Taboola.com Ltd. Q3 FY2021 Earnings Call

Thank you. Good morning, everyone, and welcome to Taboola's third quarter earnings conference call. I'm here with Adam Singolda, our Founder and CEO; and Steve Walker, our CFO. We issued our Q3 earnings press release yesterday aftermarket and it is available, along with our Q3 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 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.

Thanks, Jen. Good morning, everyone, and thank you all for joining us for our third quarter call. I'm excited to share the progress we've made. We again delivered incredible performance in the third quarter. We beat our Q3 guidance. We are raising Q4 and, as a result, 2021 overall. We also closed this quarter on Connexity, our largest acquisition to-date. As a reminder, our Q3 results and our guidance include one month, September, of Connexity's performance. A few numbers that highlight our Q3 performance: revenue was $339 million in the quarter, up 17% year-over-year. Ex-TAC gross profit, which is what's left for us after we show revenue with publishers, the main metric we measure as management, was $127 million, up 22% year-over-year, above our guidance range of $122 million to $124 million. We also delivered strong adjusted EBITDA of $40 million, above our range of $36 million to $37 million. While adjusted EBITDA is a good proxy for profitability, Taboola generates good cash flow. Over the last two years, about 60% of our adjusted EBITDA converted to free cash flow. I'm very happy with the team's execution, and these results give us confidence to raise our Q4 and full-year 2021 guidance. A couple of highlights on 2021, and Steve, our CFO, will provide more information later. Ex-TAC gross profit of $512 million to $515 million, which translates to growth of 34% to 35% for the year. This is dramatically faster than the advertising market worldwide. This is above our previous guidance of $503 million to $509 million that we shared at our e-commerce with Connexity Information Session. And to provide additional context, our original projection of ex-TAC at the beginning of the year, when we were on the road raising money for our public offering, was $445 million and 70% growth, which doubled our initial growth expectation. We now expect adjusted EBITDA of $174 million to $177 million, which is growth of 64% to 66% for the full year and above our previous guidance of $168 million to $171 million. Again, this is nearly 50% faster growth than our forecast from the beginning of the year of $127 million. Lastly, and I will touch on it later, we did not see an effect in Q3, nor do we expect one in Q4, from privacy dynamics or supply chain. When looking at our performance, I'm encouraged by all of it. It shows again that the right strategy, focus, and execution are key to meet and beat our own expectations. Let me share now some details on our strategy business and what we're seeing in the market. Starting with Taboola strategy, some of you may have heard this; however, as a newly public company, I want to remind everyone about our vision, where we fit and our winning aspiration. Taboola powers recommendations for the open web. We reach 0.5 billion people a day and help them discover things they may like. The open web, as you may know, is the term for all great websites and publishers out there that you love, that are not Facebook, Amazon, Google, Apple, or the like. It's really important, even essential, because it's free and diverse and it doesn't belong to any giant company. It belongs to everyone, and that's where Taboola fits. We have established long-term partnerships with some of the most amazing publishers and digital properties in the world, such as BBC Global, CBSI, Comcast, and many others. We work with about 9,000 publishers globally. We are important to them. A lot of times, Taboola is a top two revenue source and, in spite of our product-led approach, we empower the entire publisher organization. We drive audience, engagement growth, and other things. This includes things such as newsroom, which is used by editorial teams, and our subscription offering that is used by the product team and many, many more. At the center of what we do is a proprietary deep learning recommendation engine that is able to infer what a user might be interested in based on context and our own curiosity risk. Looking at what people who read this also read, similar to Amazon, people who bought this also bought. This means that we're not relying on third-party cookies or IDFA, but rather on our own proprietary data. We are focused on product innovation and growth, investing $100 million a year in R&D to bolster our platform and bring new solutions to our partners. It is critical for us to invest in things our publishers and partners want, as well as what advertisers need as they look to diversify outside of the walled gardens. It helps us to become more strategic as we look to work with our publisher partners forever. There is also a network effect in our space; being bigger matters. The more publishers you have, the more reach and data you have, more advertisers can come in and your yield in the end goes up. And yield going up is one of the most important things we'd like to see as it makes us even more competitive. We participate in a $64 billion market known as the open web, and this is our foundation—a business with a moat built on 14 years of technology and algorithms innovation and direct publisher and advertiser relationships. The strength and predictability of our business model, along with the relationships we've built, have allowed us to expand beyond core recommendations to two main areas. First is to expand into recommending anything. Over the next 10 plus years, much like you can search for anything on Google, what to read, what to buy, where to go, we want to diversify what to recommend and increase our yields for publishers in that way, which helps us become even more competitive. Over time, we want to recommend apps, games, and other types of verticals. In Q3, we continued to see great progress with recommending video. We call it High Impact Placements, which is where we expand from bottom of the article into mid-article, homepages, section fronts, and other places. This is where we serve a video format that agencies and brands love. At this point, brands and agencies roughly make up 15% of our business, and every time we serve a video, our yield is even higher. We're able to pay our publishers even more. We earn more. It's a high-quality advertising experience. It's just great. Our Connexity acquisition falls within our recommending anything strategy, allowing us to recommend products and tap into a huge $40 billion open web e-commerce market. Connexity will help us transform the open web into one big shopping cart. Imagine how much you trust the publisher that reviews the products; how much you'd consider buying the product if CNET says it's better, or if Wirecutter says it's better, or if you see today review.com says it's better. Especially on the back of the pandemic, we're buying online much more, and trusted publishers can shape that future in a big way. We expect that over the coming years, one-third of the open web publisher's revenue will be e-commerce. This is advantageous for retailers as they want to diversify outside of walled gardens themselves. There is no other comparable to Connexity out there in size or scope, and we believe that by acquiring Connexity, we have years of advantage in this space. The second area of growth for us is expanding to recommend anywhere. This is where we're taking our recommendation engine and publisher partners anywhere people spend their time. An example is Taboola News, our version of Apple News but for Android devices. We had great momentum this quarter as well, where we announced partnerships like Xiaomi, reaching over 100 million devices, or Samsung, which we discussed in the previous quarter. Over time, you should expect to see Taboola anywhere on connected TV apps, as even every app on the TV needs AI to engage consumers with their content. We will be in automobiles like Spotify with music integrations. We expect Taboola to bring podcast, local news, and entertainment to any car out there and audio devices at home, interacting with consumers. Now if we discuss our strategy and how over time we recommend anything and anywhere, I'd like to share some business momentum and the progress we've made in the third quarter. As only one month of Q3 includes Connexity, let me share some updates about Taboola's business before Connexity. We continue to build new relationships with premium publishers and digital properties. In Q3, 46% of our growth came from new relationships. To name a few, we announced LINE Today, which we think of as the WhatsApp of Asia Pacific. The LINE messaging app reaches more than 188 million global monthly active users and provides a wide range of services to its users. LINE Today serves as a news and content hub within the LINE app and Taboola's recommendation engine will operate on LINE Today in Hong Kong to start connecting users with news they may like but never knew existed, much like Apple News does. We also announced a new three-year strategic partnership with Weatherzone, Australia's largest private weather service. This partnership includes Taboola Feed or High Impact Placements, which is also our video solution, and Taboola News. Both of these examples are great demonstrations of our growth in our core markets. On the advertiser side, we are constantly building new relationships with advertisers and agencies looking to reach consumers in a brand-safe environment on trusted publishers' sites in the open web and diversify outside of the walled gardens. A good example from Q3 is where we entered a new three-year strategic partnership with Dentsu India, a multinational agency headquartered in London. Under this partnership, our publishers in India will have access to Dentsu's offerings across its entire customer portfolio. Dentsu agencies will also be able to drive brand awareness, consideration, and conversion from a trusted and brand-safe environment. In Q3, 54% of our growth came from growing existing clients, primarily driven by yields. When thinking about yield, as I wrote in my letter, investors should think of yield much like race drivers look at their dashboard. RPM is everything; this matters. RPM is revenue generated per 1,000 impressions; it's a multiplication of three variables: click-through rates (CTR), cost per click (CPC), and cost per conversion (CVR). None of these should ever be looked at in isolation. In fact, there are scenarios where CTRs go up, but yields can go down; you can prioritize creative that gets higher click-through rates, but conversions will go down, advertisers may lower CPC, and yields will actually be lower. Another example can be prioritizing aggressive class advertisers who will get higher click-through rates traditionally but pay much lower CPCs. Here as well, yield would go down while click-through rates went up. Much like in racing cars where the speedometer doesn't matter and only RPM matters, also in the open web click-through rates are relevant, CPC is relevant, and conversions are relevant as independent variables. Only when the three come together can RPM go higher. That's what Taboola measures: yield and RPM. Check my letter if you want to learn more about this area. Outside of core, we also made great progress in our two growth areas we've been discussing, recommending anything and anywhere. Within recommending anything, looking at recommending video, we announced a partnership with NBC Sports, who launched our High Impact Placements, which means we're expanding our presence to mid-articles, homepages, and highly visible placements, which brands and agencies love. These High Impact Placements are key drivers for our video initiatives, which also helps us grow our yield and, as a result, become an even bigger revenue driver for our publisher partners. To further assist with that, we also announced in the quarter brand safety partnerships. We attained Trustworthy Accountability Group (TAG) brand safety certification that confirms to advertisers that Taboola has high standards and has taken proactive steps to drive high-quality traffic. TAG is an organization that works to increase trust and transparency in digital advertising. We also announced a new partnership with DoubleVerify that makes available directly within the Taboola Ads console. Advertisers can now easily use DoubleVerify solutions to verify brand safety. Sharing more on our progress to recommend anything, let's look at how we recommend products. We made a big bet this quarter acquiring Connexity. We closed the transaction on September 1, and therefore, recognized one month of the results in ours. Connexity had a strong Q3, exceeding all of our expectations and signing new publishers like Merriam-Webster and new merchants such as Dell U.K. and others. To give further context on the success Connexity is having, I will share a few Q3 success stories. One large publisher partner in North America is starting in 150% commerce content growth year-over-year with Connexity into 2022, as well as taking the success in the U.S. and expand our team in Europe, which works with Connexity five-fold in 2022. In another example, a fashion company spent with Connexity 5x higher year-to-date, with the peak shopping season still to go. They tested with Connexity and moved into always-on campaigns, which means they now trust Connexity and intend to spend as much as they can so long it converts. I personally am engaged in conversations where publishers are choosing Taboola either to renew or for the first time as they want Connexity built into the forecast and their strategy as well as ours. It's only been a few months, and I like seeing these early signs of the market reacting positively. This is only the beginning. Since the acquisition closed, we have worked through the details of our integration, and our plan is to capture $100 million of synergies, which we outlined in our e-commerce with Connexity Information Session in late September. We're even more confident in our future success after a deep dive with the team. When I think about our competitive advantage in the commerce affiliate space specifically, there are four things that are unique to us. One: strong relationships with publishers who trust us and want to work more with us. Two: strong relationships with advertisers, retailers, and merchants built on the foundation of a high-performing scaled network. Three: data. We know what people read and know what people buy, and we can use that to guide publishers about which content they need to write about. I’ve said so many times that many publishers have never gotten into e-commerce because they were not sure where to even begin or what to write so that it feels authentic to the readers. We can help. And four: last but not least, traffic. The ability to drive audiences to our publisher partners. Taboola reaches half a billion people a day, and we can provide positive ROI traffic to those pieces of content we can create together. Within Recommend Anywhere, we recently announced Taboola News, where we take our publisher partners to other canvases where users spend their time. This continues to scale and now drives an average of more than 220 million monthly engagements on editorial content through mobile device and OEM partnerships. This represents an increase of more than 270% year-over-year. In Q3, we announced another exciting partnership with Xiaomi as part of Taboola News. Xiaomi is one of the second largest Android OEM manufacturers in the world, and they will integrate a feed of Taboola News on their devices. Now, taking a big picture view before I pass it over to Steve to discuss our results further, I want to make a few comments on the market more broadly. As we've stated before, we are a business that is not reliant on third-party cookies, and we instead leverage contextual signals to deliver relevant recommendations. This is also true for Connexity, where the e-commerce recommendations are solely intent-driven. This quarter, there were a lot of conversations on privacy impacts from iOS changes and IDFA. We did not see impacts from these on our business. Taboola's yield keeps growing through our ability to leverage contextual signals due to our direct integrations with 9,000 publishers, through which we reach 500 million active users every single day. This is important now and will become even more important over time as advertisers look for alternatives to the walled garden. There has also been a lot of conversation and news about supply chain challenges faced by some manufacturers and businesses. We're tracking this like everyone, and it's new to us all. But as I updated in my letter, we did not see impacts from supply chain challenges in Q3, and that is mainly due to our diverse advertiser base and growth in digital-first advertisers. We're also feeling comfortable about Q4 and raising our guidance. So in summary, I'm very excited about what we accomplished in Q3 and how the Connexity integration is making progress and what is still to come in Q4 of 2022. I will now hand it over to Steve, who will dive in deeper on our financial performance and guidance.

Thanks, Adam, and good morning, everyone. As Adam shared, we had a very good third quarter and have expectations for a strong close to the year. If you read our earnings release, you notice that we beat our Q3 guidance on all measures and we're raising our guidance going forward. Before I get into specific numbers, I have a couple of items to highlight now that we have completed the Connexity acquisition. First, we closed the Connexity acquisition on September 1. As a result, we have one month of Connexity results in our reported Q3 financials. This is consistent with the guidance that we gave during our e-commerce with Connexity Information Session on September 28, which also included one month of Connexity results in our Q3 guidance. Second, we have determined that going forward, we will account for Connexity's business on a net revenue basis. Previously, Connexity accounted for a portion of their business on a gross revenue basis and a portion of it on a net revenue basis. This change only impacts the top line revenues. Going forward, Connexity's revenues will be what we keep after we pay our publisher partners, equivalent to ex-TAC gross profit for the rest of the Taboola business. To have our comparisons on an apples-to-apples basis, we adjusted our Q3 and full-year guidance to reflect this net revenue recognition treatment for Connexity. In our e-commerce with Connexity Information Session, we guided to gross revenues of $338 million to $342 million in Q3 and $1.39 billion to $1.4 billion for the full year. With this change in accounting, the adjusted guidance for revenues in Q3 is $331 million to $335 million and would have been $1.35 billion to $1.36 billion for the full year. With our outperformance in Q3 and our higher expectations for the full year, we have raised the full-year 2021 gross revenues guidance to be $1.36 billion to $1.37 billion. Again, note that nothing else changes in our guidance due to this accounting change. The only adjustment is the top line revenues. Since we are still relatively newly public, I will also repeat the comment I made last quarter to remind everyone of how we look at and measure our business. We are focused on achieving profitable growth. The way we measure our performance against this goal is by looking at two measures. To measure growth, we look at our ex-TAC gross profit growth rates. Ex-TAC is what we keep from our revenues after we pay our publisher partners. To measure profitability, we look at our adjusted EBITDA margin or adjusted EBITDA margin - adjusted EBITDA divided by our ex-TAC gross profit. Just as SaaS businesses have a rule of 40, where they always want their growth rate plus their profit margin to exceed 40%, we too want the sum of our ex-TAC growth rate and our adjusted EBITDA margin to exceed 40%. So now on to our Q3 results. Revenue was $339 million. Ex-TAC gross profit was $127 million, and adjusted EBITDA was $40 million. This represented ex-TAC growth of 22% year-over-year and an adjusted EBITDA margin of 31.4%, which means that we were a rule of 50 company this quarter. All of these results were above our guidance for Q3. As Adam shared, we are seeing continued good progress in the business, winning new business, executing on our Recommend Anything and Recommend Anywhere growth initiatives, and realizing very good yield expansion. Of the Q3 gross revenue growth of $48 million, $23 million came from new digital property partners, and $25 million came from growth of existing digital property partners. As a reminder, when we talk about growth from new digital properties, that is revenue that is coming from publishers that are new to our network since last year. The new revenue growth was right in line with our plan. Thus, we are continuing to see plenty of opportunities to bring new digital properties onto our network. In terms of growing our existing relationships, our net dollar retention, or NDR, on an ex-TAC gross profit basis exceeded expectations. It was 112%, which primarily reflects strong improvement in yield. So, very good growth on both fronts: bringing on new partners and also growing our existing partner relationships. Our ex-TAC gross profit was up $23 million, or 22% year-over-year. It benefited from the growth in both new and existing digital properties and the addition of one month of Connexity, as well as from the continued flywheel effect that Adam referenced. This effect drives improvements in yield and helps us move from paying some publishers on minimum guarantees to paying on revenue share over time. These gains year-over-year were partially offset by the withholding in 2020 of $7 million in guaranteed TAC payments to publishers that were subsequently paid in the fourth quarter of 2020, which made for a more difficult comparison with 2020. Turning to operating expenses, which were up $40 million year-over-year. There are three noteworthy items to call out. First, $13 million of the year-over-year increase in operating expenses was due to share-based compensation, which is higher now that we are public. Excluding share-based compensation, operating expenses were up $27 million. Second, part of this year-over-year increase comes from including one month of Connexity in operating expenses. Third, there are higher professional fees and legal expenses related to our M&A transaction. In terms of more routine operations, we had higher expenses driven by public company expenses, as we expected. In addition, expenses were up due to a partial return to more normal operations following the COVID pandemic. This included a partial reopening of offices in several countries and some increased travel. The strong revenue performance flowed through to the adjusted EBITDA of $40 million, which was better than expectations and guidance. It was, however, flat year-over-year as the increase in gross profit was offset by the increases in operating expenses that I just described. From a margin perspective, the 31.4% ratio of adjusted EBITDA to ex-TAC gross profit was above our guidance and model. It is worth noting that net income was $17.3 million, which was $600,000 higher year-over-year. Net income was above our expectations of a net loss of $5 million to $7 million, driven by a $17 million reduction in warrant liability, lower income taxes, and higher gross profit that more than offset higher operating expenses. Lastly, Q3 produced free cash flow of $19 million. Through nine months, free cash flow was $11.8 million, and we expect to exceed our original guidance from our PIPE deck of $33 million in free cash flow for the year. I would also like to note that if you look back to the beginning of 2020, we expect our ratio of free cash flow to adjusted EBITDA for the 24 months that will end this December to be approximately 60%. That means for every dollar of adjusted EBITDA that we will report in 2020 and 2021, we will convert $0.60 into free cash flow. This is very consistent with the directional guidance we have given, that we expect approximately 60% of our adjusted EBITDA to convert to cash over any reasonably long period of time. We ended the quarter with $312 million in cash and cash equivalents after the cash consideration paid for the Connexity acquisition. After netting out the $300 million in debt that we raised for the acquisition, we had positive net cash. So, we feel good about where we are from a capitalization point of view. Following our strong performance in Q3, which was on the back of a strong first half, we are raising expectations for Q4, as well as our full-year guidance. I won't go through our Q4 guidance, which is detailed in our release. For the full year of 2021, though, we are now projecting ex-TAC gross profit will be $512 million to $515 million, which represents growth of 34% to 35% versus 2020. That is an increase from our previous guidance of 31% to 33% growth that we gave during our e-commerce with Connexity Information Session. We're expecting 2021 full-year adjusted EBITDA to be $174 million to $177 million, which represents growth of 64% to 66% versus 2020. This demonstrates a very healthy adjusted EBITDA margin, meaning adjusted EBITDA divided by ex-TAC gross profit of over 34%. Per my previous comments about always seeking to beat the rule of 40, our growth rate of 34% to 35% and our adjusted EBITDA margin of over 34% well exceeded that goal. For modeling purposes, we estimate the fully diluted shares outstanding at the beginning of Q4 to be approximately 272 million shares. We are not updating at this time the guidance for 2022 that we provided during our e-commerce with Connexity Information Session, except to adjust the top line revenues guidance for Connexity— for the Connexity accounting change that I mentioned earlier. This results in our previous 2022 revenues guidance of $1.7 billion to $1.75 billion being recast as $1.59 billion to $1.63 billion. To be clear, the only change in these numbers is to reflect that accounting change, and the change does not affect the fundamentals of the business. We look forward to providing an update on our 2022 expectations during our Q4 earnings call. Let me wrap up by saying that we continue to see many paths for growth in our business and we continue to invest in these growth areas. We believe we will continue to grow our core business by bringing on more digital property partners and by growing revenue from our existing partners, primarily by continuing to grow our yield. As Adam spoke about earlier, our investments in Recommend Anywhere and Recommend Anything growth strategies are showing good promise, and we look forward to telling you more about that in future calls. Finally, the Connexity acquisition is a game changer that will provide significant upside to our business going forward. On that note, let's open it up for questions.

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

So, Adam, I think you announced yesterday SmartBid Dimensions. We understand this product correctly. Seems like other companies who have released conceptually similar solutions have talked about this being a catalyst to hopefully onboard more long tail marketers because this helps to simplify advertising in general. So, we're wondering if this will help you expand the advertiser base from the current above 14,000 or so to hopefully something much bigger. And also, you've also expanded relationships with publishers like NBC, but onboarding, I think you mentioned LINE earlier as well as Xiaomi. So conceptually, how will your products be deployed on LINE Today? And you have about 500 million users right now. Like what can these two partnerships do in terms of, hopefully, unduplicated potential user growth?

Good morning, everyone, and thanks for the question, Stephen. So let's start with the first one. SmartBid Dimension is a big deal in the sense that it's going to do two things. One of them you touched on, which is help advertisers—smaller advertisers who may not have the know-how of sophisticated advertisers—to be successful. And that's basically—it's very much like a hands-off or really autonomous experience for the advertisers who Taboola can succeed. So, that is going to be one thing that we expect to happen. The second one is actually, even for our existing advertising base, up until now they had to log into Taboola multiple times a day, create multiple campaigns to find further optimization beyond the way we used to do it. Now, they’re going to have to actually do that much less, which will free up their time to work more with Taboola, to increase budgets, and to be successful with us. As a recap of what exactly dimension is, up until now, 85% of our revenue is controlled by SmartBid, which is our AI software that helps advertisers to be successful, optimizing at the publisher level, which means if one site did really well for a certain type of advertiser, SmartBid will increase the CPC to get more traffic from that site. If it was not performing, it will decrease the CPC. The gap it created is that SmartBid did not take into account, as an example, one article that was actually great for the advertiser but the publisher as a whole was not that great. SmartBid would decrease the CPC, even though one article was really doing well for that advertiser. As of now, it will not happen. SmartBid will basically create more dimensions and a more granular view of the Taboola network. So that piece of the article will increase the price and for the rest of the site, it will decrease the price. Thus, advertisers will be more successful in that fashion. And there are other examples I’ve given a bunch in my letter, but I'm very excited about it. The team has done a lot of hard work to develop this, and I hope to see even more advertisers being successful with us. So that's about SmartBid Dimension. About Xiaomi and LINE, this is great for Taboola. Just as a reminder, what it means to companies like Xiaomi, which have 100 million devices, will integrate that part of Taboola News, which is Taboola Recommending Anywhere. That's one of our growth engine areas. That means that when people buy Xiaomi, as it continues to roll out, Taboola will be pre-installed on the device. It will be in the wake screens. As you look on the device, it will surface news you might like. So it's very much the main experience, the news experience that people will have powered by Taboola. And what's really nice about it, not only is this a revenue opportunity and it's—I’m excited about it, it's actually very strategic to us because, as opposed to Apple News, every time you click on a piece of news that you discover by Taboola, we open the browser and you go to the publisher site, which means that over time the more Taboola News becomes successful, our publishers will receive traffic from Taboola, which would be similar to SEO, which is a big part of Google's business or Facebook and Twitter and the like. It means we're going to be more important to publishers. So when you think about the competitive advantage and how we continue to grow over time, yield is obviously very important. But if we can become 5%, 10%, and more of publishers’ sources of traffic using Taboola News, that's going to be a big deal. So with LINE and Taboola, with Xiaomi, that's how it's integrated. LINE, it's going to be again a feed of recommendations integrated in the app. Xiaomi, it's on the device. It's on the wake screen.

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

I'd like to hit on SmartBid Dimensions as well. Can you just help us understand the ad performance? And you guys started kind of your machine learning, deep learning efforts five years ago. How do we think about this developing over time as you guys kind of add more data and publishers adopt it more and advertisers adopt more? Can you just talk about what's the benefit today, as well as kind of how that develops over time?

Yeah. So first of all, in terms of a bit more information about that, we've added—the dimension adds about 40 dimensions that SmartBid will start looking into, which we did not do up until now. So that includes the day of the week, time of day, location, and platform. So again, just to give this follow-up and the same example I've given before. Let's say, a publisher did really well and SmartBid wanted to increase the price because of that. SmartBid did not take into account the location. So it could be that some geographies are really good and some geographies are not as good. So now that will be broken down automatically by SmartBid. Therefore, the advertisers work in SmartBid once, and SmartBid might break that campaign into 40 pieces based on what works and what's not behind the scenes. So the advertiser wouldn't have to do anything. And up until now—and by the way, it is very common for other companies in our space and that's, a differentiation and an advantage. A lot of times, these advertisers have to build the know-how of how to optimize in the platform they work with. Thus, they have to figure out if it’s working in this geography, is it working for that time of day, should you create something for the morning, or something for the evening? All those efforts on the advertisers’ side; a lot of times prevent them from even working with certain platforms. That's just to give you some more color on the types of dimensions. And then again, the expectation I have is that they will be able to be even more successful, which means that they will get more budget with us and they’ll drive better conversion rates. Thus, the CPA will be even more attractive, and then it would be easier for them to work with us, increase the budget, and for more advertisers to come along. Also, I’m happy to give more examples. Over time what we do is we—especially now with Connexity, we have about $1 million purchases a month that Connexity is getting. I think we talked about that on the Information Session, as we’re merging the data sets of Connexity and the data set—the leadership of Taboola, SmartBid will be able to know even more and then further optimize for advertiser success. Our goal is for advertisers to have the lowest conversion, lowest CPA, acquisition cost, so they can scale with us. Data helps us, AI helps us, getting more publishers helps us. That’s a continuous and forever kind of effort. If I had to guess from 1 to 10 where we are, we are still early. I mean, I think there’s so much work for us to do. This is, of course, a big announcement, Andrew. But there’s so much more for us to do, and it’s a big effort from our R&D.

Yeah. Let me just jump in and put it in kind of a broader context. I think we've talked about, as Adam just kind of alluded to, we've talked about the fact that we're very early in our yield growth journey we believe. So, we think that we could grow our business over time almost exclusively just by growing yield if we wanted to. I think this is a really important step along that journey. So, we’ve talked in the past about how yield grows from algo improvements. It grows from bringing on more advertisers to increase kind of density and it grows with bringing on more data. This is kind of the sense of all three of those, right, that is bringing in more data, getting more granular with it, making more advertisers successful so we can bring on more advertisers over time. So, this is a really important step in that journey, but kind of just demonstrates how early we are in that journey and how we can continue to grow the business through yield.

Also, just one last note that I think it's worth sharing, and I wrote about that. I have even put a screenshot of the car dashboard. SmartBid's job is, on one side, to help advertisers be successful, and that's measured usually with conversion measurement, so how, what's the price of an acquisition and how much we’re able to scale, and on the publisher side, it's measured by optimizing for yield, which is RPM, revenue per thousand impressions. As a reminder, SmartBid does not care about click-through rates independently, does not care about CPC independently, does not care about conversion rates independently. In fact, any one of them is completely dangerous to monitor and track. So SmartBid was just looking at optimizing for Q3, it would have prioritized enticing creative. It would have prioritized perhaps even advertisers that don't succeed on Taboola necessarily, and then over time CPCs would go down and yield would go down. So actually, it’s quite dangerous to look at just one metric. SmartBid is looking at all three. And on the advertisers’ side, making sure conversions are exciting and meeting our thresholds. That's a lot of hard work, and that's why we invest so much in deep learning to make sure they are successful.

Yeah, great. Let me just jump back in on the Connexity piece. So, I think we've got good momentum. We've talked about the synergies as a long-term opportunity, but I think it’s also useful to think about Connexity as a way to get our yield up faster. The fact that we have this powerful network of the open web, and we’ve got this powerful e-commerce affiliate business on the other side through Connexity really provides that flywheel benefit that Adam talked about earlier. Getting those connected is going to be very helpful in driving more yield in the near term too, not only long term as we realize the synergies.

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

I just want to build on that last question you just answered. I want to talk about content quality. So when you look at your core business, you have very high-quality content publishers like USA Today, CBS Interactive, NBC News, Bloomberg. It feels like this Connexity stuff is about lead generation, where you're writing content to drive intent to sell something, which feels very low quality. So tell me why I'm wrong about that? And why the Connexity acquisition doesn't sort of turn you into more of a lead-gen company and a wave of this very high premium news representation that you've done historically?

Yeah, good question, and good morning, Laura. Good chatting. So, first of all, before even Connexity, and taking Taboola's side, if you just look at the market and take a market view, you’re seeing the following dynamics. Companies like The New York Times, which is definitely a high-quality publisher acquiring Wirecutter and investing in reviews and high-intent content that sits side by side of The New York Times but owned by The New York Times. You're looking at USA Today; they own Reviewed.com, which is a nine-digit revenue business, a big business as an extension of them. If you look at Conde Nast, Hearst, Meredith, Meredith is generating $0.5 billion a year from high-intent pieces of content and, of course, there are also very high-quality journalistic organizations. I can go on and on. CNET obviously in Red Ventures, in general, mega successful. So the way I see it, there are going to be two types of integrations. And by the way, I believe all publishers will do it. And in fact, I believe one-third of the revenue of the open web will be like that. So, there are going to be two ways it's going to happen: One, some publishers will say, we'll take a CNET strategy, where CBSI will have CBS News, CBS Sports, and CNET. That was before it was acquired by Red Ventures or will be like The New York Times. We'll have the nytimes.com. And we'll have Wirecutter that carries the trust of The New York Times in a stepper domain, Reviewed.com of USA Today, and so forth. Then you have publishers that will say, we will build a subdomain. We will have a section on our site called reviews or something like that. So, I think that's what's going to happen. We're already seeing, I think, the examples I’ve given show us that there are highly journalistic organizations that want to tap into a $40 billion open web e-commerce high-intent budget that right now most of them are outside of it. So, I think they’re either going to launch a site that carries the trust of them, or they will launch a subdomain. I’m seeing actually some great examples also outside of the U.S. And I think everybody’s looking at Red Ventures, CNET, Reviewed, Hearst, Meredith. Now, I see everybody saying we want that strategy too. How do we begin? How do we even know what to write about? What feels endemic and authentic to our readers? And that's the main question: would they do it at all? Where do they begin? How do they write it so that it feels at home and feels relevant to the consumer? That is where Connexity comes in. That is where data comes in. They’re going to ask Connexity, give us a sequence and a pipeline of things we need to write that make sense to our readers and then help us monetize that, then help bring retailers, CPC, and CPA. So, I think on the back of companies like Red Ventures and all those folks, we're going to see everyone wanting to do it, and I think Connexity being the largest by far in this space, we could be an enabler for that transition.

Our next question comes from Shyam Patil with SIG. Your line is open.

This is Jared on for Shyam. I know that you aren't updating your '22 outlook at this point, other than providing for the Connexity accounting changes. But given the '21 raise, how are you thinking about the setup into '22? May we see further upside at this point?

Hi, Jared. Yeah, good question. So, I think the reason that we're not raising 2022 at this point is we basically just released that guidance roughly a month ago. We are - at this point, we're still standing by that. We still feel very good about 2022, and we think we have good strength going into the year, but we'll update that guidance as we release our Q4 results in February. So, we will give an update then. I think, generally speaking, to your broader question, I think what you're asking about is how do we feel going into the year and how are we doing? I think generally speaking, we're feeling very good. We obviously raised Q4 because we had a great Q3. We see good strength going into Q4 here. Connexity is doing very well; we're actually ahead of our expectations for where they were going to be at this point. They are part of the reason that we’re raising Q4. So, we feel good about their numbers as well. We have very good strength going into 2022 and we're looking forward to talking to you in February about our Q4 results and then probably revising expectations for 2022 at that point.

And then just one more if you don't mind, following up on your Connexity commentary there. Do you mind helping us unpack your progress towards that $100 million in synergies that you were speaking to? And when might that $400 million be realized?

Yeah. So in terms of just where we are, we're making good progress, I would say, on the people front. In London, the teams are already together. In New York, I expect that in the first half of the year we will have the folks being together. Financials are great. Connexity keeps signing great advertisers and publishers. So, I would say the business is continuing to have great momentum. Merriam-Webster has signed, Dell U.K. signed. So that's independently exciting to me, more synergies ad sales, which was one of the synergies. As a reminder, Connexity has built an amazing business with two ad sales people. We obviously have many sales people all around the world. We've started the global expansion essentially via our international ad sales people that includes China and Brazil to start, but more to come. In fact, it was a nice surprise as our ad sales people in China reached out to retailers; many of them wanted to actually buy in the U.S. as well, not only in China Mainland. That's great because that means demand from China being exported into the U.S., which is great for yield here in the U.S. and continuous growth here as well. So ad sales from a synergy perspective have started. China and Brazil are the starting points for publishers. We started upselling to publishers just the standalone service of Skimlinks and Connexity, which is related to what Laura asked before. I will tell you that we're thinking also at the leadership level, given Taboola is a bigger company and we have more resources, how do we build sort of a batch of publishers that get an even more resource-heavy implementation where we can grow even faster? So growth is something on our mind. We want to really double down and make this a huge success. I already said publicly that I believe in four years that's going to be a third of our business. We’re very much believers; we’ve started upselling. That also has happened on the integration front since the close. These are the high-level things that have started and continue to grow. I’m seeing good signs from the market that they want an e-commerce and affiliate strategy and are looking for us to help them get there.

Our next question comes from John Blackledge with Cowen. Your line is open.

Two questions. Could you discuss video advertising progress in the third quarter? More broadly, how do you view video as a growth driver in the coming years? And the second question on the iOS, the Apple changes, just given the measurement and targeting issues caused by the Apple changes, do you think Taboola might see higher ad demand in the coming quarters as the platforms affected and kind of deal with the changes? Thank you.

Hi, and good questions. So let's start with video. Video represents about—brands and agencies in general, which is primarily video, are very important for us. It's about 50% of our business. Every percent of traffic that gets a video, very similar to e-commerce, generates higher yield. It's high quality. It's higher yield. So, it's great for the consumer; it's great for the publishers; it's great for the advertiser. So in general, we love to increase portions of our business where we can bring premium demand. It pays more and creates this wheel and flywheel effect for our business. So in general, we care about it, and it’s about 50% of our business. At our size, that means it’s significant. We announced this quarter that Dentsu signed with us. It's a big agency. It's going to start in India, where basically all of their clients will have access to Taboola in the region. So that was a big, big progress. And in general, we're seeing good momentum with brands and agencies, especially as we sign more and more what you call High Impact Placements. So High Impact Placements is the main way we expand our recommendation into video. The way it works is up until now or a few quarters ago, the vast majority of our footprint in the open web was at the bottom of articles, which is fantastic for our performance advertisers and e-commerce. But for video, they want—brands and agencies want something else. They want much more visible placement. They want to be in the middle of the page. They want to be on the homepage. They want to be on the section front. So like I said, one of the biggest advantages of Taboola is that we are a publisher company. We work with many of them for three, four, or five years. It’s exclusive. It’s global. It’s long-term. They trust us. We have great relationships, and they upsell with us; we upsell with them constantly. So that means that when we bring a new solution to the market, they really consider that. We're not buying traffic and hoping for the best; we work with them. We are integrated on their pages. So this quarter, we announced, as an example, NBC Sports launching High Impact Placements. That means you'll now see Taboola on those placements I mentioned, and brands and agencies will be able to funnel high-quality video demand into those placements. That's just one example. So, as a summary, I'm seeing good momentum on both the advertiser side with companies like Dentsu and others coming in, appreciating the open web. They want to diversify outside of walled gardens and so forth. I’m seeing the publishers doing more with us and then expanding into placements we've never been. I think it’s also a good indication of the transition of the open web from traditional advertising formats, banners and things like that, into in-feed, native, Instagram-like formats, which is basically Taboola revolution. So, I see—if I look at the open web as a whole, it’s a $64 billion market. It’s mostly still monetized with banners; it's unbelievable. So that's going to, in my belief, change aggressively. My kids will view a very different open web. The more I’m seeing NBC Sports of the world transitioning into High Impact Placements from old-school ad formats, that’s a great sign. So all of those things happen. It’s 50%. It’s high yield. So, we care about it. That was about the first question. The second question about IDFA—short-term, I don’t know how much we’ll see that because people are W... It takes advertisers time to change. But I do think, and I'm hearing a lot of chatter from the market about advertisers being unhappy about prices going up. In general, advertisers really want to diversify and have more channels they can scale with. So, I do think over time, we'll see more advertisers try other things so they don't feel locked into one, two, or three channels. And that also ties into SmartBid Dimension. That's why it's very important for us to make sure that when advertisers come to Taboola because IDFA makes it hard for them to succeed on other platforms, it works. So, again, I'm not sure if in Q4 we will see a big rise, but I do think over time we will see advertisers coming in for other reasons and that one as well.

Our last question comes from Sean Ross with Oppenheimer. Your line is open.

This is Jason. I'm going to take the question. So maybe just help us understand the timing. I guess the trough mechanical timing. So right now, are you assuming in your kind of 2022 guidance kind of the positive impact of bringing Connexity to the "legacy" Taboola real estate? That would be like a question more like is it in there and is it kind of when maybe? And then you had a September 1 close. I mean, can you help us understand to the extent you want to kind of get to organic growth the impact of Connexity on the third quarter and kind of what's factored into the fourth quarter guidance? And then, I guess, lastly, was there any one-time items in G&A that you want to call out because it seems a little high?

Thanks, Jason. Good questions. So first of all, on Connexity in 2022. So, I think you know us well enough at this point to know that we tend to try and be fairly conservative with items that we—that are less certain. So the Connexity synergies are something that I consider to be—it's a little bit like our growth initiatives, great big opportunities that we're going to be conservative with until we start to see them showing up in our numbers. So, we've been pretty conservative with how we're factoring Connexity synergies into 2022. So when we did the Connexity Information Session, we raised our 2022 growth guidance by about 1%. That translates into about $6 million of ex-TAC. That's about what we have factored into the 2022 plan for Connexity synergies at this point, we think that’s conservative. But that’s our intent. It is to be conservative with it. So, that gives you an idea of how we're thinking about that. In terms of organic growth, I guess the way to think about organic growth in our business right now is that for 2020—let me talk about Q3 first. So in Q3, we had one month of Connexity in there. We grew roughly 22% year-over-year in that quarter. If we didn’t have the guarantee holdbacks last year, if we had paid out those guarantees, that would have been $7 million more of TAC last year, and we would have actually grown 29%. So, on an as-reported basis, we reported 22%. It would have been 29% without the—that unusual item last year. In terms of, on a pro forma basis, without the unusual item last year of those guarantee repayments, it would have been 22% growth. And as reported, it would be 15% growth. So, that gives you kind of a sense of how to look at it for Q3. For 2021 as a whole, we're reporting 34% to 35% growth of ex-TAC. And on a straight organic or without the Connexity piece, it would have been 26% on a pro forma basis. So, that gives you some idea of how to think about the organic growth. Your last question was, you asked about any sort of unusual items in operating expenses, I believe is what you were asking about. So in Q3, we did have some unusual items that we could—that we should mention. So if you look at 2020 versus 2021 for Q3 and you looked at similar OpEx as a percentage of gross revenue or of ex—really of gross revenue, we were up about $28.5 million versus what you would have expected. And of that there, the unusual items where there was a $13.5 million increase in stock-based comp. So that’s just higher stock-based comp related to us being public. Excluding share-based compensation, operating expenses were up $27 million. Second, part of this year-over-year increase comes from including one month of Connexity and operating expenses. Third, there are higher professional fees and legal expenses related to our M&A transaction. In terms of more routine operations, we had higher expenses driven by public company expenses as we expected. In addition, expenses were up due to a partial return to more normal operations following the COVID pandemic. This included a partial reopening of offices in several countries and some increased travel. The strong revenue performance flowed through to the adjusted EBITDA of $40 million, which was better than expectations and guidance. It was, however, flat year-over-year as the increase in gross profit was offset by the increases in operating expenses that I just described. From a margin perspective, the 31.4% ratio of adjusted EBITDA to ex-TAC gross profit was above our guidance and model. It is worth noting that net income was $17.3 million, which was $600,000 higher year-over-year. Net income was above our expectations of a net loss of $5 million to $7 million, driven by a $17 million reduction in warrant liability, lower income taxes, and higher gross profit that more than offset higher operating expenses. Lastly, Q3 produced free cash flow of $19 million. Through nine months free cash flow was $11.8 million, and we expect to exceed our original guidance from our PIPE deck of $33 million in free cash flow for the year. I would also like to note that if you look back to the beginning of 2020, we expect our ratio of free cash flow to adjusted EBITDA for the 24 months that will end this December to be approximately 60%. That means for every dollar of adjusted EBITDA that we will report in 2020 and 2021, we will convert $0.60 into free cash flow. This is very consistent with the directional guidance we've given, that we expect approximately 60% of our adjusted EBITDA to convert to cash over any reasonably long period. We ended the quarter with $312 million in cash and cash equivalents after the cash consideration paid for the Connexity acquisition. After netting out the $300 million in debt that we raised for the acquisition, we had positive net cash. So, we feel good about where we are from a capitalization point of view. Following our strong performance in Q3, which was on the back of a strong first half, we are raising expectations for Q4, as well as our full-year guidance. I won't go through our Q4 guidance, which is detailed in our release. For the full year of 2021, though, we are now projecting ex-TAC gross profit will be $512 million to $515 million, which represents growth of 34% to 35% versus 2020. That is an increase from our previous guidance of 31% to 33% growth that we gave during our e-commerce with Connexity Information Session. We're expecting 2021 full-year adjusted EBITDA to be $174 million to $177 million, which represents growth of 64% to 66% versus 2020. This demonstrates a very healthy adjusted EBITDA margin, meaning adjusted EBITDA divided by ex-TAC gross profit of over 34%. Per my previous comments about always seeking to beat the rule of 40, our growth rate of 34% to 35% and our adjusted EBITDA margin of over 34% well exceeded that goal. For modeling purposes, we estimate the fully diluted shares outstanding at the beginning of Q4 to be approximately 272 million shares. We are not updating at this time the guidance for 2022 that we provided during our e-commerce with Connexity Information Session, except to adjust the top line revenues guidance for Connexity—for the Connexity accounting change that I mentioned earlier. This results in our previous 2022 revenues guidance of $1.7 billion to $1.75 billion to be recast as $1.59 billion to $1.63 billion. To be clear, the only change in these numbers is to reflect that accounting change, and the change does not affect the fundamentals of the business. We look forward to providing an update on our 2022 expectations during our Q4 earnings call. Let me wrap up by saying that we continue to see many paths for growth in our business, and we continue to invest in these growth areas. We believe we will continue to grow our core business by bringing on more digital property partners and by growing revenue from our existing partners, primarily by continuing to grow our yield. And as Adam spoke about earlier, our investments in Recommend Anywhere and Recommend Anything growth strategies are showing good promise, and we look forward to telling you more about that in future calls. Finally, the Connexity acquisition is a game-changer that will provide significant upside to our business going forward. On that note, let's open it up for questions.

Thank you, everyone, for joining. I feel energized by our progress. Financially, we're beating 34% growth year-over-year, faster than the entire industry. Over the last two years, 60% of our adjusted EBITDA converts to free cash flow, which obviously matters. Unique to Taboola, we're well positioned in the strong market dynamics that are taking place with privacy and supply chain. We’re doing really well and growing. Connexity is building financials. We're integrating. We're just getting started with $100 million of synergies. I'm seeing good growth in our core business with yield bidding our expectations; SmartBid Dimensions; LINE and others are taking our technologies; and also the growth engines that we love—Recommending Anything and Anywhere, Taboola News, Xiaomi, NBC Sports with video, Dentsu. There’s a lot of good momentum. We're having a good time. I look forward to talking to many of you over the next few weeks. Thanks for listening in and asking us good questions. I also look forward to our Q4 and 2022. It's just the beginning. Thanks, everyone.

Thank you for participating. This does conclude the conference. You may now disconnect. Everyone have a great day.