Teads Holding Co. (TEAD) Q4 FY2025 Earnings Call Transcript & Summary

Good day. Welcome to Teads' Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Teads Investor Relations. Please go ahead.

Good morning, and thank you for joining us on today's conference call to discuss Teads fourth quarter and full year 2025 results. Joining me on the call today, we have David Kostman and Jason Kiviat, the CEO and CFO of Teads. During this conference call, management will make forward-looking statements based on current expectations and assumptions, including statements regarding our business outlook and prospects. These statements are subject to risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. These risk factors are discussed in detail in our annual report on Form 10-K for the year ended December 31, 2024, as updated in our subsequent reports filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the call's original date, and we do not undertake any duty to update any such statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's fourth quarter and full year 2025 results announcement for definitional information and reconciliation of non-GAAP measures to the comparable GAAP financial measures. Our earnings release can be found on our IR website, investors.teads.com, under News and Events. With that, let me turn the call over to David.

Thank you, Matt. Good morning, everyone, and thank you for joining us. About a year ago, we brought Outbrain and Teads together. The goal was and still is to build a best-in-class digital advertising platform that delivers results across every screen from the phone in your pockets, to the TV in your living room, and for every advertiser's objective from branding to actual sales. Year 1 was a transition. We managed the friction of merging 2 different cultures, technologies and businesses while navigating some tough market conditions. We also make a deliberate choice to build a sustainable premium marketplace and walked away from some low-quality revenue. It was a hard call, but we believe it was a necessary one to protect our marketplace and ensure that we can grow our business with the world's biggest brands. The lessons we learned allowed us to sharpen our focus in the second half of the year, we've simplified the org chart, rightsized our cost and brought in fresh leadership. Now we believe we are moving into 2026 with strong alignment on our strategic priorities and a well-defined execution plan. We expect this to be the inflection point in the year we return to growth. Looking at Q4. We hit the high end of our guidance on Ex-TAC, beat our adjusted EBITDA target and generated positive free cash flow. Beyond the numbers, there are a few key indicators I want to highlight. First, CTV is accelerating. Our focus on the living room is paying off. We crossed the $100 million annual revenue mark with growth hitting 55% in Q4 and with strong growth on the home screen placements. Second, performance cross-selling is scaling. We saw a 300% jump in sales to enterprise customers compared to Q3. Now to be clear, that is still just a few million dollars per quarter, but we believe it demonstrates how much headroom we have to grow. Third, in Q4, we renewed several of our joint business partnerships with leading global brands and have many more in process of resigning in Q1. The feedback from surveying our partners 1 year into the merger is excellent, highlighting creative excellence, innovation and media added value, and the renewals demonstrate the strategic nature of these relationships. On the operational side, we expect that our December restructuring will save us between $35 million to $40 million annually. In addition, we've added top-tier talent like Mollie Spilman, our Chief Commercial Officer; Dani Cushion, our Chief Marketing Officer; and Nirali Jain, who heads our North American business. We've also flattened the leadership structure to make sure our teams can move faster and drive speed and accountability. For 2026, the strategy for our enterprise advertisers is built on 3 pillars. First, we will continue to lead with our CTV offerings by focusing on 2 clear differentiators, home screen leadership and omnichannel branding to performance. On the home screen, we're continuing to win. We are not just another ad in stream. We are an entry point to the living room and TVs. And our leadership is anchored by our strategic partnerships with leading OEMs like LG, Samsung, NVIDIA and Vizio. In Q4, we further solidified our position by expanding our relationships with LG, signing exclusive partnerships in Italy and Greece. And in Q1 of this year, we expanded our footprint through an exclusive partnership with Samsung TV in certain regions in Asia Pacific. We are further expanding this reach through new integrations with Google TV and Rakuten, all focusing on integration of these OEMs and bringing the premium, highly visible and valuable placements directly into Teads Ad Manager. In terms of scale, we have access now to well over 500 million addressable TVs globally and already ran well over 3,500 campaigns on home screens. What we hear from our partners is that they choose to work with Teads due to the unique combination of our direct relationships with the most premium brands of the world through our 60-plus joint business partnerships and the quality of our creative services is ensuring that creatives are well adapted to the unique environment of the home screen and the integration with our platform Teads Ad Manager, which makes transacting on multiple OEMs easier and faster. And we're proving that CTV plus Web is a winning combination. Our thesis is simple. Using the big screen for awareness, then we're targeting on mobile drives measurable sales. For example, our recent partnership with all Accor, a global hotel operator, demonstrated that omnichannel activation on Teads not only drove 23% lift in brand favorability, but also a 17-point increase in purchase intent. That's a massive win for our advertisers and a differentiator for Teads. Second point on enterprise. We are deepening our strategic relationships with agencies. We are working on integration of our audiences with the world's leading agencies and on other data collaborations. A great example of this is our new integration with Havas, which allows their planners to activate our audiences directly from their own planning environment, driving both speed and efficiency. Third, we are scaling our performance business for enterprise advertisers. We are integrating performance capabilities, leveraging legacy Outbrain know-how directly into Teads Ad Manager designed to create a frictionless experience for agencies buying full funnel, and we are advancing our algorithmic capabilities and investing in superior post-campaign measurement. We expect these investments to drive continuous improvements in ROAS and overall campaign performance for our enterprise advertisers. Turning to our direct response advertisers. There, we are purely focused on ROAS, plain and simple, and internally on driving efficiencies that grow profitability. The 2025 trimming of our supply and demand sources to ensure higher quality will impact our year-over-year comparisons early on, but the foundation of our business is significantly stronger today than it was a year ago. We also see here exciting opportunities such as running direct response performance campaigns on CTV. In Q4 of last year, we had several million dollars of such sales. One general comment. You will hear our peers discuss supply path shortening as a new initiative, but for us, it is a foundational architecture. We provide a straight line to the source of premium supply, whether that's an LG home screen or a top-tier global publisher, which is one of the reasons we can deliver superior outcomes from branding to performance. AI. AI is the engine behind many of these growth areas. It's both a performance driver for our clients and a productivity tool for our engineers and teams. On the algorithmic side, we have progressed on the integration of our AI and data infrastructure, and we are already seeing tangible results. In addition, by using LLM models to sharpen our predictive delivery, for example, by analyzing the content of ads to extract additional relevant signals, we are achieving 2 goals at the same time. We're hitting better KPIs for our advertisers, specifically by lowering the cost per acquisition, and we're seeing a path forward expanding our own margins at the same time. We're also investing in transitioning from manual campaign setups and toward agentic-driven goal setting, which we believe will simplify the experience for our partners and allow our technology to optimize for outcomes more effectively. To sum it up, I believe the heavy lifting of the transition is behind us. We've used the second half of last year to build a leaner, faster and better teams. We saw some positive indicators in Q4 into Q1. We have started the year with strategic clarity, a well-defined execution plan and the right leadership, which I'm confident will allow us to make 2026 a breakout year. I will now turn it over to Jason to walk through the financials.

Thanks, David. As David mentioned, we achieved our Q4 guidance for Ex-TAC gross profit at the high end of our range and exceeded our range for adjusted EBITDA, generating positive adjusted free cash flow in both the quarter and for the full year. Revenue in Q4 was approximately $352 million, reflecting an increase of 50% year-over-year on an as-reported basis, primarily reflecting the impact of the acquisition. On a pro forma basis, we saw a year-over-year decline of 17% in Q4. I spoke last quarter about the drivers of volatility in our top line stemming from both legacy Teads and operating businesses. I'll reiterate them briefly here in the context of what we anticipate for 2026. But an important takeaway is that since we last reported in November, we have seen a more stable top line. Within our enterprise clients, we saw a deceleration in our top line starting in June that we attribute largely to operational challenges and distraction of the merger. This primarily impacted us in several key markets, most notably the U.S. and U.K. However, the changes we implemented in leadership and operations in Q3 are yielding positive indications in Q4 and into Q1, giving us confidence that we can see a return to growth by Q4 of this year. CTV growth has accelerated. Top line in the U.K. has stabilized, and our sales of performance campaigns to enterprise customers, including cross-selling is accelerating. Within our direct response clients through both strategic decisions around quality and external factors, including deliberately exiting lower-quality demand and supply sources from our ecosystem, we've churned a small but meaningful segment of arbitrage-based customers. This impacted our revenues primarily in H2 and most meaningfully in Q4. And while we feel we have a healthier long-term business from these changes, we expect that this will impact our year-over-year comps through much of 2026. The year-over-year comparison impact for 2026 is expected to be a headwind of approximately $20 million of Ex-TAC with the vast majority of that in H1, phasing down to a minimal amount by Q4. Ex-TAC gross profit in the quarter was $152 million, an increase of 122% year-over-year on an as-reported basis and a decline of 19% on a pro forma basis. Note that Ex-TAC gross profit growth is outpacing revenue growth due to a net favorable change in our revenue mix post acquisition as well as the continuation of improvements to revenue mix and RPM growth that we've been seeing for the last few years. Other cost of sales and operating expenses increased year-over-year, primarily reflecting the impact of the acquisition as well as a noncash impairment in goodwill. As a result of recent declines in our share price and overall market capitalization, we were required under accounting standards to perform an impairment assessment and ultimately recorded an impairment to goodwill of around $350 million. This accounting adjustment is entirely noncash and does not impact our liquidity, operating cash flows or our debt covenants. I also want to be clear and emphasize, we fully believe in the fundamental strategy of our omnichannel full funnel offering, but as we've reported, the operational challenges have led us to a timetable longer than we initially anticipated, resulting in this impairment charge. As our actions exemplify, we are committed to returning to growth and improving profitability. And to that end, in the quarter, we recognized $6 million of restructuring charges, primarily related to the reduction in force we announced and largely executed in December. The restructuring is expected to save approximately $35 million to $40 million annually from the elimination of both filled and unfilled roles. Adjusted EBITDA in Q4 was $37 million, and adjusted free cash flow, which, as a reminder, we define as cash from operating activities less CapEx, capitalized software costs as well as direct transaction costs was approximately $3 million in the fourth quarter and $6 million for the year. As a result, we ended the quarter with $139 million of cash, cash equivalents, and investments in marketable securities on the balance sheet, and continue to have EUR 15 million or about $17.5 million in overdraft borrowings classified in our balance sheet as short-term debt. Additionally, we have $628 million in principal amount of long-term debt at a 10% coupon due in 2030. As we've said in the past, we are always evaluating our cost and capital structure for opportunities to improve our financial profile. In that regard, we are evaluating opportunistic alternatives that may be available to us to strengthen our balance sheet and build a more durable capital structure. Now I'll turn to our guidance. We are focused on operating as a cash flow-generating business. We've taken recent steps to improve our cost structure, and we'll continue to look for opportunities as we further advance our integration and leverage the exciting avenues to streamline operations that are now available with AI. We've taken steps to realign our team, appoint new leadership and enhance our focus on the areas that we feel will help us return to top line growth. And while we feel good about the steps we're taking and the progress we're seeing, we acknowledge the uncertainty of the overall environment and how it may impact the time line and progress as we pursue a return to top line growth. So with that, we have provided the following guidance. For Q1 2026, we expect Ex-TAC gross profit of $102 million to $106 million, and we expect adjusted EBITDA of breakeven to $3 million. And for full year 2026, we expect adjusted EBITDA of approximately $100 million. While this level of annual EBITDA would potentially result in a small use of cash, we are comfortable with our cash balance and borrowing ability. And additionally, we see opportunities to generate positive free cash flow this year. Now I'll turn it back to the operator for Q&A.

[Operator Instructions] Our first question comes from the line of Laura Martin with Needham & Company.

On the sales force, I was just wondering, are we pretty much staffed up now on the sales force from the integration? And do you expect smooth sailing going forward on those kinds of hires? And then secondly, I was really interested, David, in your comments on the exclusive deals with Samsung and LG. Are those for homepage programmatic, the way Nexen is talking about? Or is that for -- I was just wanting you to expand on what rights you have that are exclusive right now.

Sure. Laura, thanks for the question. So first, on the sales force, we are confident we have the right leadership team and the right team in place. So I do anticipate smooth sailing. Nothing is smooth, but I think we're very confident we have a good team. I think we replaced the people we wanted to replace, and I'm very confident with what I see in the last few months with the new leadership. On the home screens, we've been at this for about 2 years working on a home screen. So we have exclusive relationships in certain geographies with LG. We have exclusive relationship in certain geographies with Samsung. We had, until last year, an exclusive relationship with VIDDA, which now also Nexen is involved, but what we do and where our advantage is really that we work directly integrated between Teads Ad Manager and the home screen. These are very unique special formats and the advantages we have around creative adaptation to the different formats and the ability of advertisers to really buy and optimize across multiple OEMs in one platform. That's a huge advantage. You can activate it programmatically, but when you activate it programmatically, it's very different in terms of the outcomes that you can drive. The premium brand relationship we have directly are a big factor why these companies work with us exclusively. We have a global footprint in more than 50 markets. They do want those premium brands on the home screen. I mean, there's no tolerance for other type of brands. So that's a huge advantage that we have. So between Teads Ad Manager direct integration, ability to run campaigns across multiple OEMs, the creative adaptation and the premium brands that gives us a huge scale, and I think huge head start on that business. And it's also driving other parts of our business. We talked on -- I mentioned on the call, the omnichannel. So the ability to activate on the home screen, and then on the web is a big advantage and the ability to drive just performance campaigns. So we believe we have a 2-year head start there, and it's a great differentiator for us.

Our next question comes from the line of Matt Condon with Citizens.

The first one is just can you provide additional color just on the securitization of the business? And just what trends are you seeing so far in 1Q that give you confidence that you've got this back on the right track? My second one is on the organizational changes, just do we have the right team in place today across the entirety of the business? And should we expect anything or any other changes going forward?

Thanks, Matt. This is Jason. I can take the -- I think I got -- it was a little broken, but I think your first question was about Q1 trends and what gives us confidence. So if I miss anything you said, I'll just start there. Yes, look, I think we're seeing improvement in Q1, right? Maybe I know the numbers might be a little funky with the timing of the acquisition last year being a few days into February. And so the pro forma and the as-reported periods are slightly different. On an as-reported basis, we are guiding at our midpoint to something fairly flat year-over-year for Ex-TAC. And on a pro forma basis, is down, but not down to the same level what we saw in Q4, where we were down a bit more. So what we're seeing in this early part of Q1 and what we expect for the full quarter is closing of the gap quite a bit here, and that means we're seeing better than what's typical in Q1 relative to Q4, and it's really concentrated in the areas that we're focusing on, which obviously when you're focusing on something, and then you see improvements in it, it gives you some confidence, right? So CTV is accelerating though through the home screens and the omnichannel, as David said, we're focused on driving more performance sales, obviously, a big part of the kind of synergies of the combination, and we do see momentum there. And then I know I've talked a little bit about some of the operational challenges that have been driving the headwinds for much of the last year or 6 months or so in U.K. and U.S. are the countries I've kind of called out. In the U.K., we do see a relative improvement and a big shrinking of the gap starting in Q1 here. And as David mentioned, in the U.S., we have new leadership in Q1, and we do feel good and gain some confidence from the pipeline that we see in March and beyond. So cautiously optimistic, but we've taken meaningful steps to focus and reduce costs and focus and realign around the things that we think will drive growth, and we're starting to see good indications of those things.

And I think, Matt, in terms of the team, I'm very comfortable. I mean, we started the year with a very clearly defined execution plan. We sort of elevated to the leadership team, some people from the product and tech side. So I'm very comfortable with where we are. We've rolled out very specific goals and targets, and I think the execution plan is well defined with the right team at this point.

Our next question comes from the line of James Heaney with Jefferies.

Just what are the assumptions behind the full year EBITDA guide? How should we think about the linearity of growth and margin as we move throughout the year? And then any color you can maybe also provide around linearity of Ex-TAC gross profit growth? I think you said getting the growth in Q4, but any other things to think about moving throughout the year?

Sure. Thanks, James. I'll take that. It's Jason. I mean, our guidance of approximately $100 million of EBITDA, it does not imply a full year Ex-TAC growth on a pro forma basis, but we do expect to get to growth by the end of the year by Q4. So maybe some color on kind of how we see that playing out. A couple of points of context. For one, I did mention on the call, we have this year-over-year comp headwind of about $20 million of Ex-TAC from the quality cleanup. And just to put that into kind of when we see that happening, it started to really impact us fully in Q4, and maybe about half of the impact we talked about in Q3 from the supply cleanup and some of the early impacts there. So the full impact, about $8 million of a headwind in Q4 of Ex-TAC, and we expect that same $8 million to impact Q1 and Q2 as well before starting to shrink in Q3 and be de minimis for Q4. So the comps do ease as the years go on. That's the biggest kind of headwind that we see kind of moving forward. And generally, we expect it will take a few quarters to build back to growth from the year-over-year decline that we reported in Q4. We see improvement, as I said, in Q1. We think it will take a few quarters to get to growth, but believe that our changes in focus, leadership and operations are driving this change. We start to see it in Q1 from the things we did last year and the things that we're doing in Q1, we think will help more and more as the year goes on. So on a pro forma basis, we expected to see improvement each quarter of the year, and then Q4 being where we hit the positive growth. In terms of expenses to get to EBITDA, obviously, you can see in our guidance for Q1, it's substantially reduced expenses from -- obviously, from the restructuring and the step-up of full year of synergies now that we have compared to last year. So you can see the lower cost base, and that's even despite FX headwinds of a few million dollars that we see from the weakening of the dollar versus mainly the euro and the shekel. But we -- the rest of the year, a few million dollar step-up probably in Q2 and Q3 just based on seasonality, revenue-related items and some fully staffing where we have some empty roles right now, and then a normal Q4 seasonal step-up as you've seen in our results this year as well would be what I expect.

Yes. Very thorough answer. Maybe just quickly for either of you. Anything on just specific ad verticals that you'd want to call out in terms of strength or weakness? I mean, any particular standouts that you want to highlight?

Maybe I'll take that. I mean, there's nothing really to -- that is material. I mean, we don't have any vertical that's sort of double digit even. So we see some weakness in CPG and automotive, some strength in health and finance, but nothing really of note.

Our next question comes from the line of Zach Cummins with B. Riley Securities.

David, I wanted to ask about the Google TV opportunity. I mean, can you maybe go a little more into detail around that announcement? And what sort of growth opportunity does that unlock for you as we move forward in 2026 for CTV home screen?

Look, overall, CTV home screen is a huge opportunity for us. We are, as I said, I mean, 2 years into it. We have a huge base of OEMs. We added Google TV to that. I'm sorry, this is New York background noise. So we added Google TV recently. We added TCL, Wale and many others. So the overall opportunity is huge. I mean, it today accounts for a big percentage of our CTV business. We've grown in Q4 55% and expect similar growth rates or better for this year on that business. And I said it earlier, I think we have clear differentiators there. I think the direct access is a big differentiator. The premium direct premium advertiser relationship is a big advantage. And that's why I think these OEMs and other applications on CTV really sign up with Teads in order to make sure that, that experience on the home screen is the best they can offer to their audiences. So it's a large opportunity, and it also helps us to, as I mentioned earlier, to omnichannel sales, sell more campaigns to our advertisers also around online video, combining the CTV home screen and the web. So it's a very big opportunity. It's a big area of investment for us, and we're very excited about it.

Understood. And my one follow-up question is just around the proactive cleanup of some of the inventory throughout 2025, obviously, a meaningful headwind when you think of Ex-TAC over the next couple of quarters. But is that process largely behind us now? Do you have the ideal mix of inventory now that you're focusing more so on enterprise-level brands?

Yes. I think it's behind us in terms of executing on that cleanup or trimming of supply and demand quality. So we walked away from about $20 million in revenue. The impact will continue into the first half of this year. It was about $8 million headwind in Q4. It will continue through the first half of this year, but we have a much healthier network. We're actually delivering better ROAS for our performance advertisers and the network and the marketplace is much more suitable for the premium brands we work with.

And this concludes -- we have reached the end of the question-and-answer session. I would like to turn the floor back over to David Kostman for closing remarks.

Thank you very much for attending today. As you can hear, we are somewhat encouraged by the sequential trends that we see. We do believe that '26 will be an inflection point for us. We're very focused on execution and also finding the sort of right levers to invest in, in the attractive growth areas that we see like CTV. So excited about the future and look forward to updating you.

And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation. Have a great day.