Innovid Corp. (NYSE:CTV) Q3 2023 Earnings Call Transcript

Innovid Corp. (NYSE:CTV) Q3 2023 Earnings Call Transcript November 10, 2023

Innovid Corp. reports earnings inline with expectations. Reported EPS is $-0.01 EPS, expectations were $-0.01.

Operator: Greetings, and welcome to Innovid Q3 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brinlea Johnson. Thank you, Ms. Johnson, you may begin.

Brinlea Johnson: Thank you, operator. Before we begin, I remind you that today’s call may contain forward-looking statements and that the forward-looking statement disclaimer included in our today’s earnings release available on our Investor Relations page also pertains to this call. These forward-looking statements may include without limitation, predictions, expectations, targets or estimates regarding our anticipated financial performance, business plans and objectives, future events and developments. Changes in our business, competitive landscape, technological or regulatory environment and other factors could cause actual results to differ materially from those expressed by the forward-looking statements made today. Our historical results are not necessarily indicative of future performance.

And as such, we can give no assurance as to the accuracy of our forward-looking statements and assume no obligation to update them, except as required by law. In addition, today’s call will include non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin and free cash flow. We use these non-GAAP measures in managing the business and believe they provide useful information for our investors. These measures should be considered in addition to and not as a substitute for our GAAP results. Reconciliations of the non-GAAP measures to their corresponding GAAP measures, where appropriate, can be found in the earnings release available on our website and in our filings with the SEC. Hosting today’s call are Zvika Netter, Innovid’s Co-Founder and CEO; as well as Anthony Callini, Innovid’s CFO, both of whom will participate in our Q&A Session.

And now I’ll turn the call over to Zvika to begin. Zvika, go ahead.

Zvika Netter: Thanks, Brinlea. And thank you all for joining the call today. Before I begin, I would like to thank our teams around the world for their hard work. We reported an excellent quarter and are on track to close out a great year. As many of you know, one of our development teams is located in Israel and I would like to give a special thanks to them for continuing to deliver on track, despite the heartbreaking situation in the region. I will start our call with our third quarter results and provide some recent business updates and highlights. I will then turn it over to our newly appointed Chief Financial Officer, Anthony Callini, who will provide further details on our Q3 performance and share updated guidance, followed by Q&A.

I am pleased to report we delivered a strong third quarter, exceeding our prior guidance for both revenue and adjusted EBITDA. We are well positioned for continued execution in the fourth quarter to deliver a solid full year 2023. As a result, we are raising our full year revenue and adjusted EBITDA guidance and now expect adjusted EBITDA margins of at least 12% compared to 10% prior. This is the third consecutive quarter of outperforming our guidance, and I am proud of the team’s ability to execute as we continue to improve financial metrics on all fronts. We remain committed to expanding our margins and positioning ourselves for accelerated growth as the macro environment improves. Looking at the quarter, our Q3 revenue grew 5% year-over-year, and importantly, we more than doubled our adjusted EBITDA to $6.5 million, compared to last Q3.

This follows a strong Q2 in which our adjusted EBITDA margin grew from negative 5% in Q2 of 2022 to 13% last quarter. Additionally, as our operational profitability increased, we generated $4.1 million in positive free cash flow this quarter. Our improving bottom line results over the last few quarters demonstrate that our products are profitable at their core. We have a business model where we generate margin expansion even as we continue to invest in exciting new and innovative technologies. We have a strong competitive moat and are capitalizing on our inevitable transformation of the market as more and more viewers watch television through CTV. We continue to see more streaming platforms implementing ad-supported offerings. Recently, Amazon Prime Video announced it will join the overall ad-supported CTV trend and will introduce ads into Prime Video next year.

This creates huge value for the industry, our partners and Innovid. There has also been a rapid shift in TV viewership. This quarter it was widely reported that linear TV viewership fell below 50% in the U.S. for the first time, which is a major milestone. Even in a world where ad budgets continue to be impacted by the macro environment, we expect that advertising dollars will meaningfully shift to align with iBalls and time spent on CTV platforms. Innovid’s CTV revenue from ad-serving and personalization grew 9% over last year, outpacing our overall revenue growth. We believe the inertia behind the trend will continue to accelerate, position us to benefit once ad budgets normalize and we can capitalize on this massive opportunity as more impressions transition to CTV.

Another growth driver, InnovidXP, our measurement offering, grew 8% as compared to last year, representing 23% of total revenue in the third quarter. We are pleased with the ramp-up in measurement as we continue to cross-sell and extend usage. Growth this quarter was also fueled by significant new customer wins, including Revlon, Fanatics, Bausch Health, and OnRunning. In addition, existing large publisher partners such as NBCUniversal have expanded their commitment for usage of our measurement solutions to help prove the value of their inventory. Turning to our platform, we continue to invest in new functionality to power the future of TV and how brands can reach consumers in new and powerful ways using the latest breakthroughs in AI technologies.

Innovid is a data-rich business that generates an unparalleled CTV data set. This data set is the optimal foundation for sophisticated AI tools that can deliver exceptional value to our clients. I am excited to announce that we have implemented leading generative AI engines into our platform. Using these AI engines, our clients will be able to generate images, videos, voice over and ad copy based on the first and third-party data feeds. Those never seen before unique creative ads are then streamed, measured and optimized by Innovid platform based on customer set strategies. We have also implemented a natural language query engine into our platform that will allow our clients to gain valuable information and insights about the CTV campaigns via a conversation like interface.

Now, I would like to share with you a few words regarding our 2024 product strategy. Innovid’s ability to apply AI algorithms to our ad server data uniquely positions us to optimize CTV ad investments. In October, we launched Instant Optimization, a machine learning solution that empowers converged TV advertisers to immediately improve ad performance. Our Instant Optimization solution goes beyond management by intelligently selecting the most impactful, creative to serve at the delivery time. We see considerable opportunity to optimize the CTV market to drive outcomes for lower investments using our proprietary data and technology. We are excited about the momentum we’ve seen over the last few quarters with increasing revenues, expanding adjusted EBITDA margins and improved positive free cash flow.

We continue to roll out the valuable product enhancements, sign new clients and expand our existing partnerships. Although, the market has not fully rebounded and we are experiencing different spend levels across our verticals, we are encouraged by the continued shift in viewership from linear to CTV and believe we are well positioned for growth. Once the market normalizes, we expect higher future growth rates and higher profitability margins. As we’ve demonstrated over the last few quarters, we remain committed to operational execution and expanding margins. We plan to share more about our excitement around 2024, including our product innovation and pipeline in which CTV performance optimization is the main theme at our upcoming Investor Day on November 30 in New York City.

Before I turn the call over to Anthony Callini, our new Chief Financial Officer, I want to thank Tanya for all her contributions to Innovid over the last 11 years. Tanya has been a key pillar in our success to date and has built a strong finance team during her tenure. Tanya, I wish you all the best in your future endeavors. I am excited to welcome Tony to his first Innovid earnings call as our new Chief Financial Officer. Tony has over 20 years of financial experience at leading private and public technology companies. He possesses deep experience in helping growth companies scale in a sustainable way and bring extensive SaaS and enterprise software experience to our team. Tony, welcome to Innovid.

Anthony Callini: Thank you for the warm welcome Zvika and good morning everyone. I’m incredibly excited to join Innovid and be part of this experienced and passionate team. It’s only been a few weeks, but the opportunity here is clearly apparent to me. The combination of a growing business, strong secular trends in CTV migration, a leading platform, world class customers and a leverageable operating model are all powerful attributes that contribute to creating sustainable long-term value. As you just heard from Zvika, our dedication to driving profitable growth is once again evident in our results. We beat the top end of the revenue guidance range by 3.5% and delivered an adjusted EBITDA margin of 18%, the second straight quarter of EBITDA expansion.

Now let me dig a little more into the numbers. Q3 revenue grew 5% year-over-year to $36.2 million. If we break that down further, ad serving and personalization revenues were up 4% year-over-year, reflecting the continued pressure on ad spend in the broader markets. As a reminder, Innovid’s ad serving and personalization revenue closely correlates with ad impression volume served through our platform. Within this category, CTV revenue, which comes from ad serving and personalization, increased 9% as more impressions continued to transition to connected TV. Measurement revenue grew 8% as compared to last Q3 as we continued to build out our products to take full advantage of the valuable data set generated from the ad serving side of the business.

As a percentage of revenue in Q3, ad serving and personalization made up 77%, while measurement accounted for 23%. A few more comments on the CTV activity this quarter. Q3 CTV revenue excluding measurement grew 9% over last year and CTV video impression volume grew 7%. Additionally, we reached another high point this quarter with 55% of all video impressions coming in via CTV. Mobile volume grew by 8% and represented 35% of all video impressions, while desktop volume decreased by 12% and reflected 10% of all video impressions. Both mobile and desktop have been inconsistent in the first three quarters of 2023, while CTV has continued gaining share of total video impressions and demonstrated constant growth even against the backdrop of the uncertainty in the market.

Revenue less cost of revenue calculated out to 77% of revenue, improving from 75% in Q3 last year. As the business scales, our margins continue to improve, reflecting the operating leverage embedded in our business model. Now, moving on to expenses. We’re pleased to report that we are continuing to see the impact of efficiency efforts and the integration of the TV Squared acquisition. As Q3 total operating expenses, excluding depreciation, amortization and impairment totaled $35.8 million, a decrease of 7% from $38.6 million last year. Employee count at quarter end was 460, a 14% decrease compared to the previous year, and resulted in a 16% reduction in compensation expenses excluding stock-based comp. We remain committed to managing our cost base, while protecting investments in high growth areas to drive improved profitability and long-term value creation for our shareholders.

Q3 net loss was $2.7 million or a per share loss of $0.02. The outstanding common share count at the end of the quarter was 140.1 million shares. Adjusted EBITDA was $6.5 million, representing an 18% adjusted EBITDA margin as compared to just 8% in Q3 last year and 13% in Q2. This improvement reflects the impact of our modest revenue growth, lower cost of revenues as a percentage of revenue and lower operating costs. We ended Q3 in a strong financial position with $47.7 million in cash and cash equivalents and $20 million drawn on our revolving debt facility, with an additional $30 million available on that line. And during the quarter we generated $4.1 million in positive free cash flow, an improvement of 78% from $2.3 million in Q3 2022. Finally, let me touch on our outlook for the fourth quarter and the full year 2023.

We are confident in the underlying strength of our business and anticipate continued strong financial performance given recent trends over the last few quarters as well as early returns thus far in Q4. We expect Q4 total revenue in a range of $35 million to $37 million, representing 4% to 10% year-over-year growth. We expect Q4 adjusted EBITDA in a range of $5.5 million to $7.5 million as compared to $2.9 million in the fourth quarter last year. For the full year, we expect revenue of $136 million to $138 million, reflecting 7% to 9% annual growth and EBITDA between $16.6 million and $18.6 million, reflecting an adjusted EBITDA margin of at least 12%. In conclusion, we are proud of the team’s work and encouraged by our third quarter results and the momentum we are seeing in the business, even in light of the broader uncertainty across the ad market.

We believe we are well positioned to become the essential technology infrastructure for the future of TV advertising and to experience outsized growth as ad spend returns to more historic levels. We remain committed to innovation and value creation for our customers and shareholders. This concludes our prepared remarks. Zvika and I are now happy to take some questions. Operator, please begin the Q&A Session.

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question comes from the line of Andrew Boone with JMP Securities. Please go ahead.

Unidentified Analyst: Thank you guys for taking my question. This is Matt on for Andrew. My first one is just on Instant Optimization. Can you just tell us or frame the opportunity for us? And then also just bring it back to the model and how can we expect it to influence results and when? And then Tony, welcome aboard. And I just wanted to get your thoughts here on your philosophy between growth and profitability and what we should expect heading into 2024 here? Thank you.

Zvika Netter: Thanks, Matt. Yes. So you definitely picked on an important topic for us that we worked a lot on this year, but even so will be a major theme for 2024 and that’s pushing forward on optimization. And in a way closing a flywheel, if you zoom out, you see that we have the ad server at the core, the key delivery engine that generates massive amount of data. The input into it is creative and campaign strategy. The output is the data. But then post the acquisition and the release of InnovidXP measurement and outcome solution, now we can see the results. So the next step, which is the big major step is connecting all these three platforms together, which was done this year to allow to understand, based on the output, based on the outcome, right, and all the data that we have that is very unique to us, I think kind of unprecedented outside of the Google universe.

The data set that we have is to impact then the campaign strategy, basically to close the loop and that’s where optimization and the heart of it, the AI models that can constantly do that. And the release of Instant Optimization is not just, here’s some recommendation, but actually to be able to affect the creative, the messaging, and the campaign strategy in real time. And this is just the initial release. We’re definitely looking forward to meet investors and analysts at the end of this month. In our Investor Day, we’re going to actually demo live some of these technologies, including some live AI demos, so it will give a better sense. So in terms of opportunity, we think there’s a massive opportunity to generate value for our customers and partners.

We’re not talking yet about next year, but this is definitely a path to additional revenue generation, the way we see it, and hence the significant investment.

Anthony Callini: Thanks, Zvika. Matt, how are you? Yes, so here’s how I think about the balance between growth and profitability. And I’ll tell you, that’s really one of the main reasons why this was such an attractive opportunity for me is the company’s done a lot of work over the last year or so to expand margins and at the same time represent some growth even in a market that’s been challenging just due to some of the macro trends. So my personal belief is really the best way to create value for shareholders and really all stakeholders is through sustainable, long-term profitable growth. And I think we’ve done the hard work to really set ourselves up for that and it’s nice to see that coming through in the numbers over the last couple of quarters.

And even as we look to Q4 and some of the guidance that we gave there, kind of expanding margins, showing higher growth there. So I think as we think forward, we’re very mindful of balancing those two things. I do think there’s the opportunity for some breakout growth as the market turns around because of our position in the CTV space. But driving profitability, expanding margins is kind of key to developing that long-term value for shareholders. So that’s kind of my personal thoughts and just views on the company in general and what I’ve seen here just over a relatively short time.

Unidentified Analyst: Great. Thank you.

Operator: Thank you. Next question comes from the line of Shyam Patil, Susquehanna. Please go ahead.