Outbrain (OB) Q3 2024 Earnings Call Transcript

Image source: The Motley Fool.

Outbrain (NASDAQ: OB)
Q3 2024 Earnings Call
Nov 07, 2024, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day ladies and gentlemen and welcome to Outbrain Inc. third quarter 2024 earnings conference call. [Operator instructions] As a reminder this conference is being recorded. I'd now like to turn the call over to Outbrain's investor relations.

Please go ahead.

Unknown speaker -- -- Analyst

Good morning and thank you for joining us on today's conference call to discuss Outbrain third quarter 2024 results. Joining me on the call today we have Outbrain CEO, David Kostman; and CFO, Jason Kiviat. During this conference call, management will make forward looking statements based on current expectations and assumptions, including statements regarding our business outlook and prospects, as well as our pending transaction with Teads. 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 Form 10-K filed for the year ended December 31st, 2023 and in our definitive proxy statement filed with the Securities and Exchange Commission on October 31st, 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 such statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's third quarter earnings release for definitional information and reconciliations of non-GAAP measures to the comparable GAAP financial measures.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $23,324!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $42,133!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $420,761!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of November 4, 2024

Our earnings release can be found on our IR website, investors.outbritain.com, under News and Events. With that, let me turn the call over to David.

David Kostman -- Chief Executive Officer

Thank you, Sarah. Good morning and thank you for joining us today. I'd like to start with a brief update on the status of the transaction with Teads. We are still on track to close in Q1 2025 as planned.

We have cleared the necessary regulatory reviews in the US and in several other countries and are progressing in the remaining geographies. We have a shareholder meeting to approve the deal set for December 5th. We are very pleased to report that the integration planning process is progressing smoothly, contributing to our excitement about the opportunity and our conviction regarding the synergies. Now, let me provide an update on Q3 and progress against our 2024 growth drivers.

For Q3, I'm pleased to report that we delivered extra gross profit within our guidance range. We exceeded our adjusted EBITDA guidance and we generated positive free cash flow for the 5th consecutive quarter. I want to highlight that we grew extract dollars year over year for four out of the last five quarters. The other quarter was flat and extract margin has improved year over year for six consecutive quarters despite the headwinds of one significant partner.

We believe that these results are driven by positive trends in our core business and momentum across our growth pillars. Our first pillar refers to expanding our share of wallet with brands and agencies, as well as performance advertisers. We are gaining traction with our cross-sell solutions from branding to performance, delivering on our full funnel value proposition. US advertisers, including Disney, Amazon and Betterment, invested in both Outbrain's performance solutions and Onyx branding solutions, showcasing the benefit of leveraging both products to drive incremental outcomes.

On the performance side, the Outbrain DSP, previously known as the Zemanta continues to see steady adoption. Advertisers are increasingly embracing our platform for its comprehensive tooling and ability to drive scaled performance across the open internet. This allows us to capture a larger share of wallet with a 60% year-over-year increase in the advertising spend on this platform year to date. Moving on to our second growth pillar for 2024, we've continued to expand beyond our traditional feed opening new opportunities for advertisers to drive results.

This revenue, which is generated from supply beyond our traditional feeds, represented approximately 28 % of total revenue in Q3 2024 compared to 26 % in Q3 of last year. We have continued to grow this metric quarterly for the last six consecutive quarters, demonstrating our focus on expanding our inventory diversity. We believe this expanded supply is also a key enabler to power advertiser outcomes at scale across the open internet. Our third pillar refers to our continued focus on deepening our premium media owner partnerships, a key strategic asset of our business.

These relationships ensure a steady base of premium exclusive inventory while giving Outbrain unique contextual and engagement insights that fuel our performance and predictive capabilities. We've successfully renewed agreements with some of our important publishing partners including Washington Post and Metronews in France. We also secured new business partnerships from competitors and launched new partners including Sport1 in Germany and Reuters and Newsweek in Japan. This again demonstrates our superior value proposition when it comes to strategic relationships with premium publishers globally.

Now, I'd like to give an update on some of our recent product and technology advancements. In September, we successfully launched Moments by Outbrain in beta. On a personal level, I truly believe Moments is one of the most exciting products I've seen in our space in the last few years. Moments brings the immersive experience of social media to the open internet, transforming our feeds on traditional publishers into vertical video environments with swipeable navigation.

Data publishers like Axel Springer and Fortune use their own professional vertical video content to create entirely new audience engagement opportunities on their sites. Brands benefit by extending the impact of their social creative assets from platforms like TikTok and Reels to the open internet, creating a premium full screen video experience. Moments has already shown early signs of generating high audience engagement with 40% of users watching three or more videos. In August 2024 study by Media Science found that vertical video ads delivered in Moments enhanced the performance of ads delivered on social platforms alone.

We believe this indicates a strong opportunity for brands to compound the impact of their social strategies on the open internet driving higher brand recall and recognition. Now, let's turn to AI. We are accelerating AI integration into our performance and creative offerings, improving efficiency and outcomes with a clear focus on the segment of our sophisticated large scale advertisers. We are doing this through our Creative Automation Suite, which allows marketers to easily use AI to create new ad images, tailor images and adjust headlines to deliver better results.

The Creative Automation Suite uses our algorithms, predictive insights to fuel the products generative AI, delivering more relevant, highly targeted creatives optimized for consumer engagement. We have several case studies demonstrating how performance clients have been able to meaningfully increase their campaign, click through rates by using AI based creative automation tools. In addition, we recently expanded our collaboration with Microsoft Azure, integrating Azure OpenAI solution to a range of ongoing services. We believe that Azure Solutions will allow us to continue to enhance our existing creative solutions, prioritizing ad creatives with predicted higher return on investment.

We also focus on deploying AI into our internal processes. We're proud to highlight that Outbrain has been recognized as one of the 25 most innovative UiPath customers for our advancements in business efficiencies. With AI. Our team stood out among global applicants for its ability to use AI and automation to redefine the way teams work.

By automating key workflows, particularly within our small, medium publishers and ad operations divisions, we've reduced manual workloads by some 40% enabling our account managers to focus on revenue generation and their clients. To wrap up, we are pleased with our continued year over year stock and profit margin improvements and we are confident that our focus on innovation and our growth drivers will continue to drive success into 2025 and will be highly relevant to the success of our integration with teams. Now, I'll turn it over to Jason for a more detailed financial update.

Jason Kiviat -- Chief Financial Officer

Thanks, David. As David mentioned, we achieved our Q3 guidance for gross profit and exceeded our Q3 guidance for adjusted EBITDA, generating positive free cash flow for the fifth consecutive quarter. Overall, total ad spend on our platform grew 6% year over year, faster than the growth seen in H1. And we saw solid profitability and cash generation as we started to realize the benefits of the changes we've been making to our revenue mix and cost structure, which we expect to continue into the future.

Revenue in Q3 was approximately $224 million, reflecting a decrease of 3% year over year. New media partners in the quarter contributed seven percentage points or approximately $15 million of revenue growth year over year. Net revenue retention of our publishers was 91%, which primarily reflects downward pressure of ad impressions from one key supply partner as noted in prior quarters. Consistent with recent quarters, logo retention was 98% for all partners that generated at least $10,000.

We've seen CPCs remain stable to slightly positive, improving over the course of Q3 and netting to a slight increase year over year for the quarter for the first time since early 2022. This along with continued improvements in click through rates drove acceleration in RPMs or yields, which have now seen growth year over year for four consecutive quarters. Ex-TAC gross profit was 59.7 million, an increase of 5% year over year, outpacing revenue for the sixth quarter in a row, driven primarily by net favorable change in our revenue mix and improved performance from certain deals. As noted previously, the investment areas that we are focused on are largely areas that we see driving higher Ex-TAC take rates and in turn higher profitability.

While Ex-TAC gross profit continued year over year growth in Q3 on the strength of these accelerating growth areas and positive momentum of RPMs. As noted in prior quarters, one of our key partners transitioned to new bidding technology and we completed the transition in early May. This volatility impacted our overall growth in Q3 by double digit percentage and our overall Q3 gross profit would have grown in the mid teens percentage year over year excluding this one isolated headwind. We remain focused on rescaling and optimizing the supply.

Moving to expenses, operating expenses increased year over year predominantly driven by one time costs of $5.6 million related to our anticipation our anticipated transaction with Teads. As a result, we grew our adjusted EBITDA 12 % year over year to $11.5 million. Moving to liquidity. Free cash flow, which as a reminder we defined as cash from operating activities less capex and capitalized software costs was approximately $9 million in the third quarter as a result of stronger profitability and working capital.

In September, we repurchased the remaining $118 million aggregate principal amount of our convertible notes for approximately $109.7 million in cash, including accrued interest, representing a discount of approximately 7.5% to the principal amount of the repurchased notes. As a result, we ended the quarter with 131 million of cash, cash equivalents and investments in marketable securities on the balance sheet and no remaining debt outstanding. While we maintain an authorized amount of 6.6 million under our existing share repurchase program, there were no share repurchases in Q3. Given the pending acquisition of Teads, we currently do not intend to resume repurchasing shares.

Now, turning to our outlook. In our guidance, we assume regular seasonality and as noted in the prior quarter, continued execution of our growth drivers. Additionally, our guidance reflects Outbrain as a stand-alone business with the assumption that the announced transaction with Teads will not close before year end. With that context, we have provided the following guidance.

For Q4, we expect gross profit of $67.5 million to $72.5 million, reflecting an annual range of approximately $235 million to $240 million. And we expect adjusted EBITDA of $15 million to $18.5 million, reflecting an increased annual range of approximately $35 million to $38 million. Now, I'll turn it back to the operator for Q&A.

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question comes from Andrew Boone from Citizens JMP. Go ahead.

Unknown speaker -- -- Analyst

Thank you so much for taking my questions. This is Matt on for Andrew. My first one is just want an update on the integration with Teads and maybe what can you do today to accelerate your integration roadmap? And then, my second question, and we've just heard from a couple of publishers specifically, The New York Times has called out AI as a headwind to traffic growth. And just as Google is rolling out, AI overviews to more people, any thoughts or anything that you're seeing as far as traffic to some of your -- your publisher partners? Thank you so much.

David Kostman -- Chief Executive Officer

Thanks, Matt. Hi. And I'll take that one. So on -- on Tead's, we are progressing.

What we can do at this stage is the post-merger post-merger integration planning, which we are doing in sort of across product, go to market and other things. We cannot really in the businesses operate individually and need to focus on each on their -- on their performance. But there's a lot of planning and operationally structurally synergies and others and we're very excited about what we see in terms of both the upside on the revenue synergies. We provided guidance when we announced the deal around 50 to $60 million of synergies.

We are more excited by the day by what we see as an opportunity to cross-sell advertisers brand, enterprise brands, small and medium brands and agencies with our performance products into the installed base and customer base of Teads which has the joint business partnerships with the most premium brands of the world. And we see other cross-sell opportunities. And we're also pretty confident around the ability to realize the synergies. On the traffic question, I mean, what we see in terms of our premium publisher base and we separate sort of the different tiers, we see page views relatively flat.

So we haven't seen at this point any negative impact from -- from AI on traffic.

Unknown speaker -- -- Analyst

Thank you so much.

David Kostman -- Chief Executive Officer

Maybe just to add, I mean, on -- on -- on the timing of the deal, I said it on the prepared remarks, we're still looking at Q1 of 2025.

Operator

Thank you. And our next question comes from Ygal Arounian from Citigroup. Go ahead.

Unknown speaker -- -- Analyst

Hey, good morning, guys. This is Max on for Ygal. I wonder if we could just start with the 4Q Ex-TAC guidance. Can you just walk -- I think it came in maybe a little below what we had expected.

Can you just talk about maybe what you're seeing there? And then, if there's any like ongoing impacts from that large supply partner impacting?

Jason Kiviat -- Chief Financial Officer

Sure, yeah, I'm happy to take that one. This is Jason. Thanks for the question, Max. Yeah, so I mean, really Q3 what we saw was, you know, strength, you know continued RPM gains that we'd seen the prior three quarters now.

CTR is very high and CPC was kind of the nice thing to start to see it flat to slightly up for the first time since Q1 of 2022. So you know, good demand stability, algo improvements mix we've been -- we've been working on and -- and driving those higher yields and overall ad spend was up 6% for us. So I know gross revenue slightly down, but ad spend which -- which encapsulates all the dollars we see from advertisers was actually up. So good indications there.

Into Q4, You know, we do expect acceleration in our year-over-year growth from the 5% Ex-TAC growth we saw in Q3 to about 10% at the midpoint in Q4. But we are being a bit more cautious with our outlook given we experienced a somewhat slower start to the quarter in October, particularly in the US. We did see some advertisers and agencies being more cautious with their budgets in October, really given the uncertainties around the election and macro. We thought it was prudent to be more cautious and you know, reflect the rest of the quarter jumping off of this kind of lower start that we saw.

We do hope now that with -- you know with more certainty around the election results coming in pretty rapidly that there will be a more normal seasonal spike that we expect for the rest of the quarter. And yes, to your point on the one key partner, I mean, excluding -- excluding that partner, the growth obviously was much higher than the reported 5% -- as reported Ex-TAC in Q3 and it was in the mid-teens percent growth year over year. So not a -- not a meaningful difference in Q4 for that partner. It is a slightly easier comp for us in Q4 and into Q1 as well.

Before we lap completely in the middle of Q2 next year, the challenge is assuming we continue to see the stability that we've been seeing there.

David Kostman -- Chief Executive Officer

Max, I want to -- I want to just add on Q4 a little bit, I mean, from a lot of conversations with advertisers, I think the fact that there is a clear outcome of the elections is very helpful. I think people were holding back on budgets and they were concerned about sort of if this gets dragged on, will people have the mindset of shopping and doing things. Clarity is good news in terms of their, you know, intention to spend more money. I mean, we haven't seen it yet.

Obviously it's one, it's 24 hours, but I think that's what I think we were waiting in terms of the business in terms of the release of potential budgets as, you know, people will get back to, you know, their normal lives.

Unknown speaker -- -- Analyst

OK. Thanks. That's helpful. And then, maybe just on Moments.

I know you just launched in beta, so it's early, but you know, I think you talk about how you know what improvements you're seeing this drive and you know, maybe bigger picture, you know, it seems like it'll, you know, it'll be kind of a bottom of the feed solution, if I have that right. So how do you see this fitting in with the existing solution you have now? Do you see it as like being complementary or would this kind of replace the existing solution you have?

David Kostman -- Chief Executive Officer

So again, it's a very exciting launch, I mean, we've been working on it for a long time and I think also in anticipation of the combination, we think this is great, great inventory for premium brands that want to have sort of good canvases for video campaigns. But this is an offering that will bring social media experiences to the open internet will help publishers engage more with their audiences. So it's really about using the content that publishers have that vertical content and integrating into that opportunities for advertisers to do brand advertising. And we have already about almost 10 publisher partners working with it, trying it out several brands that are -- that are working with it.

And it's -- what we're going to be doing with it, it's going to be when the right time and the right user with the right opportunity for an advertiser will be there. We will launch this full screen immersive experience instead of our feed. So it's going to be a decision by the algo and by the sort of our joint work with -- with certain publishers around when to launch it, and when it's the right time. Initial indications of brand lifts a deep engagement of users with -- with -- with videos in terms of swipe numbers, we just -- they just -- they're watching is great and it's a better launch.

And I think it's -- it's very exciting into 2025 early to talk about any financial impact, of course, but from a product point of view, a very successful launch.

Unknown speaker -- -- Analyst

OK. Great. That's helpful. Thanks, guys.

Operator

[Operator instructions] And there appear to be no further questions at this time. I would now like to turn it back to management for any closing remarks.

David Kostman -- Chief Executive Officer

Thank you all for joining us. We are excited by the financial performance, the consecutive quarters that we see in improvement in the performance, both in terms of Ex-TAC dollars, margin, cash flow, innovation is critical and Moments, and what we're doing with AI excites me a lot. And then, obviously looking the combination with Teads early next year, I think we're looking into great, great opportunities ahead of us. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Unknown speaker -- -- Analyst

David Kostman -- Chief Executive Officer

Jason Kiviat -- Chief Financial Officer

More OB analysis

All earnings call transcripts

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.