the retail media works for, let's say, CPG specifically, I mean, there are a number of other sectors, let's say, automotive as one example, where a performance KPI might be foot traffic in dealerships as measured by some of the companies that do that. It might be leads that are submitted online. And we do -- as I briefly alluded to earlier, we do have our tracking capabilities across thousands of advertiser websites. So we do have the ability to reconcile a CTV ad exposure to some kind of action or conversion that is taking place on an advertiser website. So it might also be a subscription to a specific service. So there are a variety of ways in which we already have built-in abilities to measure the actual performance beyond just what a retail media proposition might be able to do. And again, those things are down to the specific customers or down to the specific verticals in which those customers are.

Congratulations.

Thanks, Laura.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Kostman for any final comments.

Thank you all for joining. We are very excited about embarking on this journey with the new Teads, and I look forward to reporting many quarters of success of this merger. Thank you very much.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.