Q2 2021 Outbrain Inc Earnings Call
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Good morning, and welcome to outbreak second quarter 2021 earnings Conference call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A.
At this time I'd like to turn the conference over to Jason caveat. Thank you. Please go ahead.
Good morning, and thank you for joining us on today's conference call to discuss <unk> second quarter 2021 result join.
Joining me on the call today, we have <unk> co founder and co CEO your own Goodbye co CEO, David Kaufman CFO at least got follow up during this conference call management will make forward looking statements based on current expectations and assumptions, which are subject to risks and uncertainties.
Actual results could differ materially from our forward looking statements if any of our key assumptions are incorrect.
Because of other factors discussed in today's earnings press release, and the comments made during this conference call or in our latest reports and filings with the Securities and Exchange Commission each of which can be found on our IR website investors that outbreak dot com.
Do not undertake any duty to update any forward looking statements.
Today's presentation also includes references to non-GAAP financial measures you should refer to the information contained in the Companys second quarter press release for definitional information and reconciliations of non-GAAP measures to the comparable GAAP financial measures with that let me turn the call over to your own.
Thank you Jason Good morning, everyone and thank you for joining us today, because we have just completed our initial public offering I want to acknowledge and thank everyone who has helped US reach this exciting milestone for our company employees past and present partners customers and investors older New Thank you for being part of this journey.
We're very excited for what's next.
Since this is our first earnings call as a public company I will take the opportunity to provide some highlights about <unk> founding story.
<unk> founded operating about 15 years ago, we pioneered the space with recommendations on the open web.
We tried to solve two things first enabled consumers to more easily discover content from publishers and media owners SEC.
To create a sustainable scalable business model for those media owners.
At the time, the prevailing model for the entire online industry advertising industry was focused on extracting higher prices from advertisers.
But as consumers, we didn't feel like the AD prices matter to us at all.
Even today most of the advertising industry Optimizes, primarily for extracting higher AD prices, regardless of the impact on the user's experience.
We founded operating to be a leader and recommendations and content discovery focusing on users engagement first.
We believe that this is the key to maximizing long term yields for both our partners and for ourselves because user engagement has a compounding effect.
I wrote in more detail about this compounding effect and the founders' letter and the S. One and I encourage you to read it if you'd like to better understand <unk> differentiation and long term focus.
Defenders letter is also posted on the investors section of our website.
Why does this matter.
Let's discuss how on a recommendation engine creates user engagement, which in turn creates value for our three constituencies.
First for us the consumers recommendations drive value by being more personalized and therefore more interesting and engaging.
Second are our advertisers a powerful recommendation technology engages the right users at the right time.
Advertisers pissed, primarily for actual user engagement or cost per click.
They love this because it drives measurable results with superior ROE or return on Ad spend.
The third constituency are our media owner and publisher partners for them. The recommendations are the driver of LTV or lifetime value.
In the immediate term operating add recommendations drive tremendous revenue for our partner with.
We've generated over $3 billion of revenue from our ads for our partners to date.
In addition, our focus on user engagement when providing what's typically called organic recommendations for media partners drive more engagement and user loyalty, which translates for them into more revenue in the future.
We believe that this is what drives the scale and accelerating growth that you can see in our results.
Reached about 1 billion people per month through partnerships with more than 7000, neither properties, including many of the world's best media owners companies such as Sky News CNN Anderson der Spiegel, Washington Post some K, New York Post Lamond and many many others nearly.
All of these partnerships are exclusive with the outbreak.
More recently, we've been growing our recommendations on new media environments, such as mobile device manufacturers push notifications and web browsers, which is a good indication of how our brain will be able to power recommendations wherever content is consumed in the years to come.
Switching gears I want to briefly touch the topic of cookies now all companies in our space use third party cookies, but for us they're just one of a variety of solutions that we use.
Two other technologies that we've built and used for over a decade are much more important for us.
Since we cover the entire feed experience on many of the world's most premium publishers, we have a tremendous amount of first party data, which is immune to all the changes youre hearing about these days.
Second at my previous company Quigo Tiemannite pioneered the space of contextual advertising on the Internet.
That core team of contextual experts continued with me two outbreaks and we built it with contextual algorithms at the core from day one.
We've been pioneering and innovating on contextual technologies, which don't need any cookies for two decades now.
Before I hand, the call over to my partners I would like to note. An exciting addition, we announced at the board level last week.
We're thrilled to have recently added a new board member Capes are very <unk> currently the chief marketing officer of the NBA, continuing an impressive career of executive and senior positions at Amazon's Twitch Interactive at Facebook, Twitter and Microsoft She brings a wealth of experience in public and growth.
Companies with focus on the consumer and on brand advertisers welcome aboard Kate.
I will now turn the call over to David who will preview the exciting momentum and our results highlight our competitive advantage in the market and the opportunity for <unk> going forward with our differentiated offering David.
Thank you Ron.
We're excited to host you all on our first earnings call as a public company.
Q2, 'twenty, one was yet another record quarter for us in revenue.
<unk> gross profit and profitability.
Revenue grew 57% year over year to $247 million.
<unk> gross profit increased 68% year over year to $67 million.
Our year over year growth rate outpace the general growth, we see in all category.
Continued to demonstrate strong operating leverage delivering adjusted EBITDA of $25 million in the quarter.
Our media partner net revenue retention was 160%.
Our free cash flow conversion was 67% of adjusted EBITDA.
Our brand continues to emerge as a driving force of the open web.
For publishers and media owners, who need to compete with Google and Facebook for use of attention. We provide a state of the art AI based recommendation technology, making every page smarter more personalized and more engaging.
Our relationships with media owners are typically exclusive which means we have full control of our inventory looking.
Looking at our top 20 partners based on 2020 revenues. They have an average tenure of seven using our platform.
These partnerships are commonly renewed for two to three years at a time.
For marketers, who increasingly seek outcome based advertising solutions and allocate more dollars to performance bind we deliver an end to end solution and easy to use platform with scale reach and performance.
You can think of us as an exclusive SSP on one side and our proprietary advanced DSP on the other side so.
So we are enjoying similar market trends, but our end to end and exclusive supplier relationships create a highly differentiated and sustainable model.
For users navigating an ever growing universe of articles videos and podcasts created every day.
Provides a simpler better online experience by shrink personalized recommendations.
Meet you wherever you online.
I want to spend some time, explaining the key organic growth drivers of our platform and how they fueled our Q2 results.
Underpinning our growth is all of the indications with technology and innovation.
Our proprietary technology private cloud infrastructure and vast amounts of postponed the contextual data.
<unk> Dong strong competitive advantage and barrier to entry.
Our micro services architecture allows us to innovate faster.
As we leverage our massive dataset through machine learning and AI.
To continuously improve the performance of our recommendations.
And thanks to the architecture and efficiency of our system. We do this in a highly scalable and cost effective way supporting our high free cash flow conversion rates.
Built on top of this technology and data infrastructure I want to call out for strong market tailwind to relate to how we grow our recommendation market share and the supply side and to relate to how we grow our advertising market share.
Let's start with our recommendation market.
The explosion in digital media consumption means we reach and engage more connected users than ever before.
The technology and innovation strides we've made in personalization feed experiences and interests predictions makeup where commendations, a great deal more relevant and engaging resulting in higher participation rate.
On the advertising side, we continue to see a massive shift to digital advertising with a strong focus on e-commerce and direct to consumer model.
These advertising I used to working on a cost per click basis with platforms like Google and Facebook and they turned to us to find customers and drive sales, especially in the post pandemic landscape.
Companies now look to the CMO to not only build a brand, but also to drive online things gross subscriptions or green <unk>.
Organizations rely on digital channels for direct response and customer activation, we see a strong trend towards outcome based marketing and CPC media Bank.
Second on the advertising side, we continue to improve Ros performance by investing heavily into our proprietary AI driven performance engine and the new and innovative AD experiences that leverage video and social created.
We play an important role in complementing the spend of advertisers on the world guidance, we'd spend on the open web.
So when you put these full tracks together and.
And you get these powerful trends more users with high engagement rates and more advertising seeing better performance.
Let's dive deeper into some of the product and business activities, we have undertaken first.
On the media on our side.
Our smart logic engine released in Q4 2020 on top of our Smart technology.
Has AI powering not just what gets recommended in the feed but also what the composition looks like.
We couldn't do a experiences.
True to its comp and the.
Position of the different experiences.
From dynamically optimizing the feed AD load to managing the UI of every speed placement.
We have seen that smart logic delivers higher user engagement and close to 30% estimated revenue lift.
Accelerating smart logic deployment and by the end of Q2 more than 20%, Oklahoma <unk> feeds adopted our superior smoke logic technology.
In Q2, we also have one new relationships such as sports illustrated the street Dailymotion and more than 100, new media properties. Additionally, as we typically do throughout the year also in Q2, we renewed and extended several of our longstanding strategic partnerships with premium publishers.
As we all know the open Internet. These days, it's much more than website about 18 months ago, we kicked off the strategic initiative designed to power recommendations on new media environment.
We've seen tremendous appetite from device manufacturers mobile carriers and software companies to leverage our recommendation platform to showcase high quality.
<unk> content recommendations and to monetize the user base.
These media partners now represent more than 10% of our revenue and are growing at more than 100% year over year.
This is an exciting space, representing another growth frontier and an important step towards the goal of powering recommendation wherever content is consumed.
Moving to the advertising side of the business, we saw a year over year growth in the number of advertising.
To provide some context in 2020 more than 20000 advertisers using our platform to establish the brand build consideration and drive thing.
The increase of advertisers using Goldman would not translate to growth without the ability to drive the best results for them.
We are now realizing the investment made over the past 24 months in building conversion bid strategy and AI based conversion optimization engine that is optimizing towards onsite conversion CPA gold purchase value all lifetime value and not just C. T O.
We see higher performance for advertising when we moved the campaigns to CBS that automatically optimizes in real time every and every bid every placement and as we use them to maximize sales lead conversion we.
We've seen great momentum with conversion bid strategy, leading to increased budget spent on our platform.
Video continues to be a strong growth driver.
Revenues increased by more than 100% year over year in Q2 accounting for approximately 8% of our revenues.
One product we released in Q2 that we are very excited about this conflict.
Video performance solution designed to help e-commerce and direct to consumer players drive sales app downloads and registration we had more than 500 advertisers use this new format in Q2.
Before I conclude I want to say once again, just how excited we ought to start this new chapter as a public company.
Investments made into the business I used to accelerate our growth and provide long term value to our media owner and advertising partners, our users and to our shareholders.
Looking forward, we continue to see a positive macro environment and our industry driving momentum in our business.
Premium nature and superior quality of our network paired with a recognition that we are the trusted and transparent partner of choice continues to be a key differentiator.
This combination supports our continued positive outlook for the year and you would see in our guidance now.
Now I'll turn the call over to our CFO Andy.
Great. Thanks, David and again welcome everyone.
As you can see from our numbers, we have been delivering very strong performance both year over year and sequentially.
Benefiting from the strength in digital advertising broadly, but also we are outpacing that growth on the top and the bottom line as we delivered strong execution against our growth plans.
Before we cover the results I wanted to share a few aspects of our business model that are important attributes for creating long term value.
First we have multiple levers in the business and then within each of those areas, there's meaningful headroom for expansion.
There's a high degree of Interconnectivity of supply demand and technology growth drivers across our marketplace whereby improvements in one area driving improvements in another demonstrating the compounding benefits of our platform.
Second we have a huge distribution asset in our media on our portfolio and we are obsessed with landing and expanding.
Third we have meaningful operating leverage in the business with high margins and the opportunity to continue to drive scale through technology and organizational efficiency.
And last our technology base is efficient and ready for scale at very competitive and low capex level.
Together, we believe these attributes make our this is not a highly attractive for continued growth and profitability.
Now turning to our results we delivered strong financial performance in the second quarter ending June 32021.
Revenue grew by $89.3 million to $247.2 million, representing 57% growth compared to the second quarter of 2020.
Net revenue retention of our existing supply base, which is the equivalent to our same store sales metric grew approximately 79 million or 50%.
Well, it's from existing supply was driven by higher yields on the platform supported by both increases in demand and by ongoing improvements in click through rate or the rate of engagement on our platform.
We also grow from the addition of new supply in the clutter, which delivered approximately $12 million or seven points of growth.
Approximately half of this growth was driven by growth of new media environments that David referred to earlier.
Across all revenue, we saw continued strength in mobile which represented approximately 68% of total revenues in the second quarter and geographically, we continue to see strength globally.
As a reminder, over 60% of our revenue is outside of the U S.
Next gross profit, which is the revenue we keep after paying traffic acquisition cost or media partners increased $27.1 million or 68% year over year to $66.8 million.
Gross profit outpaced revenue growth for two reasons first we had the impact of favorable revenue mix from higher margin media partners in the period.
And second higher yields on the platform chosen through performance on our media partners with guarantee arrangement.
In addition to the year over year comparison ex that gross profit grew 11% sequentially speaking to continued overall strength in the business.
Moving to operating expenses, we saw an increase of 32% or approximately $10 million to $41.9 million in the second quarter of 2021, as we continue to invest in growth.
Approximately half of the $10.1 million increase relates to higher compensation costs, driven by both increased head count and higher incentive compensation related to our strong financial performance.
We also had the impact of unfavorable effects of foreign currency of an estimated $2 million in the period.
The remainder of the increase was driven primarily by higher professional fees and increased marketing and other costs as we gradually come back to more normal operations following the pandemic.
Adjusted EBITDA increased over four times from $5.2 million in last year's second quarter to $24.6 million in the second quarter of 'twenty. One is X that gross profit growth exceeded expense growth meaningfully.
The yield improvements that we delivered on a platform a platform, which primarily drove our ex Tac performance dropped to the bottom line, even with our continued investment in the business.
Our adjusted EBITDA to ex that gross profit margin was 36, 8%.
Free cash flow, which we define as cash provided by operating activities less capex and less capitalized software cost was $16.5 million in the quarter.
Our cash conversion was strong 67%. This is the ratio of free cash flow divided by adjusted EBITDA.
We ended the quarter with $111 million of cash and cash equivalents and pro forma for the $360 million of capital. We raised in July following the end of the quarter, our cash and cash equivalent balance was approximately $450 million after adjusting for estimated expenses.
The gross proceeds we raised a 368 million came from our IPO, which raised $160 million and the sale of our now public convertible notes to the ballparks group, which raised $200 million.
Lastly, turning to our guidance.
For the third quarter ending September 30th 2021, we expect excess gross profit of $64.5 million to $66 million or approximately 34% growth year over year at the midpoint of the range and.
And adjusted EBITDA of $15, five to $16.5 million or approximately 26% growth year over year at the midpoint of the range.
And for the full year ended December 31st 2021, we expect excess gross profit of $266 million to $270 million.
Approximately 38% growth year over year at the midpoint.
And we expect adjusted EBITDA of $80.5 million to $82.5 million or nearly doubling EBITDA year over year at the midpoint.
This outlook includes continued investment in growth as well as the absorption of an increase in ongoing costs associated with the post COVID-19 returned to normal and cost of becoming public while still delivering very strong operating margins of 30% plus.
In summary, we are very pleased with our results this year and to be able to provide an outlook that continues to exceed our internal plans we.
We are even more excited about the opportunities ahead of us.
I'll now turn the call back to Europe for closing remarks.
Thanks, Elyse so as you can see in our recent results as well as our Q3 expectations. We are benefiting from positive industry trends in our space. While at the same time accelerating growth on top of that through our superior technology and positioning while we're very pleased with our company's recent performance, we believe that the opportune.
<unk> for continued growth is significant.
Technological advantages and business model have poised our company to capture market share and create value for our shareholders. Our goal is to maintain a high level of visibility and clarity with the investment community and we look forward to keeping you up to speed as our business grows.
Thank you all for spending your time with US this morning, and with that I'll turn the call back over to the moderator for questions and answers.
Thank you ladies and gentlemen, the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time.
Confirmation tone will indicate your line is in the question queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
In the interest of time, we are asking that you. Please limit yourself to one question and one follow up before rejoining the queue for any additional questions.
Again that is star one to register questions at this time.
Our first question is coming from Nick Jones of Citi. Please go ahead.
Great. Thanks for taking the question.
Firstly could you expand a little bit just on the impact of IBSA Lumi third party cookie deprecation and how our brand is positioned.
Amid these changes is this potentially a benefit as contextual advertising becomes more popular.
Thanks.
Sure Hi.
Thanks, Nick.
So in terms of.
Being able to personalize the experience and serve.
Recommendation.
And the opening piece there are two areas that are really areas of strength relative strength.
Compared to the online advertising industry. The first one as I mentioned, we invented we I mean myself and a bunch of our core team at my previous company, we invented the space of contextual advertising or co pioneered it I would say and so we've been building and using contextual targeting technologies for about two decades now.
It's not something we've added or kind of flat to 2021.
Contextual.
Slogan on what we do but rather happens in this for over a decade of that brand in two decades, including my previous company contextual is works regardless of any cookies. It doesn't use any cookies at all and so we think that's a very important.
Strength for us going forward and it certainly as youre seeing in the industry something many companies are excited about.
The second is it's important to understand is operating towers, the entirety of the user experience on those media owners to be that we partner with them to do that usually exclusively.
That means we powered both the advertising in the feed and the recommendations himself the organic recommendations be articles and videos the ones on the same properties that gives us a tremendous amount of first party data, which again is immune to everything we are hearing about with third party cookies that first party data, we can use as we see fit.
Going forward and Thats, a big part of how we've been recommending for a good chunk of time.
Great. Thanks, and then that'd be a separate question as Covid restrictions loosen and maybe the traffic volumes change at your publishers.
Can you talk about the impact of that is kind of improving the click through rate potentially offsetting lower traffic volumes or are there any trends that youre seeing as COVID-19 restrictions loosen.
Hey, Nick it's David I'll take that one so we have we haven't seen any meaningful impact on the on the supply side of the business in terms of traffic I mean, theres some seasonality now in the summer and we aren't capturing.
Kris the user engagement better CPR better technology to compensate for any potential declines. So you see that our business is driven primarily by increasing the yield to technology and product.
Alright.
Great. Thanks for the question.
Thanks, Nick.
Thank you. Our next question is coming from Schweda touch area of Evercore ISI. Please go ahead.
Okay. Thank you.
Questions for me. Please one is could you remind us about Europe, the CBS product what percentage of cost spend is touched by that and any other but just you can provide in terms of how impactful advertising advertisers have fallen back productivity and then the second question.
Yes.
It is.
Is on the new media environment, how big of a deal when do you think that can be assessed in the early inning, what kind of other media formats do you think.
You could.
Innovate on and any context, there that would be great. Thanks.
So I'll take the first one you run them, we can take the second thing in terms of CBS, you don't give specific numbers, but we have more than half will go Netflix right now is the ease using CBS.
This is a continuous improvement and CBS gets improved on a daily basis with more algorithmic capabilities better bidding. So right now we see more than 50% of the spend is already using it we will see acceleration both in terms of the percentage of the revenue that's generated through CBS, but also through significant improvements there.
You see you can see best delivering better results for full advertisement in terms of ROI.
Thanks, David and on the second question. Please.
Hum.
Yes, sorry.
Hi, Sean this your own I needed the wrong button.
So in terms of new environments.
Theres, a tremendous opportunity of growth the new environments and it all starts from the consumer of where people are actually discovering content and consuming those feeds.
Good example from the from the broader World. There's a couple of years ago, Apple was not in the news or content business at all and now when you swipe left or lock screen and all kinds of places there are suddenly new new places, where you see a feat of content that means that a lot of other media owners other handset <unk>.
Textures are.
Lock screens or notifications, they're all looking at opportunities to provide users with the with new seats and many of those come to us asking for for those technologies. Those are not easy to develop. So this is an area that again, it's not big for us, but there are a strong tailwind to tens of millions of dollars already.
So it's something we know.
How to do and we think there's just more and more of these screens in terms of coming online that will need a seat at their core.
Thank you Sir.
Thank you. Our next question is coming from Brent Thill of Jefferies. Please go ahead.
Great. This is James on for Brian. Thanks for Thanks for taking my questions could you just talk about the investments that you plan to make with the 450 million that youre going to have in cash is it primarily head count or are there are other areas, where youre thinking about making big investments, whether that's M&A or or elsewhere.
And then my second question for lease would just be around the guide it seems to imply a decent amount of deceleration on a tier stack basis. So I'm wondering if you could comment on what's driving that diesel is there just some conservatism or any other reasons that you are being cautious.
Hi, James This is David.
I'll take the first one so in terms of the cash that we have on on balance sheet, and let you know and we will.
We need to invest in the business and primarily in hiring though what you see in our plans that are in the guidance I mean, it does look like the additional investments we see tremendous opportunities, we're trying to accelerate hiring and we're looking at many projects that are sort of positive that would be accretive to our current plan and we are.
Also looking at the M&A front.
We do not feel that we need M&A to deliver on annual growth objective. So we're looking at it very strategically in terms of potentially accelerating go to market for certain areas or entering potentially some adjacent do is and we are very actively looking at things, but nothing is right now with specifics we can update on.
Yes.
Okay, Hi, James Thanks for the question.
Two parts really I think on the two year stack as we looked at Q3, there actually isn't a deceleration. So if we looked at the Q3 call. It the midpoint at the ex Tac guidance.
It's around 55% growth, which is consistent with two year stacked comparable to the first and second quarter of the year.
On the EBITDA front, and certainly EBITDA is multiplying on a two year stack basis, and even year over year, but what you are probably observing is expenses will be growing.
And about $6 million from Q2 to Q3, and that's primarily a function of two things. One is the introduction of public company costs. So D&O insurance people processes those types of things to make their first step change and then second is the return to normal cost as we slowly and gradually come out.
And the main the main hits from Covid, So youre seeing some of that so those two combined are the bulk of the cost acceleration there and so we will expect some softer EBITDA margin, but still for the year, we expect a 30% plus EBITDA to grow at X that gross profit margins.
One other one other comment maybe I'll make just on the sequential performance Q2 to Q3, a typical progression I think what you see in our guidance is typical progression Q2 to Q3.
Nothing nothing extraordinary there and then last of course, its our first few quarters out of the box with a public company. So we're taking that into consideration as well.
Great. Thanks, so much.
Youre welcome.
Thank you once again, ladies and gentlemen, Thats Star one to register a question at this time.
Our next question is coming from Ron Josey of JMP Securities. Please go ahead.
Great. Thanks for taking the question maybe two please one on just product improvements you're one David you talked quite a bit about the investments in tech and product from App install launched a year ago to conversion bid strategy in club and just talk about maybe operating is tech development lifecycle and the improvements youre seeing in the click through rates as a result, and maybe bigger picture.
How these products are attracting newer advertisers and so that's question number one just on product improvements and how that's improving click through rates and then second question your own you're still you're still quite a bit upfront about outbreaks quality score initiatives. So maybe help us understand bigger picture just how you envision this playing out the implementation timeline things along those lines. Thank you.
Sure. Thanks Ryan.
In terms of the development.
Lifecycle, we have in our two R&D centers in Israel in Slovenia, and we have about 300 over 300 people.
And technology is at the core of everything we do since our since the first day of the airframe.
In terms of technological improvements on algorithms, which is a big area of focus for US. Those are those are obviously long life cycles of investing in research and development and bringing.
Bringing technologies to market, sometimes they succeed sometimes they don't that's the nature of our research and development, sometimes they're shorter cycles and sometimes longer quality rating is a great example of that that's a new set of algorithms that we've announced a few months ago, starting to rollout and we're doing fragile rollout learning from.
Some of the criticism publishers and advertisers head of the Tech Giants Rolling out abrupt algorithm changes. So we're we're doing this gradually over the next few months working with the media owners and advertisers to make sure that they can adjust to quality rating algorithms for us. It's one of the biggest algorithm changes or introductions, we're doing it.
In recent years and what quality rating is all about is as the name implies understanding the quality of ads.
And recommendations before they go live into the feature that we can obviously improve the quality and personalization based on that.
More specifically a lot of the signals we've used historically and in the variety of algorithms that we use are focused on the actual be engaged users the ones that are actually clicking and engaging with the recommendations in that fidelity of data or signals is very very high enables us to create more engaging recommendations what we're focused on with quality.
The rating is a different cohort of users, which is the folks that are not engaging those are the majority of the users we reach theyre not currently engaging with our recommendations and we think there's huge opportunities and engaging more people. So historic algorithms for most more focused on higher engagement quality rating is focused on engaging more use.
As I said it will take a few more months of the rollout of this algorithm, we're starting to work with the advertisers' media media owners, but we think that for many years to come we're going to have some big benefits in terms of quality and engaging more users so that we reach.
Thank you Ron.
Thank you. Our next question is coming from Ross Sandler of Barclays. Please go ahead.
Hey, guys.
Two questions just to follow up on the CBS topic.
So how much does the average.
Average account increase.
Spend with you guys when they go from not using CBS to picking that up and then.
Your ex Tac gross margin percentage or would your take rate is a little bit lower than than tableau.
Assume that's from mix, but.
Just any comment on that is that an opportunity for our brand as you kind of look forward. Thanks a lot.
Hi, It's David Hey, Ross.
C B and so as we said I mean, we have more than 50% of the revenue right. Now is being spent through that and it will basically deliver the increased budget spent than many of our budgets are basically continuing to spend with us as long as we achieved the return on that spend objectives, so they're not sort of an I O.
Yeah.
It stopped and and so as long as we can continue and improve.
Performance of those dollars that we'll continue to spend with us and will be seen is increase the budget spend so way on a daily basis and then they continue to replenish for CBS in a very significant way.
Andy do you want to take the margin question.
Sure.
Listen I think we focus on ex Tac gross profit in absolute dollar terms. So we're very focused on growing the total pie both are our share in that of which we share with our media owner partners.
And we also think that listen mix is a factor as you alluded to.
Ross, but as long as we continue to grow the absolute dollars, we continue to generate and grow profitability on the bottom line.
That's that's the primary focus we and we've said this we said it on the road show, we said it many of our discussions and we will take the absolute dollars over a point of margin.
Ladies and gentlemen, as a final reminder, if you do have a question. Please press star one on your telephone keypad at this time.
Were showing no additional questions in queue I would like to turn the floor back over to management for closing comments.
Okay, It's David I'll take that so we want to thank you all for attending our first call as a public company. We're very excited about what we delivered in Q2.
I'm very confident about the future as you can see you know our guidance based both on market trends and what we're delivering into entity in terms of technology and innovation and look forward to seeing you soon in the next quarterly call. Thank you all.
Ladies and gentlemen, thank you for your participation and interest in our frame. This does conclude todays event. You may disconnect. Your lines of log off the webcast at this time and have a wonderful day.
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Good morning, and welcome to our brands second quarter 2021 earnings Conference call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A at this time I'd like to turn the conference over to Jason caveat. Thank you. Please go ahead.
Good morning, and thank you for joining us on today's conference call to discuss offering second quarter of 2021 results.
Joining me on the call today, we have <unk> co founder and co CEO your own Gulf.
Co CEO, David Kaufman CFO Elise Garofalo. During this conference call management will make forward looking statements based on current expectations and assumptions, which are subject to risks and uncertainties.
Actual results could differ materially from our forward looking statements if any of our key assumptions are incorrect because of other factors discussed in today's earnings press release and the comments made during this conference call or in our latest reports and filings with the Securities and Exchange Commission each of which can be found on our IR website investors that help bring dot com we do.
Not undertake any duty to update any forward looking statements.
This presentation also includes references to non-GAAP financial measures you should refer to the information contained in the Companys second quarter press release for definitional information and reconciliations of non-GAAP measures to the comparable GAAP financial measures with that let me turn the call over to Europe.
Thank you Jason Good morning, everyone and thank you for joining us today.
We've just completed our initial public offering I want to acknowledge and thank everyone, who has helped US reach this exciting milestone for our company employees past and present partners customers and investors all the new thank you for being part of this journey, we're very excited for what's next.
So this is our first earnings call as a public company I will take the opportunity to provide some highlights about our brains founding story.
Worried lava and I founded operating about 15 years ago, we pioneered the space with recommendations on the open web.
We tried to solve two things.
First enable consumers to more easily discover content from publishers and media owners.
Second to create a sustainable scalable business model for those media owners.
At the time, the prevailing model for the entire online industry advertising industry was focused on extracting higher prices from advertisers.
But as consumers didn't feel like the AD prices matter to us at all.
And yet even today most of the advertising industry Optimizes, primarily for extracting higher AD prices, regardless of the impact on the user's experience.
We founded <unk> to be a leader in recommendations and content discovery focusing on users engagement first.
We believe that this is the key to maximizing long term yields for both our partners and for ourselves because user engagement has a compounding effect.
I wrote in more detail about this compounding effect and the founders' letter and the S. One and I encourage you to read it if you'd like to better understand our brand differentiation and long term focus.
Defenders letter is also posted on the investors section of our website.
Why does this matter.
Let's discuss how on a recommendation engine creates user engagement, which in turn creates the value for our three constituencies.
First for us the consumers recommendations drive value by being more personalized and therefore more interesting and engaging.
Second are our advertisers a powerful recommendation technology engages the right users at the right time.
Advertisers past, primarily for actual user engagement or cost per click.
They love this because it drives measurable results with superior ROE or return on Ad spend.
The third constituency, our media owner and publisher partners.
The recommendations are the driver of LTV or lifetime value.
In the immediate term and operating add recommendations drive tremendous revenue for our partner.
We've generated over $3 billion of revenue from our ads for our partners to date.
In addition, our focus on user engagement when providing what's typically called organic recommendations for media partners drive more engagement and user loyalty, which translates for them into more revenue in the future.
We believe that this is what drives the scale and accelerating growth that you can see in our results.
We reached about 1 billion people per month through partnerships with more than 7000 media properties, including many of the world's best media owners companies such as Sky News CNN MSN der Spiegel, Washington Post Sankay, New York Post Lamond and many many others.
All of these partnerships are exclusive with the outbreak.
More recently, we've been growing our recommendations on new media environments, such as mobile device manufacturers push notifications and web browsers, which is a good indication of how our brain will be able to power recommendations wherever content is consumed in the years to come.
Switching gears I wanted to briefly touch the topic of cookies now all companies in our space use third party cookies, but for US they're just one of a variety of solutions that we use to other technologies that we've built and used for over a decade are much more important for us.
First <unk>.
We cover the entire feed experience on many of the world's most premium publishers, we have a tremendous amount of first party data, which is immune to all the changes youre hearing about these days.
Second at my previous company Quigo Chemonite pioneered the space of contextual advertising on the Internet that core team of contextual experts continued with me two outbreaks and we built it with contextual algorithms at the core from day one.
We've been pioneering and innovating on contextual technologies, which don't need any cookies for two decades now.
Before I hand, the call over to my partners I would like to note. An exciting addition, we announced at the board level last week. We're thrilled to have recently added a new board member Capes are very <unk> currently the chief marketing officer of the NBA, continuing an impressive career of executive and senior positions at Amazon.
Twitched interactive at Facebook, Twitter and Microsoft She brings a wealth of experience in public and growth companies with a focus on the consumer and on brand advertisers welcome aboard Kate.
I will now turn the call over to David who will preview the exciting momentum and our results highlight our competitive advantage in the market and the opportunity for <unk> going forward with our differentiated offering David.
Thank you you are wrong.
We're excited to host you all on our first earnings call as a public company.
Q2, 'twenty, one was yet another record quarter for us in revenue.
<unk> gross profit and profitability.
Revenue grew 57% year over year to $247 million.
X temp gross profit increased 68% year over year to 67 million.
Our year over year growth rate outpace the general growth, we see in our category.
Continued to demonstrate strong operating leverage delivering adjusted EBITDA of $25 million in the quarter.
Our media partner net revenue retention was 150%.
Our free cash flow conversion was 67% of adjusted EBITDA.
I would point continues to emerge as a driving force of the open web.
For publishers and media owners, who need to compete with Google and Facebook for use of attention.
We provide a state of the art AI based recommendation technology, making every page smarter more personalized and more engaging.
Our relationships with media owners that typically exclusive which means we have full control of our inventory.
Looking at our top 20 partners based on 2020 revenue. They have an average tenure of seven using our platform.
These partnerships are commonly renewed for two to three years at a time.
For marketers, who increasingly seek outcome based advertising solution and allocate more dollars to performance buying we deliver an end to end solution and easy to use platform with scale reach and performing.
You can think of us as an exclusive <unk> on one side and a proprietary advanced DSP on the other side so.
So we are enjoying similar market trends, but our end to end and exclusive supplier relationships create a highly differentiated and sustainable model.
For users navigating an ever growing universe of articles videos and podcasts created every day.
Provides a simpler better online experience by shrink personalized recommendation.
Meet you wherever you online.
I want to spend some time, explaining the key organic growth drivers of our platform and how they fueled our Q2 results.
Underpinning our growth is that what the indications with technology and innovation.
Our proprietary technology private cloud infrastructure and vast amounts of postponed the contextual data.
<unk> Dong strong competitive advantage and barrier to entry.
Our micro services architecture allows us to innovate faster as we leverage our massive data set through machine learning and AI.
To continuously improve the performance of our recommendations.
And thanks to the architecture and efficiency of our systems. We do this in a highly scalable and cost effective way supporting our high free cash flow conversion rates.
Built on top of this technology and data infrastructure I want to call out for strong market tailwind.
Two relate to how we grow our recommendation market share on the supply side and to relate to how we grow our advertising market share.
Let's start with our recommendation market.
The explosion in digital media consumption means we reach and engage more connected users than ever before.
The technology and innovation strides we've made in personalization feeding experiences and interests predictions makeup where commendations, a great deal more relevant and engaging resulting in higher participation rates.
On the advertising side, we continue to see a massive shift to digital advertising with a strong focus on e-commerce and direct to consumer model.
These advertisers are used to working on a cost per click basis with platforms like Google and Facebook and they turned to us to find customers and drive sales, especially in the post pandemic landscape.
Companies now look to the CMO to not only build the brand, but also to drive online thing gross subscriptions.
<unk> or green you'd be.
Organizations rely on digital channels for direct response and customer activation.
We see a strong trend towards outcome based marketing and CPC media Bank.
Second on the advertising side, we continue to improve Ros performance by investing heavily into our proprietary AI driven performance engine and the new and innovative AD experiences that leverage video and social created.
We play an important role in complementing the spend or advertising on the walled gardens. We've spent on the open web.
So when you put this full tracks together and.
And you get these powerful trends more users with high engagement rate and more advertising thing better performance.
Let's dive deeper into some of the product and business activities. We have undertaken first on the media on the side.
Smart logic engine released in Q4 2020 on top of it with some smart technology.
Has AI powering not just what gets recommended in the feed.
But also what the composition looks like.
Frequency of experiences.
True to its called and the composition of the different experiences.
From dynamically optimizing the feed AD load to managing the UI of every speed placement.
We have seen that smart logic, they live with higher user engagement and close to 30% estimated revenue lift.
We are accelerating smart logic deployment and by the end of Q2 more than 20% of our mobile feeds adopted our superior smart logic technology.
In Q2, we also have one new relationships such as sports illustrated the street they'd emotion and more than 100, new media properties. Additionally, as we typically do throughout the year.
Also in Q2, we renewed and extended several of our longstanding strategic partnerships with premium publishers.
And we don't know the open Internet. These days, it's much more than website about 18 months ago, we kicked off the strategic initiative designed to power recommendations on new media environment.
We've seen tremendous appetite from device manufacturer mobile carriers and software companies to leverage.
I mean, they shouldn't platform to showcase high quality <unk>.
Connect content recommendations and to monetize the user base.
These media partners now represent more than 10% of our revenue and are growing at more than 100% year over year.
This is an exciting space, representing another growth frontier and an important step towards the goal of powering recommendation wherever content is consumed.
Moving to the advertising side of the business, we still year over year growth in the number of advertising to provide some context in 2020 more than 20000 advertisers use our platform to establish the brand build consideration and drive state.
The increase of advertising using outgoing would not translate to growth without the ability to drive the best results for them.
We are now realizing the investment made over the past 24 months in building conversion bid strategy and AI based conversion optimization engine that is optimizing towards onsite conversion.
CPA gold purchase value all lifetime value and not just C T O.
We see higher performance for advertising when we moved their campaigns to C. B S. It automatically optimizes in real time every and every bid every placement and every user to maximize sales needs or conversion we.
We've seen great momentum with conversion bid strategy, leading to increased budget spent on our platform.
Video continues to be a strong growth driver.
Revenues increased by more than 100% year over year in Q2 accounting for approximately 8% of our revenues.
One product we released in Q2 that we are very excited about this conflict.
Video performance solution designed to help e-commerce and direct to consumer players drive sales app downloads and registration we had more than 500 advertisers use this new format in Q2.
Before I conclude I want to say once again, just how excited we ought to start this new chapter as a public company.
Investments made into the business I used to accelerate our growth and provide long term value to our media owner and advertising partners.
Users and to our shareholders.
Looking forward, we continue to see a positive macro environment and our industry driving momentum in our business.
Premium nature and superior quality of our network paired with a recognition that we are the trusted and transparent partner of choice continues to be a key differentiator.
This combination supports our continued positive outlook for the year and you would see in our guidance.
Now I'll turn the call over to our CFO Andy.
Great. Thanks, David and again welcome everyone.
As you can see from our numbers, we have been delivering very strong performance both year over year and sequentially.
We're benefiting from the strength in digital advertising broadly, but also we are outpacing that growth on the top and the bottom line as we delivered strong execution against our growth plans.
Before I cover the results I wanted to share a few aspects of our business model that are important attributes for creating long term value.
First we have multiple levers in the business and then within each of those areas, there's meaningful headroom for expansion.
There was a high degree of Interconnectivity of supply demand and technology growth drivers across our marketplace whereby improvements in one area driving improvements in another demonstrating the compounding benefits of our platform.
Second we have a huge distribution asset in our media on our portfolio and we are obsessed with landing and expanding.
Third we have meaningful operating leverage in the business with high margins and the opportunity to continue to drive scale through technology and organizational efficiency.
And last our technology base is efficient and ready for scale at very competitive and low capex level.
Together, we believe these attributes make our business not a highly attractive for continued growth and profitability.
Now turning to our results we delivered strong financial performance in the second quarter ending June 30th 2021.
Revenue grew by $89.3 million to $247.2 million, representing 57% growth compared to the second quarter of 2020.
Net revenue retention of our existing supply base, which is the equivalent to a same store sales metric grew approximately 79 million or 50%.
Well, it's really existing supply was driven by higher yields on the platform supported by both increases in demand.
Improvements in click through rate or the rate of engagement on our platform.
We also grew from the addition of new supply in the clutter, which delivered approximately $12 million or seven points of growth.
Approximately half of this growth was driven by growth of new media environment that David referred to earlier.
Across all revenue, we saw continued strength in mobile which represented approximately 68% of total revenues in the second quarter.
And he had graphically we continue to see strength globally.
As a reminder, over 60% of our revenue is outside of the U S.
Next gross profit, which is the revenue we keep after paying traffic acquisition cost of our media partners increased $27.1 million or 68% year over year to $66.8 million.
S. GAAP gross profit outpaced revenue growth for two reasons first we have the impact of favorable revenue mix from higher margin media partners in the period.
And second higher yields on the platform chosen through performance on our media partners with guarantee arrangement.
In addition to the year over year comparison ex that gross profit grew 11% sequentially speaking to continued overall strength in the business.
Moving to operating expenses, we saw an increase of 32% or approximately $10 million to $41.9 million in the second quarter of 2021, as we continue to invest in growth.
Approximately half of the $10.1 million dollar increase relates to higher compensation costs, driven by both increased head count and higher incentive compensation related to our strong financial performance.
We also had the impact of unfavorable effects of foreign currency of an estimated $2 million in the period.
The remainder of the increase was driven primarily by higher professional fees and increased marketing and other costs as we gradually come back to more normal operations following the pandemic.
Adjusted EBITDA increased over four times from $5.2 million in last year's second quarter to $24.6 million in the second quarter of 'twenty. One is that gross profit growth exceeded expense growth meaningfully.
The yield improvements that we delivered on a platform a platform, which primarily drove our ex Tac performance dropped to the bottom line, even with our continued investment in the business.
Our adjusted EBITDA ex that gross profit margin was 36, 8%.
Free cash flow, which we define as cash provided by operating activities less capex and less capitalized software cost was $16.5 million in the quarter.
Our cash conversion was strong 67%. This is the ratio of free cash flow divided by adjusted EBITDA.
We ended the quarter with $111 million of cash and cash equivalents and pro forma for the $360 million of capital. We raised in July following the end of the acquire our cash and cash equivalent balance was approximately $450 million after adjusting for estimated expenses.
The gross proceeds we raised a 368 million came from our IPO, which raised $160 million and the sale of our now public convertible notes to the ballpark group, which raised $200 million.
Lastly, turning to our guidance.
For the third quarter ending September 30th 2021.
We expect except gross profit of $64.5 $66 million or approximately 34% growth year over year at the midpoint of the range.
And adjusted EBITDA of 15, five to $16.5 million or approximately 26% growth year over year at the midpoint of the range.
And for the full year ended December 31st 2021, we expect excess gross profit of 266 to 270 million or approximately 38% growth year over year at the midpoint.
And we expect adjusted EBITDA of $80.5 million to $82.5 million or nearly doubling EBITDA year over year at the midpoint.
This outlook includes continued investment in growth as well as the absorption of an increase in ongoing costs associated with the post COVID-19 returned to normal.
And cost of becoming public while still delivering very strong operating margin of 30% plus.
In summary, we are very pleased with our results this year and to be able to provide an outlook that continues to exceed our internal plan.
We are even more excited about the opportunities ahead of us.
I'll now turn the call back to Europe for closing remarks.
Thanks, Elyse so as you can see in our recent results as well as our Q3 expectations. We are benefiting from positive industry trends in our space. While at the same time accelerating growth on top of that through our superior technology and positioning.
We're very pleased with our company's recent performance, we believe that the opportunity for continued growth is significant.
Technological advantages and business model have poised our company to capture market share and create value for our shareholders. Our goal is to maintain a high level of visibility and clarity with the investment community and we look forward to keeping you up to speed as our business grows I want to thank you all for spending your time with US This morning and.
With that I'll turn the call back over to the moderator for questions and answers.
Thank you ladies and gentlemen, the floor is now open for questions. If he would like to ask a question. Please press star one on your telephone keypad at this time, a confirmation tone will indicate your line is in the question queue.
Participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
In the interest of time, we are asking that you. Please limit yourself to one question and one follow up before rejoining the queue for any additional questions.
Again that is star one to register your questions at this time.
Our first question is coming from Nick Jones of Citi. Please go ahead.
Great. Thanks for taking the question maybe.
Maybe first could you expand a little bit just on the impact of I D. S. A looming third party cookie deprecation and how our brand is positioned.
Amid these changes as this is a potentially a benefit as contextual advertising becomes more popular and then a follow up thanks.
Sure Hi.
CRM Thanks, Nick.
So in terms of.
Being able to personalize the experience and serve a relevant recommendation.
And the opening piece there are two areas that are really areas of strength relative strength.
Compared to the online advertising industry.
Industry. The first one as I mentioned, we invented we I mean myself and and a bunch of our core team at my previous company, we invented the space of contextual advertising or co pioneered it I would say and so we've been building and using contextual targeting technologies for about two decades, now and it's not something we've added or.
Flat to 2021.
Contextual.
Slogan on what we do but rather have been doing this for over a decade of that brand in two decades.
My previous company contextual is works regardless of any cookies. It doesn't use any cookies at all and so we think that's a very important a.
Strength for us going forward and it certainly as youre seeing in the industry something many companies are excited about.
The second is it's important to understand is ethane towers be entirety of the user experience on those media owners could be that we partner with them to do that usually exclusively.
That means we powered both the advertising in the feed and the recommendations themselves the organic recommendations be articles and videos the ones on the same properties that gives us a tremendous amount of first party data, which again is immune to everything we are hearing about with third party cookies that first party data, we can use as we see fit.
Going forward and that's a big part of how we've been recommending for a good chunk of time.
Great. Thanks, and then that'd be a separate question as Covid restrictions loosen.
And maybe the traffic volumes change at your publishers.
Can you talk about the impact of that is kind of improving the click through rate potentially offsetting lower traffic volumes or are there any trends that you're seeing as COVID-19 restrictions loosen.
Okay. So David I'll take that one so we have we haven't seen any meaningful impact on the on the supply side of the business until the traffic I mean, there's some seasonality now and in the summer.
And then we aren't capturing increased user engagement better CPM better technology to compensate for any potential declines. So you see that our business is driven primarily by increasing the yield to technology and product.
Alright.
Okay.
Great. Thanks for the question.
Thanks, Nick.
Thank you. Our next question is coming from Schweda touch area of Evercore ISI. Please go ahead.
Okay. Thank you.
Two questions for me. Please one is could you remind us about Europe. The CBS product what percentage of course that is touched by that and any other but just you can provide in terms of how impactful advertising advertisers have found that productivity and then the second question.
Okay.
Is on the new media environment, how big of a deal when do you think that can be assessed in the early innings, what kind of other media formats do you think.
You could.
Innovate on it.
Any context, there that'd be great. Thanks.
That's right that's what I think the first one you want me to take the second thing in terms of C beds, we don't give specific numbers, but we have more than half of our network right. Now is the ease using C. B and C benches of continuous improvement and CBS gets improved on a daily basis with more algorithmic capabilities better bid.
So right now we see more than 50% of the spend is already using it we will see acceleration both in terms of the percentage of the revenue that's generated through CBS, but also through significant improvements that we see in C bench delivering better results for full advertising into jungle Ross.
Thanks, David and on the second question. Please.
Yeah.
Yes, sorry, hi.
High fructose just your own neither the wrong button.
So in terms of new environments.
We think theres, a tremendous opportunity of growth the new environments and it all starts from the consumer of where people are actually discovering content and consuming those feeds.
A good example from the from the broader World. There's a couple of years ago, Apple was not in the news or content business at all and now when you swipe left or lock screen and all kinds of places there are suddenly new a new places where you see a feat of content that means that a lot of other media owners other handset men.
Textures or lock screens or notifications, they're all looking at opportunities to provide users with the with new seats and many of those come to us asking for fitness technologies. Those are not easy to develop. So this is an area that again, it's not big for us, but there are a strong tailwind.
Tens of millions of dollars already so it's something we know.
How to do and we think there's just more and more of these screens in terms of coming online that will need a seat at their core.
Thank you Sir.
Thank you. Our next question is coming from Brent Thill of Jefferies. Please go ahead.
Great. This is James on for Brian. Thanks for Thanks for taking my questions could you just talk about the investments that you plan to make with the $450 million that youre going to have in cash is it primarily head count or are there are other areas, where youre thinking about making big investments, whether that's M&A or or elsewhere.
And then my second question for lease would just be around the guide it seems to imply a decent amount of deceleration on a tier stack basis. So I'm wondering if you could comment on what's driving that T cell is there just some conservatism or any other reasons that you are being cautious.
Yes.
Hi, James This is David.
I'll take the first one so in terms of the cash that we have on on balance sheet, and let you know and.
We will continue to invest in the business and primarily in hiring though what you see in our plans that are in the guidance I mean, it does look like the additional investments, we see tremendous opportunities for trying to accelerate higher.
Bring and we're looking at many projects that are sort of positive that would be accretive to our current plans and we're also looking at the M&A front.
We do not feel that we need M&A to deliver on annual growth objective. So we're looking at it very strategically because of potentially accelerating go to market for certain areas or entering potentially some adjacent do is and we are very actively looking at things, but nothing right now is specifically this weekend.
They thought.
Yeah.
Okay. Thank you.
For the question.
Two parts really I think on the two year stack as we looked at Q3, there actually isn't a deceleration. So if we looked at the Q3 call. It the midpoint at the ex Tac guidance, it's around 55% growth, which is consistent with two year stack comparable to the first and second quarter of the year.
On the EBITDA front, and certainly EBITDA is multiplying on a two year stack basis, and even year over year, but what you are probably observing is expenses will be growing and about $6 million from Q2 to Q3, and that's primarily a function of two things. One is the introduction of public company costs.
So D&O insurance people processes those types of things make their first step change and then second is the return to normal cost as we slowly and gradually come out of the main the main hit from Covid. So you're seeing some of that so those two combined are the bulk of the classic acceleration there and so we will.
Expect some softer EBITDA margin, but still for the year, we expect a 30% plus EBITDA to grow ex Tac gross profit margins.
And one other one other comment maybe I'll make just on the sequential performance Q2 to Q3, a typical progression I think what you see in our guidance is typical progression Q2 to Q3 and nothing nothing extraordinary there and then lastly of course, its our first few quarters out of the box with a public fund company. So we're taking that into consideration.
<unk> as well.
Great. Thank you so much.
Welcome.
Thank you once again, ladies and gentlemen, Thats Star one to register a question at this time.
Our next question is coming from Ron Josey of JMP Securities. Please go ahead.
Great. Thanks for taking the question maybe two please one on just product improvements you're one David you talked quite a bit about the investments in tech and product from App install launched a year ago to conversion bid strategy and clip and just talk about maybe operating is tech development lifecycle and the improvements youre seeing the click through rates as a result, and maybe bigger picture.
How these products are attracting newer advertisers and so that's question number one just on product improvements and how that's improving click through rates and then second question your own you're still you're still quite a bit upfront about out brings quality score initiatives. So maybe help us understand bigger picture just how you envision this playing out.
The implementation timelines things along those lines. Thank you.
Sure. Thanks, Ryan So in terms of the development in our.
Lifecycle, we have in our two R&D centers in Israel, and Slovenia, We have about 300 over 300 people.
Technology is at the core of everything we do since our since the first day of the airframe.
In terms of technological improvements on algorithms, which is a big area of focus for US. Those are those are obviously long life cycles of investing in research and development and bringing.
Bringing technologies to market, sometimes they succeed sometimes they don't that's the nature of our research and development, sometimes they're shorter cycles and sometimes longer quality rating is a is a great example of that that's a new set of algorithms that we've announced a few months ago, starting to roll out and we're doing fragile rollout learning from.
Some of the criticism publishers and advertisers head of the Tech Giants Rolling out abrupt algorithm changes. So we're doing this gradually over the next few months working with the media owners and advertisers to make sure that they can adjust to quality rating algorithm for us. It's one of the biggest algorithm changes or introductions, we're doing it.
In recent years and what quality rating is all about is as the name implies understanding the quality of ads.
Recommendations before they go live into the field. So that we can obviously improve the quality and personalization based on that.
More specifically a lot of the signals we've used historically and in the variety of algorithms that we use are focused on the actual the engaged users the ones that are actually clicking and engaging with the recommendations in that fidelity of data signals is very very high enables us to create more engaging recommendations what we're focused on with <unk>.
The rating is a different cohort of users, which is the folks that are not engaging those are the majority of the users we reach theyre not currently engaging with our recommendations and we think there's huge opportunities and engaging in more people. So historic algorithms were more focused on higher engagement quality rating is focused on engaging more you.
As I said it will take a few more months of the rollout of this algorithm, we're starting to work with the advertisers many media owners, but we think that for many years to come we're going to have some big benefits in terms of quality and engaging more users so that we reach.
Thank you Ron.
Thank you. Our next question is coming from Ross Sandler of Barclays. Please go ahead.
Hey, guys.
Two questions just to follow up on the <unk>.
CBS topic.
So how much does the average.
Average account increase their spend with you guys and when they go from not using CBS to picking that up and then.
Your ex Tac gross margin percentage or would your take rate is a little bit lower than than tabbouleh.
I assume that's for mix, but.
Just any comment on that is that an opportunity for outbreak as you kind of look forward. Thanks a lot.
Hi, It's David Hey, Ross on the C B and so as we said I mean, we have more than 50% handle the revenue right now is being spent through that and it will basically deliver the increased budget spent than many of our budgets are basically continuing to spend with us as long as we achieved there.
The return on that spend objectives, so they're not sort of an I O that.
It stopped and and so as long as we can continue and improve it.
The performance of those dollars that we'll continue to spend with us and will be seen as increased the budget spend so way on a daily basis and then they continue to replenish for CBS in a very significant way.
Maybe if you want to take the margin question.
Sure listen.
Listen I think we focus on ex Tac gross profit in absolute dollar terms. So we're very focused on growing the total pie those are our share in that of which we share with our media owner partners.
We also think that listen mix is a factor as you alluded to them rough, but as long as we continue to grow the absolute dollars.
We continue to generate and grow profitability on the bottom line.
That's the primary focus we and we've said this we said it on the road show, we said it many of our discussions.
We'll take the absolute dollars over a point of margin.
Ladies and gentlemen, as a final reminder, if you do have a question. Please press star one on your telephone keypad at this time.
Were showing no additional questions in queue I would like to turn the floor back over to management for closing comments.
Okay, It's David I'll take that so what we want to thank you all for attending our first.
As a public company, we are very excited about what we delivered in Q2.
Very confident about the future as you can see you know a guidance based both on market trends and what we're developing internally in terms of technology and innovation and look forward to seeing you soon in the next quarterly call. Thank you all.
Ladies and gentlemen, thank you for your participation and interest in outbreak. This does conclude todays event. You may disconnect. Your lines of log off the webcast at this time and have a wonderful day.