Q1 2022 Taboola.com Ltd Earnings Call

May 13, 2022

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Okay.

Good day, and thank you for standing by and welcome to the <unk> first quarter 2020 earnings Conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.

Please be advised that today's conference may be recorded I would now like to hand, the conference over to your speaker today, Jennifer wisely.

Investor Relations. Please go ahead.

Thank you good morning, everyone and welcome to <unk> first quarter 2022 earnings conference call I'm here with Adam <unk>, our founder and CEO and Steve Walker our CFO .

We issued our earnings press release yesterday aftermarket and it is available along with our Q1 shareholder letter in the investors section of our website.

Now I'll quickly cover the safe harbor certain statements today, including our expectations for future periods are forward looking statements. They are not facts and are subject to material risks and uncertainties described in our SEC filings. These statements are based on currently available information and we undertake no duty to update them, except as you.

Required by law. Today's discussion is also subject to the forward looking statement limitations in the earnings press release future events could differ materially and adversely from those anticipated.

During this call we will use terms defined in the earnings release and refer to non-GAAP financial measures for definitions and reconciliations to GAAP. Please refer to the non-GAAP tables in the earnings release posted on our website.

With that I'll turn the call over to Adam.

Thank you Jay and good morning, everyone and thank you all for joining us for our first quarter call Q1 was a strong quarter, we beat our targets delivering 31% ex tax gross profit growth over Q1 of last year by eight 4% on a pro forma basis. We also generated $35 million of adjusted EBITDA, Despite a very challenging macro environment.

To follow up through the highlights from the quarter, though I want to address the revised guidance, we issued today in conjunction with our results. The revision was driven by basically two factors Dominion factor is the economic uncertainty caused by the war on Ukraine, which increased in the second quarter in a bigger way affecting our advertising business in Europe , which is 30% of our revenue and global yield.

As many of our advertisers in Europe , but all around the world in many ways. It's felt similar to what we saw in the pandemic, but obviously in a smaller scale where business has slowed down their spending but in this case, mainly in Europe . The second factor is the launch of our bidder, which is now live and off to a good start but still behind plan now that were alive and we're seeing real data on even.

More bullish and how much growth opportunity. There is here not only with Microsoft itself, but also on other platforms, which we do plan on integrating via header bidding in the short term due to these two factors we are lowering our full year 2022 guidance ranges on ex Tac gross profit to 595 million to $616 million in.

The adjusted EBITDA to 152 million to $162 million, Steve will speak more about our guidance in a few minutes as well, obviously not happy about having to adjust guidance, especially after having a strong first quarter I can tell you our new guidance factors in both of these two one time events, we do not want to do this again the fundamentals of our business with <unk>.

<unk> were profitable generating cash we have technological advantages our team is passionate and energized and our intention is to keep the meeting and beating our clients partners and investors expectation as I look beyond those two events were profitable growing expect to generate significant cash flow in 2022 with this new guidance and overall the business is getting a.

Lot of momentum in all of the things we love we won new deals expanding relationships with important partners launch new products and made progress in capturing more of the $6 to $4 billion open web advertising market. There are few things that I do want to highlight that I am very excited about first I am taking a much bigger focus on growing our performance.

Achieving even greater scale and relevance aiming to achieve something that I believe only four companies have ever done Amazon, Google snap and Facebook, making many many advertisers big and small successful with them rely on them grow with them, we're going big here and you should imagine smart beta to get even more attention and innovation as an example.

Our new guidance assumes that we will double our engineers in that area over the next one year and four X over the next two years that includes of course, our AI engineers as well.

On the other side of it and over time, we sit double as it placed any performance advertisers can find positive ROI and succeed, especially as social networks will not be able to check consumers as they used to I believe in the open web in contextual advertising being a big part of the future and advertisers. The second thing I want to highlight is at our Investor day I spoke of.

What about our endless growth opportunity and momentum, we're getting in replacing traditional banners with personalized relevant recommendations you see most of the $64 billion of open web advertising market is made out of out of banners. The same advertising formats invented 30 years ago, when time of Gucci and Dvds were invented <unk>.

Obviously are gone now, but banners are still here and remain as you think about our Tam and our growth. We are liberating the open web from banners into relevant personalized experiences, bringing that power of the walled gardens into the open web at this stages in this room for growth on this journey of replacing batteries with the board on Amazon moved away from <unk>.

Banners to paid recommendations on Twitter, if there are no banners, but paid posts on Instagram you don't see banners, but to see paid posts and on search pages. Obviously, there are no banners, but paid search results. The open web is the only place where banners remain and it was an event in 30 years ago. This is a market and we have advantages in capturing it in the first quarter we.

Continuing to replace banners in the middle of the page on the homepage and other placements. Some examples include E online globes in Israel, seven West media in Australia and others.

Certainly I'm incredibly excited about our OEM partners scaling really fast we tripled our news this is becoming an increasingly meaningful part of our business is growing fast and it's scaling. It also relates to our vision to capture more time with consumers as we've talked about on our Investor day. There are some exciting momentum here, which I hope to be able to update.

You very soon.

More on first quarter, we had very strong publisher pipeline and saw progress with new deals as well as renewables a lot of time with significant expansion and the size and length of the agreement to give you. Some examples Penske Media Corporation PNC, a leading independent global media publisher that reaches monthly audiences of more than 310 million people.

With such like variety Rolling stones, and other just move to tabbouleh published.

Publishers moved all over the world not just in the U S. Chubb people in Italy, France said, Erika International Forbes in Spain, Korea, Australia, and Metropoles in Brazil, just to name a few I had a chance to personally talked to the Ceos of some of these and in many cases. The reason they choose to go down is because they will generate more revenue and they get technologies that help them.

Run their business I told my board this week as I look into the market spent 14 years with publishers, we provide them technology that they want to beyond just the revenue will be empowered the editorial team, we help them drive growth and I believe in most markets, 70% of tabbouleh is worth a 100% of our competitors, which explains not on euro high win rates.

It also at a higher gross margin as a proxy for competitive advantage. It is very expensive to take a publisher from tubular.

In another example, one of our top five revenue publishers globally, just extending with us for five years associated press AP inside our teeth are also great names that have recently chosen to buhler as I mentioned earlier, you can see I'm very excited about the advertiser side of our business. We recently updated our advertiser base just.

Crossed the 15000, Mark and in Q1, we expanded our work with well known brands such as Heinz Canada Goose, Volvo Michelin Yoon die Chipotle, Mris Progressive insurance and Honda among many many others in Q1, we also signed and renewed trade agreements with a number of agencies, including density in the UK.

<unk> in Germany, Tms AC digital probably sees an <unk> partnership in Israel in Q1, 15% of our revenue were from brands and agencies and we expect this percentage to grow.

As you think about the future beyond the core business, we want to keep diversifying what we recommend we call that strategy recommend anything video commerce gaming audio and Additionally, we want to grow the time, we have with consumers by being wherever they may be some inbound our VP strategy <unk> talked about that as well on our Investor day, we call that recommend anywhere.

On mobile devices, CTV automobile and more.

You may have read the article and digitally recently speaking about the importance of personalized homepages. They referenced Washington, Post's, New York Times, and Tabouleh homepage for you product, which we've been speaking with you. All watch recently, we launched it in early January as part of newsroom, our editorial suite for writers and editors and Adi's you can imagine is to make every homepage.

On the Internet personalized driven by Vittorio team plus AI.

It is a winning offering it's wanted to just money and publishers are choosing us. Thanks to it some examples our Miami Herald Mcclatchy adjust out this morning with the team. It's beautiful. Other examples include Ndtv independence, Sinacore, there was associate us and others.

And their privacy front, which is one of our advantages, we just announced an expansion of tubular trust portfolio, where we work with brand safety leaders, including Ias doubled verify news guard tag and IV U K. We believe we are a leader in content review and safety and these partnerships are critical to demonstrating our commitment to a safe.

Privacy and protected web. This also supports our expanding of work with brands and agencies.

We're also seeing good headway in e-commerce, which comprised 15% of ex Tac gross profit in Q1, it's been a little over six months since we closed the connected acquisition and we're making steady progress cross selling advertisers, including E Commerce, and new publishers deal and merging offices and importantly, coming together as one team one strong.

Firmly progress on synergies in Q1 includes a bunch of things expansion of connectivity publisher solution in APAC and EMEA, where we expanded connectivity commerce monetization solution to 14, new countries teams are trained up and actively pitching several new partnerships on a weekly basis per country success is also building with tabbouleh AD sales.

Selling connectivity advertising solution. We've spoken previously of the success, we're seeing out of China with multiple new advertisers signed on within the U S and new retail vertical sales team is in place trained and has begun pitching connectivity e-commerce all the time.

Lastly, leveraging tubular supply network for connectivity advertisers is taking off within the U S. 54 merchants have already given consent to move forward with double a pixel within Europe , a robust pipeline of over 200 clients has been built consistent of both new prospects and existing merchants.

Before I hand, it off to Steve 2022 started strong we had two one time events that we think are now in our past. We've included those things in our new guidance and we're executing strong on all the things that matter to our business with our core business growth with publishers and advertisers and going to recommend anything in anywhere in the open web and now over to Steve who will dive in deeper.

Prior to our financial performance and guidance.

Thanks, Adam and good morning, everyone. Let me address right upfront our revised guidance as Adam discussed earlier, there were two factors that caused us to reduce our guidance. The first and main one was caused by the war in Ukraine and subsequent macro weakness the effect of that on our business has been a negative impact on our European.

Advertising business, which is more than 30% of our overall revenue.

The economic and political uncertainty caused by the war caused advertisers to cut back on their spend in Europe . This reduced global yields since many of our European advertisers target users in the U S and other countries.

We saw an initial dip when the war started but yields seem to recover in March before declining again towards the end of the month and in early April .

We have also seen a related effect impact our growth, which is a weakening of the euro against the US dollar this translates into lower U S denominated revenue when we convert our euro revenues and $1.

We estimate the foreign exchange rate impact on our growth in Q1 was one 5% and we will have a similar impact for the full year of 2022, we felt there was judicious to be cautious and therefore factored both the conservative outlook on yield for the balance of the year and the weaker euro into our forward looking guidance.

The second factor was the bidder that launched 100% on Microsoft on April one.

While it is off to a good start it is behind our plan. We have factored current performance levels of the bidder into our forward looking guidance. We believe there is potential upside to this as we have identified opportunities to improve the bidder and we also will start using the bidder to compete for display inventory via header bidding on publisher side.

Other than Microsoft However, we chose not to factor either of these potential upsides into our guidance since we prefer to be conservative I am obviously, not happy to have to adjust our guidance and I can assure you that I don't want to be in this position again later this year. So we believe our updated guidance fully baked in the impact of that.

These two factors both of which we believe are one time events.

Now more specifically on our results as Adam shared we had a solid first quarter, we met or exceeded our Q1 guidance on all measures. Despite some macro headwinds as I just discussed.

Revenue in Q1 was $335 million ex Tac gross profit was $135 million and adjusted EBITDA was $35 million. This represented ex Tac growth of 31% year over year or eight 4% on a pro forma basis with connectivity, which is approximately 10.

10% on a constant currency basis.

And a 25% 25, 2% ratio of adjusted EBITDA to ex Tac gross profit, which is what we often refer to as adjusted EBITDA margin.

As I mentioned last quarter Q1, 2022 is a challenging comparable because organic ex Tac gross profit grew 54% year over year in Q1, 2021, which was an exceptionally strong performance.

After Q1 gross revenue growth of $52 million $21 million came from new digital properties and $31 million came from growth of existing digital property partners our growth in existing revenue came from a combination of yield improvements and upsells of additional platform.

Capabilities to existing publishers, such as our high impact placements offering.

Our Q1 ex Tac gross profit was $138 million and was up $32 million or 31% year over year. This growth came from three sources. The additional of new digital property partners to our network growth of existing digital property partners and the addition of connectivity to our.

Business, our ex Tac net dollar retention for our publishers continues to be positive at 106% for to Blue on a standalone basis.

Looking at operating expenses, they were up $52 million year over year, which is consistent with expectations driven by multiple factors.

First growth in investment in our business.

Second the inclusion of connectivity as well as higher depreciation and amortization from intangibles coming from the connectivity acquisition third costs related to being a public company fourth some additional costs due to the resumption of travel and opening of offices as the pandemic receded.

And fifth higher labor expenses, reflecting the inflationary environment and a tight job market.

We generated adjusted EBITDA of $35 million, which was above our guidance of $32 million to $34 million, an increase of $1 $4 million year over year. Adjusted EBITDA margin of 25, 2% was lower year over year. However, it was in line with expectations given the planned.

Higher operating costs I just described.

GAAP net income of $3 $9 million included warrant liability revaluation benefit of $14 million share based compensation expense of $17 million any intangibles amortization of $15 million all of which were excluded from non-GAAP net income of 21.

$9 million, which was above our guidance of 12% to $14 million.

In terms of cash generation Q1 is seasonally the lowest cash generation quarter, and we were pleased to have $8 million in operating cash flow and $1 2 million and free cash flow, which was an improvement of $16 million year over year.

We ended Q1 with a strong balance sheet position and positive net cash our cash and short term deposits balance of $318 million is above our debt balance of $285 million. So a good result in terms of cash generation and we continue to have ample financial flexibility.

Shifting now to our expectations for the rest of 2022, we are updating our 2022 guidance as I mentioned and now expect revenues between $1 5 billion and $154 billion.

Gross profit between 485 and $505 million.

Ex Tac gross profit between 595 and $615 million adjusted EBITDA between 152, and $160 million and non-GAAP net income between 83 and $91 million.

Yes.

I would like to say the fundamentals of our business are strong looking beyond those two onetime events that we've now adjusted for with our new guidance. We continue to be a company that is growing at a good rate that is profitable and that generates strong EBITDA and significant positive cash flow our five year compound.

Average growth rate for ex Tac based on this new guidance is 23% and we will generate over $150 million of adjusted EBITDA. In 2022, we continue to demonstrate competitive advantage based on our strong ex Tac margin, which is almost 40%.

We are bullish about our business and believe that over time tabbouleh is at 20% per year grower and 30% plus adjusted EBITDA margin business.

Because we believe the fundamentals are strong we do not plan on reducing the investment in our business. At this time, we believe that strong businesses benefit from continuing to invest through downturns and that these investments will position us strongly going into 2023 for growth acceleration.

With that let's open it up to questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from Stephen Ju with Credit Suisse. Your line is open.

Okay. Thank you. So can you give us a little more color on the bidder product.

That you called out as being behind what is it designed to do.

What do you think is the reason for what sounds like a slower.

A customer activity, though do you think it's so prada.

Product or an ROI problem or do you think this is an awareness problem.

And I guess the <unk>.

So the weakness you saw in Europe did you overall activity just step down on the heels of the war and not really recover thereafter.

And does the guidance basically assume at this point Europe back of the envelope math. It seems like it's down about 25% versus where you guys had planned before and that persists for the balance of the year.

Hi, Good morning, Stephan and good morning, everyone.

But the bidder and Steve can take the financial part dine in Europe , So as an update I'm happy to say, it's fully live now so.

We've developed over the last.

A year or so the bid or the team has done a really good job integrating that with Microsoft supporting us in designing that.

I would say, we're seeing a few things that are doing even better than expected and others that are behind but overall its down our expectation, but off to a good start and from here. We believe that as we look forward on Microsoft specifically and even outside of Microsoft There is a lot of growth opportunity for us because if you recall, we mentioned on Investor day that Microsoft was kind of a drag on our growth in past.

That will not be the case as we look into the future. So I'm really happy that the team was able to build the technology that in such a quick time is doing what some other companies have done in 10 years building a bidder and for now I think we have a lot of opportunity with them. The second thing is the better over the next short term really will be start integrating into.

Other inventory beyond just Microsoft so header bidding and things of that nature. So overall, the bidder will become a nice growth opportunity for the Ebola.

Yes, and Stephen regarding Europe .

So I think what.

Way to think about what happened in Europe is that you can think of it almost as a small pandemic.

Except in Europe , not in the world as a whole and what happens as advertisers when they when they see that economic uncertainty, we see two things from them. So one is we see less spend so in some cases, they cut down on budgets.

They reduce their activity and also we end up earning less per click because the way to think about that is we've always talked about the fact that our yields are driven by three factors click through rates cost per click and conversions and basically they become worried that their consumers are not going.

Buy as much from them so they reduce how much they're willing to pay per click to adjust for the fact that they're not going to make as much on it. So we see all those effects and then what happened.

With us is because our European advertising business, Scott softer it actually.

<unk> impacted our global yields not just Europe , because basically the European advertisers in many cases are trying to reach U S consumers in Asia Pacific consumers and others. So it actually impacted our global yields. So when you mentioned that Europe was down 25%.

It's really our global business gets impacted not just the European business and it affects our yields which is where it affects our full business.

So thats the way to think about kind of what happened there.

But from a moving forward perspective, and we think both the bidder in the case in Europe are single onetime events and the guidance we've revised.

Everything that we think has happened.

And from now it's only it's only unaware yeah and I also just want to mention that we do are the fundamentals of our business are still strong. So we still expect to generate $150 million plus of adjusted EBITDA and we expect to generate significant positive cash flow to the tune of high tens of millions of dollars of cash flow this year.

As well right.

Thank you.

Thanks, Operator, we'll take the next question.

Our next question comes from Laura Martin with Needham Your line is open.

Good morning, I'll ask two let's do one at a time so that's.

Thats, great desks open path.

Understand that you guys are supply cost optimized because you have direct relationships with buyers and sellers.

Question is is it really trade desks open path essentially.

Doing your job and away, but in the open internet, meaning if somebody if these journalists.

Companies like Washington post adopt to open path and he is really not going to charge for it. He is just going to do it at cost Jeff.

Really they don't really need it doesn't that take business away from you or isn't that harder than for you to take a customer away from open path because they basically have optimized the supply chain, which is one of your big brand promises when you sign up a new customer could you speak to that.

Yes, so first of all in good morning, Hi.

So first of all it's important to remember that tableau supplying tubular demand are both unique to us.

Think about if you go to ESPN or CNBC or BBC or anyone of our publisher partners, what we actually create that real estate. We create on those publishers does not look like anything that the trade desk is looking to achieve with open path right. So we serve two things both editorial recommendation as well as Pedro foundations you cannot replace.

With any form of just banner or single AD. So from a supply perspective, it's very unique it's very negative.

That's from that perspective, the demand is also unique because most of it is performance advertising supplemented by about 15% of brands and agencies. So both of those dynamics make it quite unique and not something that we believe is in the same addressable market is what the trade desk is looking to replace the second point I'll make is that over time as the <unk>.

Look into the next in 2020 to the next.

10 years in any case I suspect banners are at risk of being resolved because if you can imagine and I mentioned that in my letter, we're seeing really good momentum, replacing banners with this sort of carrier style experiences that are have editorial and have paid and debate portion is either e-commerce to video or native advertising and if you think from a public perspective.

Active any banner I have homepage middle of the page section front that anyone can potentially buy would I prefer to sort of a banner or would I prefer to make the sentiment of many or more and then have half of it actually engaged users with editorial content and to and Thats a very hard competition. So we're seeing good momentum there and I meant.

Your line NBC.

NBC sports <unk> and others and I think over time that has worked to build we will grow the most which is tens of billions of dollars of banners.

Replaced by basically displayed recommendations and editorial recommendation, let me just add one other thing in addition to the unique supply and the unique demand that Adam mentioned, we also have unique data. So if you remember we've talked about it in the past, but what we have that the trade desk doesn't have is we know what people are reading about we know what they're interested in it.

Different form of data so I think that also.

Makes gives advertisers something different with us and they get from the trade desk, because it's a different way of targeting consumers with that highly contextually oriented data and that's where 9% of the revenue smart bid right.

That's super helpful. Thank you for that Okay. The other thing is that as Steve you said youre going to keep cost in line, even though revenue is going to be a little softer anatomies that in one area, you're going to double your engineering resources over the next year. My question is around hiring.

Have you had issues hiring and have you been able to hire and ramp up your spending as quickly as you wanted given the tight labor market.

Yes, so it is tight for sure and I think especially when it comes to tech resources.

A very challenging environment.

So far this year, we're a bit behind on our hiring plan, but April for instance was our best hiring months base.

Basically in the last 18 months. So it could be that things are opening up a bit and we do expect to hire at something close to what we had initially targeted by the end of the year. So I'd say a bit behind but we think we can close that gap and definitely its competitive still but it could be that things are loosening up based on our recent experience.

We've also taken an international strategy to expand our tech sort of hubs right. So we have Israel. Initially we have an office now in the latest part of the connectivity that's growing fast and then also in Taiwan, We're seeing a lot of good momentum. So in general. We're also looking to expand our international sort of tech hubs to be able to attract great talent.

We've been hearing that back to office, if you let people G. Just since it's easier to recruit what's your in office policy.

Well first of all I will say that we don't foresee any want to come back we give the local leaders sort of the opportunity to decide what we are working 22 countries and it's very different I was just in Israel in Israel people are have their offices in Israel every day. So that's hundreds of people come into the office and other regions much less.

China people are at home. So I mean, it's very regional so we want to empower our leaders to decide personally I can tell you my opinion is that being in the office sustained the people we hired north of 400 people last year. So you can imagine seen then interacting with them showing empathy to each other.

Such a boost in culture and eventually execution. So I think it's important to see each other I think over time companies that will be too aggressive on being remotely you will suffer from execution execution gaps. So I chose culture and in person, but but that will take time.

I come to the office.

Thanks, Laura.

Question.

Thank you. Our next question comes from James Kopelman with Cowen Your line is open.

Good morning, as you look across industry verticals can you talk about where you saw advertisers strength during the quarter in which verticals have held up the best into April and May versus which verticals saw the most impact from the macro and other factors that you cited any color around the conversations youre, having with advertisers will be helpful and secondly in terms.

Of your forward Guide you mentioned, taking a conservative approach what do you view as the two or three biggest factors that could drive upside over the quarter and through the remainder of the year, how much of a potential upside could come from macro a broader digital market improvement versus execution on your growth initiatives, including connectivity or new features like smart. Thanks.

Thanks James.

So I'll address the verticals first of all so I think the.

First of all we've seen the most impact geographically rather than on certain verticals. So as we talked about Europe has been weak.

There has been much less of an impact in the U S. Although there has been some flow through but less of an impact on advertisers in the U S and Asia Pacific and Latam. So generally speaking it's been much more of a regional impact and in Europe for instance.

Pretty it's been impacted pretty evenly across the board. The one thing I would say is that it definitely has impacted brands and agencies more than performance advertisers. So for instance in Europe .

I was talking to our VP of EMEA yesterday, and he was telling me that they've had almost every single brand in Europe said. Please don't show me on any pages about the war so they've cut back significantly on what they want to be shown on they've cut spend they reduce targets, whereas.

He said not a single performance Advertiser has had that same conversation with them about not being on more pages. So just to give you a sense, it's definitely more brands and agencies. We are also seeing.

A bit of softness in e-commerce, mostly due to supply chain issues.

So that has been a little bit softer than again, our core performance advertising, but not by a lot. So generally speaking its relatively across the board, but with a little bit more impact on brands and agents branding dollars than performance in a little bit more on e-commerce than our core performance.

Yes, I can take the second one so not assuming.

Like we said the guidance assumes that those two onetime events or in the past and from here with execution. We believe we can meet and beat People's expectations. So so just to share a few execution opportunities for us that are within our control one way. It has very strong publisher pipeline you've seen the recent success with PNC and others.

People choose to build our thanks to our technology and revenue advantages that we have in the market, but also our wins are becoming a greater impact to our business because we're not just when you bought them a vertical where we traditionally operated we're also winning better real estate. So we have a bigger vertical growth with those publishers that remaining I spoke about banners moving to <unk>.

I also mentioned that performance advertisers, we're taking and I have a huge ambition in a dream here to really become what I believe is the first company in the history of that and that was very unique and performance advertising success outside of Amazon Google.

Snap so I think in Facebook. So I think we have a huge opportunity in performance advertising and I mentioned the investments, we're making on AI and engineering. So that's just on the publisher advertising front. The core to Brillo news has is it basically experiencing explosive growth is a three digit growth for us.

We're seeing great momentum, we've seen there on Investor day, Samsung on states speaking about it hopefully will be able to share more soon publicly but I'm very excited about the financial impact, it's making and this is the fastest growing basically part of our business. The bidder Davita is live there is no more.

Certainty about what's going to happen when it's launched slide but it's off to a good start from here. The tech team is very optimistic about all the things we can do to grow one on the Microsoft partnership.

Together with them and the second thing is outside of Microsoft We see a lot of the header bidding opportunity, where we have advantage because like Steve said, we have a lot of advertisers we have a unique data and now with the better technology. We believe we can become a significant bidder.

So thats number less the third one and Thats why its ecommerce personally I just bought two strollers and Champlain and metrics to my daughter, I did all of that on review Dot Com, New York Times, Wildcatter and others because they have no idea, what's a good trampoline and I believe this experience that everyone. On this call knows exactly what I mean, we'll be a big part of the future.

We all need trusted sources.

To be able to make decisions.

That's what Dubai, and I think that will be.

Huge driver for us starting now but also into the future. So I would say four things strong publisher advertiser pipeline to prevent news explosive growth been going up and up and e-commerce to add synergies.

Let me just add two things on the from a numbers perspective on those for the four upsides that Adam talked about so first of all on the bidder. He mentioned that we that theres an opportunity to improve the bidder and also to take it to header bidding on other publisher sites just to be clear in our current guidance we factored in.

Current bidder performance, which we already are seeing improvements on so we think that is definitely upside as we improve the better over time. So I think that we've tried to be very conservative in terms of what we factored in there and we did not bake header bidding into our.

Guidance at all so that's pure upside if we're successful with that the other thing I would say on the new publisher supply that Adam talked about in winning new publishers. We're currently forecasting that this year will be our second best year for new publisher revenue in our history other than 2019.

Which was exceptional and most of you know the story there. So it is shaping up to be a very good year from a new publisher supply perspective.

Thanks, Jami operator next question.

Our next question comes from Andrew Boone with JMP Securities. Your line is open.

Good morning, and thanks for taking my questions I have.

Got guidance questions and then just an operational question. So I think Microsoft historically was around 20% of gross profit ex TAC you guys have highlighted the Europe is 30% of revenue can you just help us size. The two impacts as we think about guidance is how do we think about the difference between the two and then secondly, given softer demand can you remind us the.

The amount of contracts that are fixed CPM versus a percentage of revenue in other words, how should we think about softer demand rolling through the take rates and then lastly, and more operationally hopefully a little bit more fun, Adam you highlighted the.

The investment in performance advertising.

Whats missing right now from your Advertiser suite, what are you going to focus these new engineering resources on thanks, so much.

Alright, So let me start with the split between like the impacts of the different components here. So first of all I kind of said in my prepared remarks that foreign currency exchange rates is about one 5% drag on our growth.

So that is directly comes off of our forward looking guidance a majority of the rest of it was the European demand softness due to the war.

The launch of the bidder was a factor, but a smaller part of the overall reduction so without getting into specific numbers. That's how you can think about the three different components.

To your second question about guarantees.

So we in our Q1 filings I believe we said that the Q1 percentage of tax that was paid out under guarantees was 9%.

We expect that to be consistent with Q2. So just to give you a sense in April we paid out <unk> at 9% of our of.

Based on a 9% of our TAC was paid out under guarantees again, so we expect that to be relatively consistent maybe it trends up very slightly but we don't expect it to go up a lot. So that we don't see risk to our business from that perspective.

Yeah, Hey, Andrew.

And then Youre going to ask me in advertising questions. So I'm happy with that.

So let me just say.

As I think about the opportunity we have on the advertising side.

Google and Facebook were able to get to millions of advertisers.

Amazon Israel would just saw just a question of $30 billion in advertising, which is most of the performance as well.

A big amount of advertisers snap I believe it's a quarter million advertisers, we had 15 and I believe the rest of the company's advertising space of less than us and I'm talking about direct contracts not programmatic.

Lyons to work directly with that rely on your technology and your data that is the main thing I'm talking about so to me to be the first company.

As far as I understand it.

That is able to make a huge amount of advertisers successful and by successful I mean, they come to us they tell us what is there a goal whether thats an acquisition cost or whatever they're trying to reach they give us some creative to make create the creative for them. They may have them and we do the rest and we were able to drive the most amount of sales for them most likely.

Can rely on search and social.

With Google and Facebook that is what I want to we will have to be and as part of that we're doing a lot of interesting things in terms of the product roadmap, but also like I said investing in engineering and NII. So that we are very well position to be the first company that has ever done it now that will be a multiyear journey right.

But the upside here is.

Is unlimited I mean, because I think the yield effect as we continue to be successful and Thats one.

We'd be very impactful.

Thank you Sandra Thank you.

Question.

Our next question comes from Steven Rome, Roman with Oppenheimer. Your line is open.

Hey, it's Jason Hey, guys.

So I guess two questions and they're kind of related so I guess help us understand.

The theme right now obviously as everyone thinks we're going to a recession.

And more and more we're seeing companies.

Cut back on spending.

Youre choosing not to cut back so help us understand what you will gain by not cutting back and then the second is the market themes.

Question your business model, even prior to this current.

Concerned about macro that we are now some of that relates to what Laura talk to some of it is still just people are focused on some of the early days of the business where there was.

More click based as opposed to the content recommendation, which is the business today.

So I guess help us understand Europe meaningfully cash flow generating business.

Just talk to US how you plan to narrow the intrinsic value of the stock is worth versus.

How the market is valuing you within the towards the year control. So again, a two part question. What do you think youre getting out of making investments while others are cutting back and then two how do you ultimately get the market to reward you for the value you're creating thank you.

Great. Thanks, I'll start with the first question, which is spending what are we getting for by not cutting back. So as we talked about at our Investor day and as many of you probably know.

Disproportionate amount of the investment that we're doing in our business the growth of our operating expenses is going towards R&D. So what we are gaining from that is obviously new products new services things that we can bring in terms of value to our advertiser and publisher partners, So and frankly.

Pension into the growth areas outside of our core business.

So where that translates for us in terms of our business is in terms of growing our core business is growing yield by bringing on more advertisers.

Making them more successful.

Driving up our overall revenue to our individual publishers by growing that yield it's a new publisher tools for our publishers for instance will continue to invest in homepage for you, which has been very well received by publishers and it's something that we want to double down on and really.

Add value to our publisher partners with that and then in the growth areas.

I mentioned, a few minutes ago that.

<unk> news is the single fastest growing part of our business its triple digit percentage growth rates this year.

That's something that two years ago.

If we had not been investing like we have in R&D that wouldn't be a significant portion of our business. So that's the type of thing that we get by continuing to invest in our businesses growth in new areas that frankly, we wouldn't get without that investment and as we said, we think that great companies.

Invest through downturns, and that's what makes them unique and special and we're fortunate enough in our case that the fundamentals of our business are strong I mentioned, we planned we still expect to generate over $150 million of adjusted EBITDA and high tens of millions of dollars of free cash flow this year.

We're in a strong financial position, we think it would be a big mistake for us at this point in time in our kind of advantaged position generating positive cash flow to cut back now now is the time to invest.

Yes.

And about the second question.

It goes back to where you think the industry is going and what you think is the addressable market that we have and also the fact that we're a large scale the company already and we have.

Advantages as we continue so.

You unbundle that over time, I do think theres going to be a company that's over $10 billion in revenue in the open web side by sides of the walled gardens, but just which doesn't exist today right. So the open web does not have a big scale over $10 billion revenue company. So that advertisers can really rely on that channel.

Side by sides of search and social.

So that's something that I think is going to happen and the way it's going to happen in my belief is that it's going to be replacing traditional advertising formats that were invented when you and I watch Dvds with a feed of personalized recommendations like we see on the homepage of Amazon that is what our children will experience I do not think those seem more cubes.

Cubes.

1% of people click on.

That is very bullish on that future secondly, I think as you look into the people that we partner with publishers publishers need a very very good friend and we are the best friend you can get to empower the entire organization, it's more than just money editorial the total team gets newswoman hope it's for you they get commerce strategy.

<unk> subscription opportunities and Thats why youre seeing five to 10 year partnerships, which I believe no other company on the Internet has ever had.

I also think it's worth well positioned to become the open web is best friend, because we invest so much like Steve said and technology Thirdly, as you look into your mobile phones.

Automobile I don't think Youll see banners on your in your car, but I just think you'll see a field of recommendations in your car I don't think Youll see youll see a banner on your Samsung just think you'll see personalize recommendations from Samsung and I don't think Youll see banners on your TV, but I just think that TV will say you may like so as you look at other future.

<unk> spent with people, we are well positioned to be that engine that says.

Other people also liked.

About the stock I really care little about short term stocking dynamics, but the coupon because I can't control it and we're part of a world dynamic.

The dynamics that I can control, either but I can control the long term execution of this company and I still think that by 2025, we're close to $1 billion of ex Tac, which is very significant scale company in the open web.

Part of that like Steve said, we're growing we're profitably growing and we're producing high tens of millions of dollars of free cash flow in 2022, which is again is a tricky at least the beginning so to me when you add all those things up it's a good place to be.

Just let me quick follow ups, so to your point on like not being focused on the stock price short term understand youre, taking a long term view and clearly with the answer I mean is it a concern at all from employee retention do you have to you have employees, who are now looking at their compensation and saying I'm, making a lot less money because.

Whatever item.

Massively out of the money on my stock options or use.

Yes, so I can tell you first of all I know it when we became a public company. The first thing that happened is you have almost 2000 people that become traders and Thats a new thing, but it's also interesting for me.

Because we only are used to build and ship and dream and now we also have this reflection from the public market. So it's definitely a new thing and we're adjusting to it we don't speak about the stock can all hands have been all hands every two weeks I don't speak about it I answer questions. If someone asked but it's not the things that I focus on because again short term, we can control it people care.

Of course, it sucks, but at least I know, we're not alone. There are many great companies like <unk> that are also going through these dynamics and I can tell you with people.

And I've been doing this for a long time, what people care about the most when you think about where they wanted to be from a career perspective, they care, so much more than money and things of that nature.

They care about who is the manager how does their career you're going to be developed how will they be able to reinvent themselves over the next three to five years as an employee.

<unk> is an amazing place for people to be part of it's a great culture, we're very diversified with global and people care about that more than I think the stock price.

Thank you.

Thanks, Steve.

Operator, I think you have one last question.

Yes, our last question comes from Shyam Patel with Susquehanna. Your line is open.

Hey, guys. This is Jared on for Sean Thanks for taking the question.

Digging in on connectivity a little bit we saw that this represented about 15% ex Tac gross profits in the quarter roughly in line with <unk>.

How did this performed versus your own expectation are you pretty comfortable with that range of ex Tac gross profit in the near term.

And looking ahead, a little bit do you think that connectivity sensitivity to macro factors.

Pretty similar to that of the core business or is there anything to call out there.

So yes connect said thanks for the question Gerrick connectivity has performed basically in line with our expectations. So we're we're happy with where we're at I think Adam talked a little bit in his prepared remarks about some of the positive things that we're seeing in some of the positive trends that we that we.

We are seeing.

He also talked a bit about the fact that we that we still believe strongly that this is going to be core to the publisher revenue in the future. So we still think it's going to be a third of publisher revenues in the future. So we're still very bullish on it and in the short term, it's performing up to expectations.

And that by the way is despite the fact that there are some headwinds around E. Commerce in terms of supply chain challenges supply chain challenges and you saw Amazon had a.

Down year over year quarter for the first time and forever for them. So there's some headwinds, but we're happy with the performance it's roughly in line with our expectations and we feel good about where we're at and we're very bullish about the future.

Great. Thank you.

Now I'll hand, it back to Adam to wrap up.

Alright.

Thanks, everyone for joining us today I will look forward to spending time with them with all of you in our Investor base over the next few weeks.

So let me just start by saying that I'm very bullish about the <unk> growth the fundamentals of the business are very strong there were before.

This revision we had two one time events. There are now in the past and they are fully factored in our guidance Trust me, we did not want to do this again as I look into the rest of 2022 and the future of the Internet I'll say three things one we've replaced banners and we already pacing vendors with native personalized experiences like all of us doing Amazon homepage Twitter.

Our Instagram checkout, NBC sports and online ots, and others and you'll see exactly what I mean to E. Commerce will be a huge part of the internet and our business people need trusted publishers to make decisions about what to buy and they want to connect with direct to consumer brands as they do it three recommendation engines will be everywhere.

We see explosive growth here and we have amazing partners like Samsung and Xiaomi, where over time, we'll be in every TV Goodbye and every car you drive and I don't think traditional ads will make it like we will.

Our high gross margin I think it is a proxy that will not only just winning because they have something that everybody needs. It also shows our competitive advantage, we're getting over $150 million of adjusted EBITDA high tens of millions of dollars of free cash flow in 2022, and my team is energized like never before and that is the American rapper Fed Joe says.

And I will quote him from here, it's all the way up.

This concludes today's conference call. Thank you for participating you may now disconnect.

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Good day, and thank you for standing by and welcome to the.

First quarter 2020 earnings conference call at this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.

Please be advised that today's conference maybe recorded I would now like to hand, the conference over to your speaker today, Jennifer wisely.

Head of Investor Relations. Please go ahead.

Thank you good morning, everyone and welcome to <unk> first quarter 2022 earnings conference call I'm here with Adam <unk>, our founder and CEO and Steve Walker our CFO .

We issued our earnings press release yesterday aftermarket and it is available along with our Q1 shareholder letter in the investors section of our website.

During this call we will use terms defined in the earnings release and refer to non-GAAP financial measures.

For definitions and reconciliations to GAAP. Please refer to the non-GAAP tables in the earnings release posted on our website.

With that I'll turn the call over to Adam.

Thank you Jay and good morning, everyone and thank you all for joining us for our first quarter call Q1 was a strong quarter, we beat our targets delivering 31% ex tax gross profit growth over Q1 of last year by 8% and 4% on a pro forma basis. We also generated $35 million of adjusted EBITDA, Despite a very challenging macro environment.

Before I walk through the highlights from the quarter, though I want to address the revised guidance, we issued today in conjunction with our results. The revision was driven by basically two factors. The manufacturer is the economic uncertainty caused by the war in Ukraine, which increased in the second quarter in a bigger way affecting our advertising business in Europe more than 30% of our revenue and global yields.

As many of our advertisers in Europe , but all around the world in many ways. It's felt similar to what we signed a pandemic, but obviously in a smaller scale where business has slowed down their spending but in this case mainly in Europe .

Second factor is the launch of our bidder, which is now alive and after a good start but still behind plan now lets were alive and were seeing real data I'm, even more bullish and how much growth opportunity. There is here not only with Microsoft itself, but also on other platforms, which we do plan on integrating via header bidding in the short term.

Due to these two factors we are lowering our full year of 2022 guidance ranges and expect gross profit to 595 million to $616 million and adjusted EBITDA to $152 million to $162 million, Steve will speak more about our guidance in a few minutes as well.

Not happy about having to adjust guidance, especially after having a strong first quarter I can tell you our new guidance factors in both of these two one time events, we do not want to do this again the fundamentals of our business was strong were profitable generating cash we have technological advantages our team is passionate and energized and our intention is to keep meeting and beating.

Our clients partners and investors expectation as I look beyond those two events were profitable growing expect to generate significant cash flow in 2022 with this new guidance and overall the business is getting a lot of momentum in all the things. We love we won new deals extending relationships with important partners launch new products and made progress in.

Capturing more of the $6 billion to $4 billion open web advertising market. There are few things that I do want to highlight that I'm very excited about first I'm, taking a much bigger focus on growing our performance advertisers, achieving even greater scale and relevance aiming to achieve something that I believe only four companies have ever done Amazon, Google Snap and Facebook.

Making many many advertisers big and small successful with them rely on them grow with them, we're going big here and you should imagine smart beta to get even more attention and innovation as an example, our new guidance assumes that we will double our engineers in that area over the next one year and four X over the next two years that <unk>.

<unk> of course, our AI engineers as well.

On the other side of it and over time, we sit tabbouleh as it placed any performance advertisers can find positive ROI and succeed, especially as social networks will not be able to check consumers as they used to I believe in the open web in contextual advertising being a big part of the future and advertisers. The second thing I want to highlight is at our Investor day I spoke of.

A lot about our endless growth opportunity and momentum, we're getting in replacing traditional banners with personalized relevant recommendations you see most of the $64 billion of the open web advertising market is made out of out of banners. The same advertising formats invented 30 years ago. When times are good chain Dvds were invented kind of Gucci <unk>.

Obviously are gone now, but banners are still here and remain as you think about our Tam and our growth. We are liberating the open web from banners into relevant personalized experiences, bringing that power of the walled gardens into the open web at this stage there is endless room for growth on this journey of replacing batteries with Ebola Amazon moved away from <unk>.

Banners to paid recommendations on Twitter, if there are no banners, but paid posts on Instagram you don't see banners, but to see paid posts and on search pages. Obviously, there are no banners, but paid search result, the open web is the only place where banners remain and it was an event in 30 years ago. This is a market and we have advantages in capturing it in the first quarter we.

We continue to replace banners in the middle of the page on the homepage and other placements. Some examples include E online globes in Israel, seven West media in Australia and others.

Certainly I'm incredibly excited about our OEM partners scaling really fast we tabled our news this is becoming an increasingly meaningful part of our business is growing fast and it's scaling. It also relates to our vision to capture more time with consumers as we've talked about on our Investor day. There is an exciting momentum here, which I hope to be able to update.

You very soon.

More on the first quarter, we had very strong publisher pipeline and saw progress with new deals as well as renewals a lot of time with significant expansion and the size and length of the agreement to give you. Some examples Penske Media Corporation PMC, a leading independent global media publisher that Richard monthly audience of more than 310 million people.

With sites like variety Rolling stones, and other just move to tubular public.

Publisher's moves all over the world not just in the U S people in Italy translate Derrick International Forbes in Spain, and Australia, and Metropoles in Brazil, just to name a few I had a chance to personally talking to Ceos of some of these and in many cases. The reason they choose to go down is because they will generate more revenue and they get technologies that help them.

Run their business I told my board this week as I look into the market spent 14 years with publishers, we provide them technology that they want to beyond just the revenue when we empower the editorial team we help them drive growth and I believe in most markets, 70% of tubular is worth a 100% of our competitors, which explains not on your high win rates.

I also have a higher gross margin as a proxy for competitive advantage. It is very expensive to take a publisher from tomorrow.

Another example, one of our top five revenue publishers globally, just extending with us for five years associated press AP inside our Ltvs are also great names that have recently chosen to buhler as I mentioned earlier, you can say I'm very excited about the advertiser side of our business. We recently updated our advertiser base just.

Crossed the 15000, Mark and in Q1, we expanded our work with well known brands such as Heinz Canada Goose, Volvo Mitchell and noon die Chipotle Mris Progressive insurance and Honda among many many others in Q1, we also signed and renewed trade agreements with a number of agencies, including denser in the UK.

Only come in Germany, Tms AC digital probably cease enrichment partnership in Israel in Q1, 15% of our revenue were from brands and agencies and we expect this percentage to grow.

On mobile devices, CTV automobile and more.

You may have read the article and digitally recently speaking about the importance of personalized homepages. They referenced Washington, Post's, New York Times, and Tabouleh homepage for you product, which we've been speaking with you I'll Watch recently, we launched it in early January as part of newsroom, our editorial suite for writers and editors and idea. If you can imagine is to make every homepage.

On the Internet personalized driven by editorial team plus AI.

It is a winning offering it's wanted to just money and publishers are choosing us. Thanks to it. Some examples our Miami Herald Mcclatchy I just saw it this morning with a team. It's beautiful. Other examples include Ndtv independence, Sinacore associate us and others.

And their privacy front, which is one of our advantages, we just announced an expansion of <unk> Trust portfolio, where we work with brand safety leaders, including Ias doubled verify news guard tag and IV U K. We believe we are a leader in content review and safety and these partnerships are critical to demonstrating our commitment to a safe.

Privacy and protected web. This also supports our expanding of work with brands and agencies.

Sending <unk> advertising solution. We've spoken previously of the success, we're seeing out of China with multiple new advertisers signed on within the U S and new retail vertical sales team is in place trained and has begun pitching connectivity e-commerce all the time.

Lastly, leveraging tubular supply network for connectivity advertisers is taking off within the U S 54 in March and have already given consent to move forward with tubular pixel within Europe , a robust pipeline of over 200 clients has been built consistent of both new prospects and existing merchant.

Before I hand, it off to Steve 2022 started strong we had two one time events that we think are now in our past. We've included those things in our new guidance and we're executing strong and all the things that matter to our business with our core business growth with publishers and advertisers and going to recommend anything anywhere in the open web and now over to Steve who will dive in deep.

Prior to our financial performance and guidance.

Advertising business, which is more than 30% of our overall revenue.

The economic and political uncertainty caused by the war caused advertisers to cut back on their spend in Europe . This reduced global yield since many of our European advertisers target users in the U S and other countries.

We saw an initial dip when the war started but yields seem to recover in March before declining again towards the end of the month and in early April .

We have also seen a related effect impact our growth, which is a weakening of the euro against the U S. Dollar this translates into lower U S denominated revenue when we convert our euro revenues into dollars.

We estimate the foreign exchange rate impact on our growth in Q1 was one 5% and we will have a similar impact for the full year of 2022, we felt it was judicious to be cautious and therefore factored both the conservative outlook on yield for the balance of the year and the weaker euro into our forward looking guidance.

The second factor was the bidder that launched 100% on Microsoft on April one.

These two factors both of which we believe are one time events.

Now more specifically on our results as Adam shared we had a solid first quarter, we met or exceeded our Q1 guidance on all measures. Despite some macro headwinds as I just discussed.

<unk> percent on a constant currency basis.

And a 25% from 25, 2% ratio of adjusted EBITDA to ex Tac gross profit, which is what we often refer to as adjusted EBITDA margin.

As I mentioned last quarter Q1, 2022 is a challenging comparable because organic ex Tac gross profit grew 54% year over year in Q1, 2021, which was an exceptionally strong performance.

Capabilities to existing publishers, such as our high impact placements offering.

Business, our ex Tac net dollar retention for our publishers continues to be positive at 106% effort to bull on a standalone basis.

Looking at operating expenses, they were up $52 million year over year, which is consistent with expectations driven by multiple factors.

First growth in investment in our business second the inclusion of connectivity as well as higher depreciation and amortization from intangibles coming from the connectivity acquisition third costs related to being a public company fourth some additional costs due to the resumption of travel and opening of offices.

As the pandemic receded.

And fifth higher labor expenses, reflecting the inflationary environment and a tight job market.

Higher operating costs I just described.

GAAP net income of $3 $9 million included warrant liability revaluation benefit of $14 million share based compensation expense of $17 million and the intangibles amortization of $15 million all of which were excluded from non-GAAP net income of 21.

$9 million, which was above our guidance of $12 million to $14 million.

Shifting now to our expectations for the rest of 2022, we are updating our 2022 guidance as I mentioned and now expect revenues between $1 5 billion and $1.54 billion.

Gross profit between 485 and $505 million.

Ex Tac gross profit between 595 and $615 million adjusted EBITDA between 152, and $160 million and non-GAAP net income between 83 and $91 million.

Yes.

I would like to say the fundamentals of our business are strong looking beyond those two one time events that we've now adjusted for with our new guidance. We continue to be a company that is growing at a good rate that is profitable and that generates strong EBITDA and significant positive cash flow our five year compound.

We are bullish about our business and believe that over time tabbouleh is at 20% per year grower and 30% plus adjusted EBITDA margin business.

Because we believe the fundamentals are strong we do not plan on reducing the investment in our business at this time.

We believe that strong businesses benefit from continuing to invest through downturns and that these investments will position us strongly going into 2023 for growth acceleration.

With that let's open it up to questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from Stephen Ju with Credit Suisse. Your line is open.

Thank you so Adam can you give us a little more color on the better product.

That you called out as being behind plan.

What is it designed to do and.

What do you think is the reason for what sounds like a slower.

The pace of customer activity, though do you think so.

<unk> door and ROI problem or do you think this is an awareness problem.

Then.

And I guess in regards to the weakness you site in Europe did you overall activity just step down on the heels of the war and not really recover thereafter.

And does the guidance basically assume at this point Europe .

Back of the envelope math it seems like it's down about 25% versus where you guys had planned before in depth.

Persist for the balance of the year. Thanks.

Hi, Good morning, Stephan and good morning, everyone.

The bitter and Steve can take the financial part die in Europe . So.

As an update I'm happy to say, it's fully live now so.

We've developed over the last.

Year or so the bid or the team has done a really good job integrating that with Microsoft supporting us in designing that.

Other inventory beyond just Microsoft so header bidding and things of that nature. So overall, the bidder will become a nice growth opportunity for tubular.

Yes, and Stephen regarding Europe .

So I think what.

Way to think about what happened in Europe is that you can think of it almost as a small pandemic.

They reduce what their activity and also we end up earning less per click because the way to think about that is we've always talked about the fact that our yields are driven by three factors click through rates cost per click and conversions and basically they become worried that their consumers are not going to.

Buy as much from them so they reduced how much they are willing to pay per click to adjust for the fact that they're not going to make as much on it. So we see all those effects and then what happened.

With us is because our European advertising business, Scott softer it actually.

Impacted our global yields not just Europe , because basically the European advertisers in many cases are trying to reach you ask consumers in Asia Pacific consumers and others. So it actually impacted our global yields. So when you mentioned that Europe was down 25%.

It's really our global business gets impacted not just the European business and it affects our yields which is where it affects our full business.

So that's the way to think about kind of what happened there.

That's even moving forward perspective, and we think both the bitter end the case in Europe , our single one time events and the guidance we've revised.

Everything that we think has happened.

And from now it's only it's unaware I ask I just want to mention that we do are the fundamentals of our business are still strong. So we still expect to generate $150 million plus of adjusted EBITDA and we expect to generate significant positive cash flow to the tune of high tens of millions of dollars of cash flow this year.

As well right.

Thank you.

Thanks, Operator, we'll take the next question.

Our next question comes from Laura Martin with Needham Your line is open.

Good morning, I'll ask two let's do one at a time so that's.

Akshay desks open path I understand that you guys are supply path optimized because you have direct relationships with buyers and sellers.

Question is is it really trade desks open path essentially.

Doing your job in a way, but in the open internet, meaning if somebody if these journalistic companies like Washington post adopt to open path and he is really not going to charge for it is just going to do with it.

Yes, so first of all in good morning, Hi, So first of all it's important to remember that tabbouleh supplying tubular demand are both unique to us.

So if you think about if you go to ESPN or CNBC or BBC or anyone of our publisher partners, what we actually create that real estate. We create on those publishers does not look like anything that the trade desk is looking to achieve with open path right. So we serve two things both editorial recommendation as well as Pedro foundations you cannot replace.

That with any form of Justin a banner or single AD. So from a supply perspective, it's very unique it's very native.

That's from that perspective, the demand is also unique because most of it is performance advertising supplemented by about 15% of brands and agencies. So both of those dynamics make it quite unique and that's something that we believe is in the same addressable market is what the <unk> is looking to replace the second point I'll make is that over time.

I look into the next in 2022. The next the next 10 years in any case I suspect banners are at risk of being resolved because if you can imagine and I mentioned that in my letter, we're seeing really good momentum, replacing banners with this sort of carrier sell experiences that are have editorial and have paid and debate portion is either e-commerce to video or.

Native advertising and if you think from a publisher perspective any banner I have homepage middle of the page section front that anyone can potentially buy what I prefer to serve a banner or would I prefer to make the sentiment of many or more and then have half of it actually engaged users within the total content and to and Thats a very hard.

Competition. So we're seeing good momentum there and I mentioned online.

Sports <unk> and others and I think over time that has worked a way that will grow the most which is tens of billions of dollars of banners.

Place by basically displayed recommendations and editorial recommendations, let me just add one other thing in addition to the unique supply and unique demand that Adam mentioned, we also have unique data. So if you remember we've talked about it in the past, but what we have that the trade desk doesn't have is we know what people are reading about we know what they're interested in it.

<unk> form of data so I think that also.

Makes gives advertisers something different with US then they get from the trade desk, because it's a different way of targeting consumers with that highly contextually oriented data and that's where 9% of the revenue smart bid right.

Have you had issues hiring and have you been able to hire and ramp up your spending as quickly as you wanted given the tight labor market.

Yes, so it is tight for sure and I think especially when it comes to the Tech resources.

Very challenging environment. So far this year, we're a bit behind on our hiring plan, but April for instance was our best hiring months.

We've also taken an international strategy to expand our tech sort of hubs right. So we have Israel. Initially we have an office now in the latest part of the connectivity that is growing fast and then also in Taiwan, We're seeing a lot of good momentum. So in general. We're also looking to expand our international sort of tech hubs to be able to attract great talent.

We've been hearing that back to office, if you let people GE cintas easier to recruit what's your in office policy.

Well first of all I will say that we don't foresee any want to come back we give the local leaders sort of we now have the opportunity to decide what we have.

We're working turning to countries and it's very different I was just in Israel in Israel people are have their offices in Israel every day. So that's how it is that people are coming to the office and other regions much less.

In China people are at home.

It's very regional so we want to empower our led us to decide personally I can tell you my opinion is that being in the office sustained the people we hired north of 400 people last year. So you can imagine seen then interacting with them showing empathy to each other.

As such a boost in culture and eventually execution. So I think it is important to see each other.

Over time companies that will be too aggressive on being remotely you will suffer from an execution execution gaps so.

So I'll try and in person, but but that will take time.

I come to the office.

Thanks, Laura.

Question.

Thank you. Our next question comes from James Kopelman with Cowen Your line is open.

Good morning, as you look across industry verticals can you talk about where you saw advertisers strength during the quarter in which verticals have held up the best into April and May versus which verticals saw the most impact on the macro and other factors that you cited any color around the conversations youre, having with advertisers would be helpful and secondly in terms of your <unk>.

Forward Guide you mentioned, taking a conservative approach what do you view as the two or three biggest factors that could drive upside over the quarter and through the remainder of the year, how much of a potential upside could come from macro or broader digital market improvement versus execution on your growth initiatives, including connectivity or new features like smart bed.

Yes.

Thanks James.

So I'll address the verticals first of all so I think.

First of all we've seen the most impact geographically rather than on certain verticals.

As we talked about Europe has been weak.

Pretty it's been impacted pretty evenly across the board. The one thing I would say is that it definitely has impacted brands in <unk>.

Agencies more than performance advertisers. So for instance in Europe .

Talking to our VP of EMEA yesterday, and he was telling me that they have had almost every single brand in Europe said. Please don't show me on any pages about the war so they've cut back significantly on what they want to be shown on they've cut spend reduced targets, whereas he said.

Not a single performance Advertiser has had that same conversation with them about not being on war pages. So just to give you a sense, it's definitely more brands and agencies. We are also seeing.

A bit of softness in e-commerce, mostly due to supply chain issues.

Yes, I can take the second one so not assuming.

Like we said the guidance assumes that those two onetime events or in the past and from here with execution. We believe we can meet and beat People's expectations. So so just to share a few execution opportunities for us that are within our control. One rate is very strong publisher pipeline you've seen the recent success with with PMC and others.

People choose tabbouleh, thanks to our technology and revenue advantages that we have in the market, but also our wins are becoming greater impact to our business because we're not just winning bottom a vertical where we traditionally operated we're also winning better real estate. So we have a bigger vertical growth with those publishers that remaining I spoke about banners moving to <unk>.

I also mentioned that performance advertisers were taken and have a huge ambition in a dream here to really become what I believe is the <unk> company in the history of that and that was very unique and performance advertising success outside of Amazon Google.

At snap so I think in Facebook. So I think we have a huge opportunity in performance advertising and I mentioned the investments, we're making on AI and engineering. So that's just on the publisher advertising front. The core Timberland news has is it basically experiencing explosive growth is a three digit growth for us.

We're seeing great momentum, we've seen there on Investor day, Samsung on states speaking about it hopefully will be able to share more soon publicly but I'm very excited about the financial impact it's making any this is a it's our fastest growing basically part of our business. The bidder debaters live there is no more.

Together with them and the second thing is outside of Microsoft We see a lot of header bidding opportunity, where we have advantage because like Steve said, we have a lot of advertisers we have a unique data and now with the better technology. We believe we can become a significant better so thats number less the third one and Thats why as ecommerce personally I just bought two of <unk> and <unk>.

<unk> and the metrics to my daughter, I did all of that on review Dot Com, New York times drives color and others because they have no idea, what's a good trampoline and I believe this experience that everyone. On this call knows exactly what I mean, we'll be a big part of the future, we all need trusted sources to.

To be able to make decisions.

Thats about Dubai, and I think that will be.

A huge driver for us starting now but also into the future. So I would say four things strong publisher advertiser pipeline to prevent news explosive growth bids are going up and up and e-commerce to add synergies.

Let me just add two things on the from a numbers perspective on those four four upsides that Adam talked about so first of all on the bidder. He mentioned that we that there is an opportunity to improve the bitter and also to take it to header bidding on other publisher sites just to be clear in our current guidance we factored in.

Current bidder performance, which we already are seeing improvements on so we think that is definitely upside as we improve the bitter overtime. So I think that we've tried to be very conservative in terms of what we factored in there and we did not bake header bidding into our guidance.

<unk> it all so that's pure upside if we're successful with that the other thing I would say on the new publisher supply that Adam talked about in winning new publishers. We're currently forecasting that this year will be our second best year for new publisher revenue in our history other than 2019.

Which was exceptional and most of you know the story there. So it is shaping up to be a very good year from a new publisher supply perspective.

Thanks, Jami operator next question.

Our next question comes from Andrew Boone with JMP Securities. Your line is open.

Good morning, and thanks for taking my questions.

Got guidance questions and then just an operational question. So I think Microsoft historically was around 20% of gross profit ex TAC you guys had highlighted Europe is 30% of revenue can you just help us size. The two impacts as we think about guidance how do we think about the difference between the two and then secondly, given softer demand can you remind us the amount of cars.

Tracks that are fixed CPM versus a percentage of revenue in other words, how should we think about softer demand rolling through the take rates and then lastly, and more operationally hopefully a little bit more fun, Adam you highlighted the.

The investment in performance advertising.

Whats missing right now from your Advertiser suite, what are you going to focus these new engineering resources on thanks, so much.

Alright, So let me start with the split between like the impacts of the different components here. So first of all.

Said in my prepared remarks that foreign currency exchange rates is about one 5% drag on our growth.

So that is directly it comes off of our forward looking guidance.

A majority of the rest of it was the European demand softness due to the war.

The launch of the bidder was a factor, but a smaller part of the overall reduction so without getting into specific numbers. That's how you can think about the three different components.

To your second question about guarantees.

So we in our Q1 filings I believe we said that the Q1 percentage of tax that was paid out under guarantees was 9%.

We expect that to be consistent with Q2. So just to give you a sense in April we paid out tack at 9% of our of.

Yeah, Hey, Andrew.

And then Youre going to ask me and advocacy questions. So I'm happy you did.

So let me just say.

As I think about the opportunity we have on the advertising side.

Google and Facebook are able to get to millions of advertisers Amazon Israel. We just saw just a question of $30 billion in advertising, which is most of the performance as well.

A big amount of advertisers snap I believe it's a quarter million advertisers, we had 15 and I believe the rest of the companies in the advertising space of less than us and I'm talking about direct contracts not programmatic people clients, who work directly with that rely on your technology and your newer data that is the main thing I'm talking about so to me.

<unk> to be the first company.

As far as I understand it.

That was it that is able to make a huge amount of advertisers successful and by successful I mean, they come to us they tell us what is there a goal whether that's an acquisition costs or whatever they're trying to reach they give us some creative to make create the creative for them. They may have them and we do the rest and we were able to drive the most amount of sales for them must shortly.

Can rely on search and social.

With Google and Facebook that is what I want to build it to be and as part of that we're doing a lot of interesting things in terms of the product roadmap, but also like I said investing in engineering and NII. So that we are very well position to be the first company that has ever done it now that will be a multiyear journey right.

But the upside here is <unk>.

Limited I mean, because I think the yield effect as we continue to be successful and Thats one.

We'll be very impactful.

Thank you Sandra Thank you.

Yes.

Our next question comes from Steven Rome, Roman with Oppenheimer. Your line is open.

Hey, it's Jason Hey, guys. So.

I guess two questions and they're kind of related so I guess help us understand.

The theme right now obviously as everyone thinks we're going into a recession and more and more we're seeing companies.

Cut back on spending.

Youre choosing not to cut back so help us understand what you will gain.

Cutting back and then the second is the market teams.

Kind of question your business model, even prior to this current.

Concerned about macro that we are now some of that relates to what Laura talk to some of it is still just people are focused on some of the early days of the business where there was.

More click bait as opposed to the content recommendation, which is the business today.

So I guess help us understand Europe meaningfully cash flow generating business.

<unk>.

Just talk to US how you plan to narrow the intrinsic value of what the stock is worth versus.

We know how the market is valuing you within the towards the year control. So again, a two part question. What do you think youre getting out of making investments while others are cutting back and then two how do you ultimately get the market to reward you for the value you're creating thank you.

Great. Thanks, I'll start with the first question, which is spending what are we getting for by not cutting back so.

As we talked about at our Investor day, and as many of you probably know.

And frankly expansion into the growth areas outside of our core business.

So where that translates for us in terms of our business is in terms of growing our core business, it's growing yield by bringing on more advertisers make.

Making them more successful.

Driving up our overall revenue to our individual publishers by growing that yield its new publisher tools for our publishers for instance, we will continue to invest in homepage for you, which has been very well received by publishers and it's something that we want to double down on and really.

Add value to our publisher partners with that and then in the growth areas.

I mentioned, a few minutes ago that.

<unk> news is the single fastest growing part of our business its triple digit percentage growth rates this year.

That's something that two years ago.

Invest through downturns and Thats, what makes them unique and special and we're fortunate enough in our case that the fundamentals of our business are strong I mentioned, we planned we still expect to generate over $150 million of adjusted EBITDA and high tens of millions of dollars of free cash flow this year.

Yes.

And about the second question.

It goes back to where you think the industry is going and what you think is the addressable market that we have and also the fact that we're a large scale the company already and we have.

Advantages as we continue so if you unbundle that over time.

There's going to be a company that's over $10 billion in revenue in the open web side by sides of the walled gardens, but just which doesn't exist today right. So the open web does not have a big scale over $10 billion revenue company. So that advertisers can really rely on that channel.

Side by side to search and social.

So that's something that I think is going to happen and the way. It is going to happen in my belief is that it's going to be replacing traditional advertising formats that were invented when you and I watch Dvds with a feed of personalized recommendations like we see on the homepage of Amazon that is what our children will experience I do not think those seem more.

Cubes.

1% of people click on so that is very bullish on that future. Secondly, I think as you look into the people that we partner with publishers publishers need a very very good friend and we are the best friend you can get to empower the entire organization, it's more than just money the editorial in the toilet.

Jim Getz newsroom and hope it's for you they get commerce strategy subscription opportunities and Thats why youre seeing five to 10 year partnerships, which I believe no. Other company on the Internet has ever had so I also think it's worth well positioned to become the open web is best friend, because we invest so much like Steve said and technology certainly as you look into your <unk>.

Phones PV automobile I don't think Youll see banners on your in your car, but I just think you'll see a feat of recommendations in your car I don't think Youll see youll see a banner on your Samsung just think you'll see personalize recommendations from Samsung and I don't think Youll see banners on your TV, but I just think <unk> will say you may like so as you look at.

Other future time spent with people, we are well positioned to be that engine that says.

Other people are also liked so and about the stock I really care little about short term stocking dynamics, but the coupon because I can't control it and we're part of awards.

Dynamics that I can't control, either but I can't control the long strong execution of this company and I still think Thats by 2025, we will cross the $1 billion of ex Tac, which is very significant scale company in the open web and as part of that like Steve said, we're growing we're profitably growing and we're producing high tens of millions of dollars of free cash flow in 2000.

'twenty, two which is again is a tricky at least the beginning so to me when you add all those things up it's a good place to be.

However.

Massively out of the money on my stock options or issues.

Because we only are used to build and ship and dream and now we also have this reflection from the public market. So it's definitely a new thing and we're adjusting to it we don't speak about the star can all hands have been all hands every two weeks I don't speak about it I answer questions. If someone asked but it is not the things that I focus on because again short term, we can control it people care.

Of course, it sucks, but at least we're not alone there are many great companies like <unk> that are also going through these dynamics and I can tell you with people.

And I've been doing this for a long time, what people care about the most when you think about where they want to be from a Korea perspective, they care, so much more than money and things of that nature.

They care about who is their manager how does their career you're going to be developed how will they be able to reinvent themselves over the next three to five years as an employee.

<unk> is an amazing place for people to be part of it's a great culture, we're very diversified we're global and people care about that more than I think the stock price.

Thank you.

Thanks, Dave.

Later, I think we have one last question.

Yes, our last question comes from Shyam Patel with Susquehanna. Your line is open.

Hey, guys. This is Jared on for Sean Thanks for taking the question.

Digging in on connectivity a little bit we saw that this represented about 15% ex Tac gross profits in the quarter roughly in line with <unk>.

How did that perform versus your own expectation are you pretty comfortable with that range of ex Tac gross profit in the near term.

Looking ahead, a little bit do you think that connectivity sensitivity to macro factors.

Similar to that of the core business or is there anything to call out there.

So yes connect thanks for the question Gerrick connectivity has performed basically in line with our expectations. So we're.

We're happy with where we're at I think Adam talked a little bit in his prepared remarks about some of the positive things that we're seeing in some of the positive trends that we that we are seeing.

And that by the way is despite the fact that there are some headwinds around E. Commerce in terms of supply chain challenges supply chain challenges and you saw Amazon had a.

Great. Thank you.

Now I'll hand, it back to Adam to wrap up.

Alright.

Thanks, everyone for joining us today I will look forward to spending time with them with all of you in our Investor base over the next few weeks.

So let me just start by saying that I'm very bullish about the rollout growth the fundamentals of the business are very strong there were before.

This revision we had two one time events. There are now in the past and they are fully factored in our guidance Trust me, we do not want to do this again as I look into the rest of 2022 and the future of the Internet I'll say three things one we've replaced banners and we are replacing vendors with native personalized experiences like all of US here on Amazon homepage Twitter.

Instagram checkout, NBC sports and online ots, and others and you'll see exactly what I mean to E. Commerce will be a huge part of the internet and our business people need trusted publishers to make decisions about what to buy and they want to connect with direct to consumer brands as they do it three recommendation engines will be everywhere.

We see explosive growth here and we have amazing partners like Samsung or Xiaomi, where over time, we'll be in every TV Goodbye and every car you drive and I don't think the traditional ads will make it like we will our growth our high gross margin I think is a proxy that will not only just winning because they have something that everybody needs. It also shows our competitive advantage.

We're getting over $150 million of adjusted EBITDA high tens of millions of dollars of free cash flow in 2022, and my team is energized like never before.

We can wrap a fed Joe says I'll quote him from here, it's all the way up.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q1 2022 Taboola.com Ltd Earnings Call

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