Outbrain Inc. (NASDAQ:OB) Q1 2024 Earnings Call Transcript

Outbrain Inc. (NASDAQ:OB) Q1 2024 Earnings Call Transcript May 10, 2024

Outbrain Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to Outbrain Incorporated First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I’d like to turn the call over to Outbrain’s Investor Relations. Please go ahead.

Unidentified Company Representative: Good morning and thank you for joining us on today’s conference call to discuss Outbrain’s first quarter 2024 results. Joining me on the call today, we have Outbrain’s CEO, David Kostman, and CFO, Jason Kiviat. During this conference call, management will make forward-looking statements based on current expectations and assumptions. These statements are subject to risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. These risk factors are discussed in detail in our Form 10-K, filed for the year-ended, December 31, 2023, and updated in our subsequent reports, filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the call’s original date, and we do not undertake any duties to update any such statements.

Today’s presentation also includes references to non-GAAP financial measures. We should refer to the information contained in the company’s First Quarter earnings release, for definitional information and reconciliations of non-GAAP measures to the comparable GAAP financial measures. Our earnings release can be found on our IR website, investors.outbrain.com, under news and events. With that, let me turn the call over to David.

David Kostman: Thank you, Lynn [ph]. Good morning, everyone, and thank you for joining us today for our First Quarter 2024 earnings call. I’m pleased to share with you our progress and achievements over the past quarter, as well as our strategic direction moving forward. On the financial front, I’m pleased that we delivered an extra gross profit of $52.2 million towards the high end of our guidance, and that we exceeded our adjusted EBITDA guidance reporting $1.4 million. We generated a positive free cash flow of $4.6 million. Strategically, Outbrain is on at journey to become one of the largest gateways to the open internet for advertisers. We believe we are uniquely positioned on the open internet to offer a cross funnel platform that enables advertisers to build their brands, drive consideration, and deliver conversions.

The open internet is estimated to be a $100 billion advertising opportunity, providing advertisers with access to incremental audiences across highly relevant, professionally produced editorial contents. As we look to the future, we believe the industry’s focus on consumer privacy, premium quality, transparency, and outcomes aligns favorably with our strengths. Now more than ever, we are seeing all buyer types, from brands to performance, focus on measurable outcomes. We believe that we possess a competitive edge in driving these outcomes from relevant audiences. Despite Google’s announcement to further delay third-party cookie deprecation on Chrome, we believe advertisers remain focused on finding more advanced solutions to drive brand outcomes from relevant audiences.

Our foundational code-on-page and engagement data signals continue to enable us to leverage our proprietary data and AI to innovate these solutions for advertisers. Next, I want to provide a quick update on how we’re progressing on our gross drivers for 2024. As you may recall from our last call, these revolve around three key pillars. Our first pillar focuses on expanding our share of wallet with advertisers, brand and agencies, and performance advertisers. First our business with brand agencies. In Q1, overall direct spend from our brand and agency clients was over $100 million globally. This number represents spend from direct advertisers of all sizes, from mid-market to enterprise brands, and independent agencies to holding companies. We are seeing good progress with Onyx, our brand-building offering focused on enterprise clients with revenues in Q1 exceeding $7 million.

We launched Onyx in the Japanese market in Q1, which we believe represents a strong agency growth opportunity, and plan to make Onyx available in additional markets in Q2. Speaking of Onyx, I’m excited to share the success story of one of our most recent enterprise clients, Leica. Leica chose to partner with Onyx for the launch of their new home cinema. Leica leveraged the Onyx brand studio to create a custom high-impact format that enabled audiences to experience the immersive moments of the Leica home cinema. Onyx enabled Leica to outperform attention benchmarks by 65% and sparked 550,000 audience interactions. This case study exemplifies Onyx’s ability to deliver beautiful brand experiences that deliver measurable outcomes. In addition, we announced Onyx’s partnership with Scope3, enabling us to launch Onyx Green in early April.

Onyx Green provides buyers with access to curated deals that reduce carbon emissions by up to 30% compared to open exchange video and display. As we said in the past, we have focused and will continue to invest in this flywheel of demand and supply. Premium global publishers like the ones on the Outbrain platform are looking for better quality advertising and brand advertisers are attracted to our premium publisher base for the cross-final objectives. The second pillar, growing our show wallet is from advertisers across our core performance offerings. We are invested in and have been growth of large-scale advertisers on our performance DSPs Zemanta. As part of those efforts, we saw increased total spend through Zemanta by approximately 40% in Q1 2024 compared to Q1 of last year.

We look forward to leveraging our DSPs as a strategic enabler for savvy clients to drive strong performance across the open internet. In addition, our ad manager Amplify remains our core offering for advertisers of all sizes to drive scalable performance. Our focus has been on enabling greater automation of workloads and building strategies through AI. Growth in adoption of our AI creative tools nearly doubled from Q4, 2023 to Q1 with 14% of our customers utilizing creative AI tools. This suite of tools empowers our teams to deliver innovative creative solutions that enable advertisers of all sizes to scale. AI also sits at the core of our prediction engine and corresponding automated bidding technology. Continued investment in the performance of this technology has led to high adoption with 89% of advertisers spend now leveraging one of our automated bidding modes.

Moving on to our next pillar, we continue to expand our supply footprint enabling advertisers to reach consumers across the entirety of the open internet. We’ve accelerated the expansion of partnerships beyond our core publisher inventory, which drove over 25% of total advertisers spent in Q1 on our platform. Bringing our prediction technology and performance capability beyond traditional web publishing is a major focus in 2024 that we believe will enable advertisers to reach wider audiences across diverse media types. The next pillar focuses on growing our differentiated premium publisher partnerships. Publisher logo retention remains strong in Q1 at 98%. This achievement reflects the enduring nature of our publisher partnerships, which remain core to our future success.

Exclusive code on page inventory continues to be a differentiator for our demand business, both through access to proprietary supply and corresponding page level and engagement data. We are focused on expanding the breadth of services we offer to these premium publishers in an effort to expand monetization opportunities and access viewable, brand-suitable placements. Our premium publisher base is also continuing to expand. In Q1, we added new supply partnerships including News Corp Australia and Webedia Spain, both of them moving from a competitor. In addition, we signed the telegraph, which is working with us on the Keystone platform, showcasing Keystone’s ability to bring incremental partnerships and margin opportunities to our portfolio.

On the AI front, in addition to our AI efforts on the product side, our team has also been exploring the use of AI to drive business efficiency and operational effectiveness, seeing real success thus far. We’ve been able to automate the handling and resolution of 40% of account management support cases with our small and medium publisher team by leveraging AI and robotics process automation. We’ve applied the same approach to our demand operation team support cases and plan to expand the capabilities to more teams. In conclusion, our first quarter results underscore our commitment to broadening our relevance to more advertiser segments, with the objective of becoming one of the leading gateways to the open internet. We are confident that with continued execution on our growth drivers, we will be able to deliver on the growth and profitability targets for this year and 2025.

With that, I’ll turn it over to Jason to cover the financials.

Jason Kiviat: Thanks, David. As David mentioned, we achieved our Q1 guidance for ex-TAC gross profit and exceeded our Q1 guidance for adjusted EBITDA. Revenue in Q1 was approximately $217 million, reflecting a decrease of 6% year-over-year. New media partners in the quarter contributed 5 percentage points or approximately $11 million of revenue growth year-over-year. Net revenue retention of our publishers was 89%, which reflects a continued headwind from the impact of the demand environment on pricing, which remains the consistent factor driving pressure on our revenue and on our net revenue retention. I’ll touch on the demand trends in a moment. As noted in the prior quarter, we also experienced a decline year-over-year on ad impressions contributing to the retention being below 100%.

Again, this was driven largely by page view volatility from certain supply sources as opposed to churn. Consistent with recent quarters, churn has remained at similarly low levels, with local retention of 98% for all partners that generated at least $10,000. In our five largest churns, we mapped it to only two combined points of year-over-year headwind on NRR in Q1. Turning to advertising demand. Following a seasonal step down in January, CPC remained fairly stable throughout February and March, but remained down significantly versus the prior year. Despite the lower pricing, we experienced the RPM or yield growth for the second consecutive quarter, thanks to ongoing click-through rate expansion, which continues to exceed our previous highs.

Ex-TAC gross profit was $52.2 million, flat year-over-year outpacing revenue growth for the fourth quarter in a row, driven primarily by improved deal performance on certain media partners and the net impact of revenue mix. As noted previously, the investment areas we were focused on are largely areas that we expect will drive a higher ex-TAC take rate. We experienced supply volatility from a key partner, which negatively impacted year-over-year ex-TAC gross profit by mid to high single-digit percentage. Our ex-TAC gross would have grown year-over-year by this percentage, excluding this one key partner. This impact was primarily a result of this partner’s transitioning from their legacy bidding platform. Our tech migration to the new platform was completed last week.

However, the optimization and rescaling of our demand is ongoing, and while we see an impact in Q2 results more than we anticipated, we expect to see sequential growth over the coming month. Moving to expenses, operating expenses decreased by approximately 5% year-over-year to $48.2 million in the quarter, as we continued to balance investments in our strategic priorities with continued cost discipline. We began in 2024 with a headcount of approximately 870 FTEs, which is down 11% from January 2023, as we have focused our attention on driving greater efficiencies in our operations and now on redeploying resources towards higher confidence growth areas. The decline year-over-year was partially offset by a prior year one-time benefit around variable compensation that did not repeat in the current year.

Of note, we saw reduced bad debt expenses in Q1 down nearly $1 million year-over-year as we continue to focus on collection efforts, and we expect to see lower levels over the remainder of the year. As a result, we doubled our adjusted EBITDA year-over-year to $1.4 million. Moving to liquidity, pre-cash flow, which as a reminder, we define as cash from operating activities, plus CapEx and capitalized software costs, was approximately $5 million in the first quarter. This was driven largely by working capital benefits coming from seasonality, timing of payables around period end, and focused improvements in DSO. As a result, we ended the quarter with $232 million of cash, cash equivalents and investments in marketable securities on the balance sheet, and $118 million of long-term convertible debt.

In December 2022, the company’s board of directors authorized a $30 million share repurchase program, and in 2023, we purchased approximately $3.7 million shares for $17.8 million. We continued share repurchases in 2024, and in Q1 we repurchased approximately $1 million shares for $3.9 million. So as of March 31, we have $8.6 million remaining under our current authorization, and we continue to believe it an attractive way to enhance shareholder value under current market conditions. Now turning to our outlook. In our guidance, we assume that current macro conditions persist with no material deterioration or improvements, regular seasonality, and as noted in the prior quarter, continued execution of our growth drivers. Additionally, to add color, we expect to start to lap a softer comparison period as the year progresses in H2, and particularly in Q4.

With that context, we have provided the following guidance. For Q2, we expect gross profit of $53 million to $57 million, and we expect adjusted EBITDA of $1 million to $4 million. We maintain our previous full year 2024 guidance provided at the beginning of the year of $238 million to $248 million of expect gross profit, and $30 million to $35 million of adjusted EBITDA. Now, I’ll turn it back to the operator for Q&A.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And we’ll take our first question from Andrew Boone from JMP Securities. Please go ahead, Andrew.

Andrew Boone: Good morning, and thanks much for taking my questions. Dicky, I have a big picture question, then Jason will go a little bit more tactical for the second. But Dicky, can you just talk about the key growth drivers in terms of returning revenue to growth for Outbrain? What do you view as kind of the key one, two, three things that you guys can do to drive better top line growth? And then Jason, tactically on take rates, how should we be thinking about that for the remainder of the year? And can you talk about the drivers that you saw in 1Q? Thank you so much.

David Kostman: Hey, Andrew. Good morning. Thanks for the question. So I think the biggest growth drivers if I have to rank them is really our move to full funnel. I think this is very unique in terms of participation on the open internet. And we have a unique opportunity here to link brand and performance and to offer advertisers a full funnel solution on the open internet. The opportunity is very large. It requires formats like video and high-impact display. It requires you to have placements on site. So we’re very confident that that’s a great opportunity for us and pretty unique in terms of the ability to combine a full funnel, mid funnel or funnel. The second one is just growing our share of wallet with advertisers, including our performance advertiser, which is the biggest base of our advertisers.

So we’re investing a lot in two directions there. One is moving some of those large advertisers to Zemanta or DSP platform that delivers performance across the entire open internet, not just on our publisher base, and continuously improving Amplify, which is our own direct access platform. We’ve seen record CTRs in the last couple of quarters. So we feel very good about the ability to drive growth there. So I would say these are the two main ones.

Jason Kiviat: Andrew, it’s Jason for the second question. So yes, the take rates have been up a few quarters in a row. I mentioned about a point and a half year over this quarter and Q1. Less about — part of it’s obviously mixed and some of that means new deals or just different weighting of deals. Of course, mixed kind of works both ways. But really the optimizations and performance is something that we’re just always working on. I mean, David included in his third pillar, a growth, which is improving yields, improving click through rates and optimizations to drive better performance. We added a ton of supply a couple of years ago and we kind of preached. We see ourselves as land and expand rate. We see our AI learning the users and ourselves learning the users and driving that better performance and time.

And that’s certainly part of what’s happening here. And beyond that, and going forward, we are focused on areas of these investments that we see as all things that should drive higher take rates. So whether it’s supply beyond the feed, where we think we have our bidding technology can help us drive higher take rates and onyx and video, there’s time to drive higher take rates, additional margin opportunities from getting more share of wallet for DSP. And of course, more optimization of yields. So they’re all things that we’re focused on kind of a more efficient growth. And so that’s what we expect going forward.

Andrew Boone: Thank you.

Operator: Thank you. And we’ll take our next question from Laura Martin from Needham. Please go ahead, Laura.

Laura Martin: Hi. So I have three. One is Outbrain has traditionally been a performance-oriented ad tech company. But what we’re seeing in connected television is that with the rise of RMNs, they’re closing the loop and they’re making CTV more performance-oriented. And it feels like that segment is growing the fastest CTV. So I’m wondering if you think the competitive landscape is worsening for your piece of the market, which is performance as connected television does more performance-oriented tasks. My second one is that in your commentary, you said that you are adding supply that is non-traditional. I’m interested in learning more about that. What kind of supply that’s non-traditional are you adding? And then third, when you mentioned cookies, I would have guessed that you don’t actually have a lot of cookies risk because you have an end-to-end platform.

Could you just remind us in the first quarter how much of your ad placement was targeted by using cookies? Thanks.

David Kostman: Hey, Laura. Thanks for the question. So I’ll take the first one on CTV. We are today a relatively small player, but if you’ll recall, we made an acquisition a couple of years ago of a company called Video Intelligence that has capabilities that have brought us into CTV. We believe that video as a format is a very large opportunity. We’ve made a deposition. We’re seeing good growth in the deployment of VI players on our base of digital publishers. And we need to find a way to grow our CTV business, but we believe that definitely it’s a combination also of branding and performance that we see there. And it is becoming a more significant share of market of performance advertisers. We believe we in the future need to find a way to play there in a bigger way.

When we talk about non-traditional, it’s what we call platforms. Its third part, it’s gaming platforms, it’s news apps, it’s lock screens and other such environments where users today consume content. So we’re growing that. It’s part of our strategy of becoming the gateway to the open internet again, full funnel, brand building, consideration and performance, but also getting way beyond our publisher, traditional publisher base. So that’s one of our big efforts. It’s today about 25% of our business is done outside of our traditional publisher base, which we think is an important level for growth. Again, leveraging the core capabilities we have on those premium publishers, which are anchors for those brands who want to spend. So we’re not giving up on that, we’re growing that, we mentioned News Corp Australia, but we’re also expanding beyond that.