Good day, and welcome to Outbrain Incorporated Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd like to turn the call over to Outbrain's Investor Relations. Please go ahead. Good morning, and thank you for joining us on today's conference call to discuss Outbrain's second 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. 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 31, 2023, as updated in a subsequent report filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the call's original date, but 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 second quarter earnings release for definitional information and reconciliations of the non-GAAP measures to the comparable GAAP financial measures. Our earnings release can be found on our IR website, investors.outbrain.com, under News and Events. With that, let me turn the call over to David. Thank you, Sam. Good morning, and thank you for joining us today for our Second Quarter 2024 Earnings Call. Last Thursday, we announced the definitive agreement to acquire Teads, combining the two companies into a platform that we believe will define the next generation of open internet advertising. This is a transformative merger that positions us as one of the largest open internet advertising platforms. It dramatically changes our financial profile in terms of profitability and growth opportunities. We believe the combination will deliver significant accretion to our shareholders, through synergies and the financial leverage of the transaction. The two companies have amazing teams of talented, innovative, driven people that have been instrumental in establishing our two companies as category creators and leaders, Outbrain in performance and Teads in branding. Together, we believe we will create a scaled global platform that can deliver outcomes for advertisers currently only rivaled by walled gardens. We've been clear that our vision is to become a true end-to-end, full-funnel platform for the open internet, with a level of service and standards centered on serving brand needs. The news of our merger with Teads allows us to take a massive leap forward in executing this strategy. The reception we've seen from many industry players reinforces our confidence in the merger's rationale. Many of our partners, from media owners to brands and agencies, expressed their excitement about the opportunities the new company would create. For example, Peter Würtenberger, Executive Vice President at Axel Springer, wrote to us: "This is a significant milestone for both companies, and we are thrilled to see your expanded capabilities. We look forward to seeing the positive impact this partnership will have on the industry and on our collaboration." Another one, Alexandra Chabanne, CEO of GroupM France, one of our agency partners, wrote: "This merger of the leaders in performance marketing and video branding promises to be an exciting and transformative alliance." These statements are just two of many examples of the overwhelmingly positive feedback from so many of our clients, and I want to take this opportunity to thank them for that and for their continued partnership. The two companies will continue to operate as standalone businesses as we prepare the post-merger integration plans. Closing, which is subject to regulatory approval, Outbrain shareholder vote, and other standard closing conditions, is expected by Q1 2025. Now, I want to provide an update on Q2 and the progress on our 2024 growth drivers. For Q2, I'm pleased to report that we delivered extra gross profits of $56 million towards the higher end of our guidance. We significantly exceeded our adjusted EBITDA guidance with $7.4 million, and we generated positive free cash flow for the fourth consecutive quarter. These results are driven by positive trends in our core business and the momentum in our growth drivers. As you may recall, these growth drivers we talked about revolve around three pillars. The first pillar refers to expanding our share of wallet with advertisers across both brands and agencies, as well as performance advertisers. Onyx direct sales continued to grow through the combination of new clients, new markets, and rebookings. We successfully launched Onyx in Israel and Spain and have several campaigns live in both countries. This is in addition to the U.S., U.K., Germany, Italy, and Japan. In addition, Onyx has continued to see strong rebooking rate of nearly 40% in Q2, reflecting the business impact Onyx has delivered for our clients. Notably, we've secured multiple campaigns from enterprise partners such as Disney+, Purina, Nissan, including a great campaign promoting the Taylor Swift Eras Tour. Sorry, I had to mention this campaign to get some credit with my daughter.... On the performance side of our business, one of our main initiatives is shifting certain buyer profiles to our DSP, Zemanta. Our DSP enables these clients to drive ROAS at a larger scale on the open internet, allowing us to capture a larger share of wallet from these clients at a higher ex-TAC margin. In the first half of 2024, we achieved remarkable growth on our DSP, with advertiser spend growing by approximately 50% in comparison to the first half of 2023. Moving on to our second pillar. We've continued to expand our supply footprint outside of our traditional feed, enabling advertisers to reach consumers with a range of placements across the entirety of the open internet. These revenues, which are on inventory beyond our traditional feed, represented approximately 27% of our, of our revenue in Q2 2024, versus 24% in Q2 2023. Our third pillar, we continue to invest in deepening our partnerships with top premium media owners. We signed new exclusive feed partnerships, among others, with EBRA in France and The Daily Beast in the U.S. We also renewed several partnerships, including Ad Alliance in Germany and Vox in the U.S. This resulted in logo retention of 99% in Q2. Also, Keystone, so continued adoption by some of our top premium publishers. Let me share a few highlights on our products and algo. We launched a new AI-driven targeting solution, Predictive Demographics. Predictive Demographics enables our clients to reach relevant demographic audiences without relying on third-party cookies. Outbrain Predictive Demographics is establishing itself as a real option for demographic targeting among demand buyers, with early data showing an adoption rate surpassing traditional third-party targeting segments by up to 40%. For one of our recent clients, a public health campaign in the U.S., Predictive Demographics drove 2.7x higher click-through rate in comparison to campaigns using third-party demographic segments. We are encouraged by these results, which signal to us that advertisers are looking for privacy-forward audience solutions that can drive results. On the heels of Google's announcement to reverse their plans to deprecate third-party cookies in Chrome, we remain committed to driving results with contextual and privacy-centric signals. The successful launch of Predictive Demographics is a reflection of this. On the algo side, our click-through rate has witnessed double-digit growth in the first half of 2024, and we've also witnessed our third consecutive quarter of year-over-year RPM growth, sustaining our upward momentum. In conclusion, our second quarter has been marked by growth, new partnerships, and innovative strides in improving campaign performance and user engagement. I'm confident that our trajectory remains strong and that we are well positioned for sustained success in the future. We are thrilled to embark on the next chapter with Teads and are focused on executing our strategy to build towards becoming the preferred full funnel platform for brands on the open internet. With that, I'll turn it over to Jason. Thanks, David. As David mentioned, we achieved our Q2 guidance for ex-TAC gross profit and exceeded our Q2 guidance for Adjusted EBITDA, generating positive free cash flow for the fourth consecutive quarter. Overall, we feel we have made updates to our revenue mix and cost structure that are having a positive impact on our profitability now and expect that to continue in the future. Revenue in Q2 was approximately $214 million, reflecting a decrease of 5% year-over-year. New media partners in the quarter contributed 6% points, or approximately $14 million, of revenue growth year-over-year. Net revenue retention of our publishers was 89%, which reflects continued headwind from the impact of the demand environment on pricing, as well as downward pressure of ad impressions from certain key supply partners, as noted in the prior quarter. Consistent with recent quarters, logo retention was 99% for all partners that generated at least $10,000, and our five largest churns amounted to only two combined points of year-over-year headwind on NRR. With respect to advertising demand, pricing remains low relative to our history, and while it remains down year-over-year, we have seen positive trends over the course of Q2, with improvement month-over-month. This, along with continued improvements in click-through rates, drove acceleration in RPMs, which have now seen growth year-over-year for the third consecutive quarter. ex-TAC gross profit was $50 million, an increase of 3% year-over-year, outpacing revenue for the fifth 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 we are focused on are largely areas that we expect will drive a higher ex-TAC take rate, and these areas are helping bring that to fruition. While ex-TAC gross profit returned to year-over-year growth in Q2 on the strength of these accelerating growth areas and the positive momentum of RPMs, over the past two quarters, we've noted volatility from one of our key partners transitioning to a new bidding technology, Outbrain being one of the first partners to complete this transition in early May. The transition involves access to new supply opportunities for us, and we remain focused on the optimization and rescaling of our demand. This volatility impacted our ex-TAC gross profit in Q2 by high single-digit%. Our overall Q2 ex-TAC gross profit would have grown double-digit% year-over-year, excluding this one isolated headwind. Moving to expenses. Operating expenses decreased by approximately 1% year-over-year to $51.2 million in the quarter, as we continued to balance investments in our strategic priorities with continued cost discipline. The OpEx decline year-over-year was driven by compensation and bad debt savings, as well as timing benefits of expenses shifting from Q2 into H2, offset partially by the increased professional fees related to our announced anticipated transaction with Teads. As a result, we doubled our adjusted EBITDA year-over-year to $7.4 million. Moving to liquidity. Free cash flow, which, as a reminder, we define as cash from operating activities, less CapEx and capitalized software costs, was approximately $300,000 in the second quarter as a result of offsetting the impacts of profitability, strong collections of receivables, timing of income tax and other payments, and seasonality. As a result, we ended the quarter with $229 million of cash, cash equivalents, and investments in marketable securities on the balance sheet, and $118 million of long-term convertible debt. In December 2022, the company's board of directors authorized $30 million share repurchase program, and in Q2, we purchased approximately 500,000 shares for $2 million. As of June 30, we have $6.6 million remaining under our current authorization. Given the pending acquisition of Teads, we currently do not intend to continue repurchasing shares. 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 reflect Outbrain as a standalone 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 Q3, we expect ex-TAC gross profit of $58 million-$62 million, and we expect adjusted EBITDA of $8 million-$10.5 million. We maintain our previous full year 2024 guidance for ex-TAC gross profit of $238 million-$248 million, and are increasing our guidance for adjusted EBITDA to $31.5 million-$36 million. Now I'll turn it back to the operator for Q&A. Thank you. Ladies and gentlemen, the floor is now open for questions. If you do have a question, please press star one on your telephone keypad at this time. Again, that's star one if you do have a question or comment. We'll take our first question from Andrew Boone from JMP Securities. Please go ahead, Andrew. Good morning, and thanks so much for taking my questions. You highlighted the growth in RPMs in the quarter. Can you talk about the drivers of that and you're confident that this can continue? And then, Jason, can you wrap that into the implied guidance for 4Q and talk about your confidence, just given the implied acceleration that full year guidance implies for 4Q? And then, David, just stepping back, can you talk about the conversations that you're having with advertisers just in the last week? Understand it's still very new, but what's the reception been to the announcement of the Teads acquisition? Thanks so much, guys. Sure. Thanks, Andrew. It's Jason, and I'll take the first couple there. So, you know, as far as what's driving RPMs, I mean, it's the third quarter in a row that we're seeing yields or RPMs up year over year. One constant driver has been the click-through rates, which we've been kind of each quarter breaking our previous records as far as just how high those click-through rates are. There's a lot that goes into that. Obviously, algorithmic improvements, use of additional data signals, optimizations, like some of our dynamic placements that we're using are helping drive higher click-through rates. So click-through rates have been a good thing for a long time for us and go in the right direction. The one, kinda new thing I'd say this quarter was we started to see just a better trend on cost per click on CPCs, which have been a headwind and remain a headwind for us year-over-year in Q2. But over the course of the quarter, we started to see it go in the right direction as far as just narrowing the headwind year-over-year. So that was a real positive. It comes with, you know, maybe some market dynamics and also some changes we made internally as well. So good things there at RPMs, and we obviously see it, you know, not only driving better revenue, but also better margins. Then as far as the confidence in the back half and Q4, yeah, you know, we do expect acceleration, you know, in Q3 vs Q2, and also, you know, Q4 vs Q3. You know, vs the 3% ex-TAC growth we saw in Q2, we get to, I think, 6% in Q3 at the midpoint and 17% in Q4 at the midpoint. So maybe just, you know, a lot of the good things that we see driving the success in Q2 and into Q3, we see continuing into Q4. So that, that's definitely a piece of it, but I think a big piece of it, and that step up from the 6% growth to 17%, the difference is a lot of it's coming from year-over-year comps, actually. So, eight points of beaten comps in Q4 is one way to look at it. Last year, we didn't have a normal Q4. Obviously, it started with the attacks on October seventh and the war and the impact on our, you know, war-related news page views and just advertising demand. And also just, you know, we talk about the key tech partner transition. We did start to see some headwinds on that really in Q4 of last year. So the two of those things combined ease the comps for Q4, and that's driving, I think, eight points of improvement as compared to the Q3. And then, you know, continued success of the growth drivers that we're already seeing some success with, obviously. Yeah, RPMs, elections. So just those are more smaller items there flowing through our model, but all that combined. ... Hey, and we'll take the second one. Thanks. So it's been actually very exciting week with, overwhelmingly positive feedback from players in the industry, both advertisers and, and video owners, publishers. On the advertiser side, specifically, they really view this as a huge opportunity to have one player that can provide the full funnel solution on the, on the open internet. When we talk about full funnel, that means branding, consideration, and, and conversions on an end-to-end basis, due the advantage of the data. So it was overwhelmingly both the Teads on the Teads side and on our side, really, people are expecting as quickly as possible for us to close this and be able to bring them the value proposition we're talking about, which is really the combination of leaders in performance, which is us, and leaders in branding that is Teads. So it's been great, and it's been a very exciting week, as you can imagine. Thank you. Thank you, and we'll take our next question from Yigal Arounian from Citi. Please go ahead, Yigal. Hey, good morning, guys. You have Max on for Yigal. I guess first, maybe, just start with what you're seeing in the ad macro. You know, it seems like we've maybe been a little more mixed, but you know, what you're seeing now and, kind of how you see that playing out through the rest of the year, if there's anything maybe geographical or vertical, to call out. Sure. I can start with that. So yeah, like I said, we did see, you know, continued RPM and even CPC gains over the course of Q2, which is, you know, a combination of a lot of factors. So it's hard to know how much of it is macro versus, you know, internal, or specific to us, but we did see positive things, so that's a good sign. Geographically, I'd say, you know, we see strength in Europe, particularly, you know, Germany, which is our second largest market, and Spain were a couple of our stronger markets throughout the quarter. And yeah, I mean, going forward, I think it's hard to predict anything, I guess, macro-wise going forward. But, you know, we obviously hope to see the continued acceleration of what we saw through Q2, is what we're, you know, hoping for, but not overly relying on, I'd say, in our guidance. Okay. Thanks. Yeah, that's helpful. And then, maybe just spending a little time on Zemanta. You know, obviously some good growth there. You know, is there anything maybe, like, specific you guys can call out on what's driving this? And then, you know, maybe just kind of, like, bigger picture, you know, when, you know, in the combined company, how do you see, you know, Zemanta fitting in, with Teads and, you know, maybe just with the tech stack, too, as you look to combine? Obviously, early days, but maybe just how you... Any early thoughts on how you think about combining those, going forward? Sure. Yeah, I'll take that, Max. So on Zemanta, it's been one of our growth drivers for this year has been really to grow the share of wallet from performance advertisers by just delivering superior ROAS to them, and also allowing them to spend more on the entirety of the open internet, again, in line with our vision of becoming the main gateway for the open internet for both brand advertisers and performance. We started last year to ship some type of clients that just had better performance on the Zemanta platform into that, so that causes two things. A, they spend more, because they still spend on the Outbrain publisher network, but they also can spend on third-party platforms, other SSPs and so, and then that grows the share of wallet. And also we, for us, it's a margin enhancer. We've seen, we've had 50% growth in the spend on Zemanta, and, I think that will continue to be one of the main growth drivers for the company standalone. As to the combination with, with Teads, it's, it's a little bit early days. We have not yet gone deeply into sort of product, planning, et cetera. We just started, I think we mentioned, the post-merger integration planning. Generally, I would say the Zemanta platform is very, very focused on performance buyers, so I, I believe it will continue to be part of our growth drivers in the future for those type of buyers. Okay, great. Thanks, guys. Thank you. We'll take our next question from Laura Martin, from Needham. Please go ahead, Laura. Yeah, I also have two. The first one is, when you think about revenue synergies, is it a bigger upside driver that Teads will be able to sell in performance advertising from the Outbrain core business or the reverse? Outbrain adds more upper funnel from the Teads client base. Hey, Laura. It's actually on both sides. So what we've heard and also throughout the process, that Teads was going sort of to the mid-funnel and to conversions, but again, only with enterprise brand buyers. So that's the focus in terms of the customer base, and that customer base also has different objectives on their campaigns. So we see a huge opportunity, and also the Teads management sees a huge opportunity to just drive leveraging our prediction technology algorithms to better conversions and lower funnel business for the brand advertisers. At the same time, we have about 40% of our business today is with brand and enterprises. They do mostly performance. I mentioned a few campaigns that we have.... So, for example, if you look at an automotive client like Audi, we mentioned it in the call, they can really have us as the partner for the entirety of the funnel. So I think it's in both directions. When we gave the synergy number that we when we announced the deal, the $50-$60 million, that doesn't include minimal top-line synergies. It's mostly just around operating synergies and other opportunities across the two networks. Okay, thanks. And then, Jason, for you, the gross revenue came in really light, but the net revenue, which is how we value, came in right in line, sort of, with our estimates. So is that related to this unique client that had an impact, and it only had an impact on gross revenue, but not net revenue? Is that how I should take your commentary about the one-time disruption of, I assume it's Microsoft? Yeah. So, yeah, so the partner, yes, it definitely impacted both. It's not, it's not just one line or the other line. You know, a lot of the things that we're focusing on right now are things that are, you know, higher margin, you know, segments or drivers. I think, you know, the Zemanta DSP business is a good example of that, in that, you know, the way that works is it's actually a, you know, like a net revenue business. In that, you know, the fees that are charged, you know, for customers to use the platform and buy media spend are recognized on a net revenue basis. It's just an accounting thing there, and we might see some, you know, trade-off in gross revenue in exchange for ex-TAC when we're doing that. Maybe I just wanna add on the, Laura, on the one partner. So again, strategic partner, they made a transition. We are the first native partner to make a full transition, signed a new agreement with them that, you know, that transition also involves access to new types of supply within Microsoft, like Outlook, and Games, and others. So it's a transition. We were the first to complete it. We see also, you know, big upside opportunities potentially down the road, but I think we just need to be cautious with sort of how we scale up our buyers on that. Thank you. Thank you. We'll take our next question from James Heaney from Jefferies. Please go ahead, James. Great. Thank you, guys. Could you just talk about the growth that you saw from Onyx in the quarter? And maybe if you could comment on your pivot from being, you know, more of a performance ad platform to servicing more upper funnel objectives. And I have another follow-up. So we talked about Onyx. We had strong rebookings. We don't break it down specifically, but strong rebookings, good adoption. We launched it in more markets, and I'm excited about sort of second half of it. I think that that's actually one part of the business that, you know, in the second half, may get somewhat impacted by the Teads merger. I mean, it is addressing sort of the upper funnel opportunities with large agencies. And so that, that's Onyx. Great. And then, Jason, just on your full year EBITDA guide being raised, I'm just curious where you're seeing the majority of the cost savings in the business, and then, you know, just broadly speaking, how to think about the balance, growth, and profitability. Thank you. Sure, yeah. Well, we do... You know, we've been a bit, you know, focused on, in the last couple of years, on just improving our business model in general, and I think that we've done a lot of that, both in terms of, you know, changing our revenue mix and our approach to these investment areas that tend to have higher margins and higher profit margins as well, which I think we've been pretty successful at, if you look at the take right now versus where it was a year or two years ago, but also with cost structure. And we've, you know, been pretty focused on that, you know, last year and the year before, and we continue to focus on it this year. You know, we've been outperforming our plans on costs, and, you know, some of that comes with just, you know, operating more efficiently, really, you know, being hard on ourselves with, you know, which areas to invest in and which not, and, you know, really scrutinizing our spend on that. You know, we do expect to step up in the second half of the year on costs in some areas. Obviously, some of the hiring we've done for the investment areas happened during Q2, and so we expect that to be a little bit higher in the second half of the year. But, you know, we think it's a nice setup for us to, obviously, deliver the higher level of EBITDA and, you know, remain prudent in our spending. Thank you. Thank you. And we'll take our next question from Zach Cummins from B. Riley. Please go ahead. Hi, good morning. Thanks for taking my questions. Jason, I was curious, what are your assumptions that you're baking in for Microsoft in the second half of the year? Are you assuming you're relatively stable from these Q2 levels or any sort of improvement baked into the second half? Yeah. So we obviously are looking at this very closely. You know, again, we believe we're the first native partner to complete this transition, and we've been very focused on driving the rescaling, as we said it, you know, a few months ago. You know, I think right now what we've seen is just volatility, and that's really our approach to the forecast for the second half of the year, is accounting for it with just a greater range of variability in our Q2, in our H2 numbers. You know, 'cause on one hand, we do see upside. On the other hand, we've seen volatility, and so we thought the best approach was to just account for it with a wider range of variability. ... Understood. And in terms of just your overall footprint on the open internet, I think metrics you shared was 27% on your nontraditional formats on the open internet. Can you speak to the ideal mix as you go over time in terms of your footprint, just for standalone Outbrain? I'm curious how you're continuing to drive that strategy. So we are really trying to build ourselves as the main gateway to the entirety of the open internet. We have a strong asset in the bidding technology that we acquired through Zemandtor that allows us to really go way beyond just our publisher base. So ideally, we grow both. I mean, we've had some great wins on the premium publisher side this quarter. So again, we're very, very focused on our core supply base and brand and enterprises on premium. We believe that sort of premium supply drive premium demand. We're also going for performance on third parties, where they're looking for pure ROAS, and Zemandtor is just a great platform to do that. Again, overall, we see ourselves in terms of the organic growth that we deliver to sort of these efforts as the sort of outperforming competition on organic growth, and that's what we're looking at in terms of, again, growing the entire budget base that we can deliver, both on our publisher base and on other third-party supply. Understood. Well, thanks for taking my questions, and best of luck with the rest of the quarter. That will conclude the question and answer session. I'd like to turn the floor back to David Ko stman for closing remarks. Thank you, Karen. Thank you all for joining us today, we appreciate your support and partnership, and looking forward to the exciting journey ahead together with all our shareholders. Thank you very much. Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.