Taboola.com Ltd. Q4 FY2021 Earnings Call

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Taboola Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. At this time, I would like to turn the broadcast over to Ms. Jennifer Horsley. Ma'am, you may begin.

Thank you. Good morning, everyone, and welcome to Taboola's fourth quarter and full year 2021 earnings conference call. I'm here with Adam Singolda, our Founder and CEO; and Steve Walker, our CFO. We issued our earnings press release yesterday aftermarket, and it is available, along with our Q4 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 for joining us for our fourth quarter call. I'm excited to say we finished the year with a record Q4 and record 2021. Taboola is growing fast, our EBITDA margin is over 30% and we're generating cash, and there's a meaningful momentum in the market. Let me share some of our 2021 numbers. Q4 revenues were $408 million, ex-TAC Gross Profit, which is what's left for us after we share revenue with our publishers, the main metric we measure as management, was $169 million, which represents a 54% growth rate over Q4 of 2020 on a reported basis. This ex-TAC growth rate in Q4 on a pro forma basis, which means if we had owned Connexity in Q4 2020, then our Q4 growth rates in 2021 versus 2020 would have been 22%. We also generated adjusted EBITDA of $65 million in Q4 with an adjusted EBITDA margin of 38.6%. When looking at 2021, we exceeded our full-year guidance, growing ex-TAC gross profit to $519 million; growth rates are 36% over 2020 on a reporting basis with Connexity pro forma, our ex-TAC growth rates in 2021 was 25%. To put this in perspective, when going public in 2021, we guided for 16% ex-TAC growth over 2020. We also delivered strong adjusted EBITDA of $179 million in 2021, at a margin of 34.6%. As you can see, 2021 was a strong year financially for us. But it was really a milestone year for us in many ways. We went public on June 30, completed our largest acquisition in our history, Connexity, making us a leader in e-commerce, brought new products into the market, and won meaningful partnerships all around the world. We've demonstrated our differentiation while we win, as well as establishing our predictability of the business with long-term exclusive publisher partnerships. All of this while delivering beat and raise each quarter. I'm very proud of the team for all of that we've accomplished in 2021, and these results providing us confidence to increase our guidance for 2022. Steve will share more details, but I would like to provide some highlights. We expect revenues of $1.67 billion, ex-TAC gross profit of $665 million, and adjusted EBITDA of $204 million, each at the midpoint of our guidance. This guidance represents an ex-TAC growth rates of 28% over last year and 16% on a pro forma basis, with a 30% to 32% adjusted EBITDA margin. I could not be more excited about our future, and I feel we're exactly where we need to be. There are only 24 hours in a day, and the average person makes about 30,000 decisions a day. And recommendation engines like Taboola are needed to help people make decisions that can impact their lives: what to read, what to listen to, what to buy. Our mission is to power recommendations for the open web anywhere outside of the Walled Garden. Over time, we aim to ensure that anything, and everything will be personalized powered by Taboola. I think of Amazon's 'people who bought this also buy' but powered by Taboola for content, products, and services, and everywhere on the open web outside of the Walled Garden. The open web is a $64 billion market and we have differentiated offerings that help us to win business fast and profitably. You've all used this before. If you've ever been on a website or an app that you love, like CNBC, or ESPN, or BBC, or The Independent, or El Mundo, Taboola recommends more content from the site you're already on, as well as from elsewhere around the web. People click on Taboola 30 billion times a year, half of it is to read and watch more editorial content, and the other half is sponsored by advertisers. Now more than 15,000 advertisers work with Taboola already to reach users in the open web in the right context when they're reading about something they care about. We reached about half a billion people every day. It's safe to advertise with us, and we're effective. Following the acquisition of Connexity, we're also a leader in the power of e-commerce recommendations, driving more than 1 million monthly transactions. Leading brands including Walmart, Macy's, Wayfair, Skechers, and eBay are among some of our key customers. This is a good time to also update about where we are in Connexity and our integration. We made progress in all three fronts that I talked about in the past. People, there's a lot of excitement and good energy. We're merging our sales and comms system and it's starting to feel like we're one. My goal here is that soon enough, people joining Taboola will not know who came from Taboola or Connexity. On the advertising front, there's good momentum in selling Connexity by the Taboola sales team starting in China and soon in the U.S. On the publisher front, we're cross-selling Connexity offering to Taboola publishers in EMEA and APAC, and we're getting good demand for it from all of our partners. You may have seen us highlight Connexity as part of our solution in recent press releases in win announcements, so you already know that the market cares about it. Taking a step back, over the past year, the open web has begun to transition from its addiction to tracking user data and is shifting to contextual targeting. I'm encouraged by where the industry is going. It's safer for users and contextual advertising is the source of Taboola’s strength. Advertisers can reach users on Taboola based on their reading preferences, what makes them curious, what interests them, what they watch and read, not just what they told a social network about themselves. This is the future of our industry, especially in the back of all the changes we're seeing with Apple, Google, and more. As I reflect on 2021, there are three important things on my mind as it relates to our business. I'll share highlights of each: our differentiation and how that makes us win, our significant growth opportunities in our $64 billion market, and a strong predictable financial model. We win business because we're differentiated in the marketplace. Many companies in the advertising space offer ads to publishers. But the truth is that nobody is looking forward to seeing an ad. Taboola, though, doesn't just offer ads. Publishers working with us get more than just revenue; chief editors choose Taboola, product leadership chooses Taboola, the audience development team chooses Taboola, and now e-commerce people choose Taboola. Thanks to that, we're able to win long-term exclusive partnerships with some of the most amazing publishers in the world. This is what comes from having a product-led approach and investing $100 million a year in a unique platform offering that differentiates us. Here are a few of those investments that took place in 2021 and how our clients and partners choose Taboola, thanks to them. Advertisers choose Taboola because our technology and AI work. SmartBid is our AI that helps advertisers succeed with Taboola. Similar to how if you're buying an ad from Google or Amazon, their technologies optimize on your behalf. At Taboola, it's called SmartBid. In Q3, we announced SmartBid’s newest innovation, Dimensions, which factors in 40 different signals or dimensions, as we call them, at scale to drive strong campaign performance. Most companies are providing advertising solutions to publishers without programmatic channels to bring dollars, and they're trying to be less dependent on it. They call it supply path optimization. It means that they want less companies between them and the advertiser or client; it means they are not the ones optimizing for the advertisers. They're not sure if the advertiser will keep buying from them. With Taboola, on the other hand, we behave a lot more like Google, Amazon, or Meta, where the vast majority of our revenue, about 90% of it, comes from advertisers who work with us directly. Those advertisers use SmartBid AI to optimize their campaigns, using user self-service tools, best practices, new ad formats, and data to succeed, and we know who they are. We onboard them, we grow their business; it just works. On the supply side, when you compare Taboola to companies that are mainly demand-oriented and programmatic, our main advantage is that we don't buy inventory and hope that the inventory we have now will be here tomorrow. We work with publishers exclusively and long-term, which means that as an advertiser working with Taboola, you're one step away from the publisher, and there's consistency in the people you get to reach. In many ways, Taboola to the advertiser community is much more like a consumer company. You can think of us as one big global publisher, we have guaranteed supply, and we reach half a billion people every single day. All of those dynamics help advertisers succeed with us repeatedly. We also invested in 2021 in our high-impact placements product launch to capture new mid-article inventory to drive greater brand and agency growth; partners like NBC Sports, Future, Reach, and Sinclair are choosing us for those reasons and brands just love it. In further support of our brands and agency work, we've established important relationships with brand protection groups like DoubleVerify or Moat and others. Another significant differentiator for us are editorial products, like newsroom and the newly launched homepage for you. We've been investing in these for the past five years, and it's paying off. AI technology that empowers editors to get unique insights about their decisions. The Homepage for You makes the homepage as personalized and engaging as the world’s top social apps. These new offerings have been showing us that we can drive over a 30% increase in fixed rates on the homepage, and that's already been adopted by leading publishers. Our competitors don't offer products like this, and they miss an opportunity to engage one of the most important audiences on the publisher side, the editors. It's been a decision point in Q4 wins like McClatchy and NDTV, which is valued at so much they signed a 10-year partnership with us. Another star within Taboola is Taboola News—think Apple News, but for Android devices. In 2021, we secured groundbreaking partnerships with Samsung Brazil and Xiaomi all around the world, two of the largest Android OEM manufacturers in the world, to integrate a speed of use on Android devices. The news we are getting scaled and now drives an average of more than 400 million monthly engagements on editorial content from mobile devices in OEM partnerships. This represents an increase of more than 125% year-over-year. Last but not least, our leadership in content moderation. We want to make sure the open web stays safe, and I'm convinced that our processes, policies, and approach are some of the best in our space. We have a dedicated moderation team of 50 employees that review every new advertisement. We were the first unmoderated COVID-19 when it happened to make sure people are safe and we don't recommend things that can hurt people. Our policies are public; anyone can read them. They're local and relevant to the market they're enforced in. We interact with local reporters and authorities to constantly learn and improve. Our products, our approach, and providing more than just revenue, as well as investing in policies in a safe open web help us win publishers and advertisers. As I look at the last year, we've had a tremendous amount of momentum, winning partnerships with BBC, Hearst, Penske Media, Line Today in Hong Kong, and Le Figaro. We've also announced exciting news as we saw the new agreement with Microsoft lasting into July 2024, allowing both Microsoft and Taboola to look for even faster growth as part of a new bidder technology which Microsoft has supported us in the design of. As I finish my remarks, I want to spend a few moments on our significant growth opportunities. Think of it in three phases. The first one is how we win within the open web $64 billion core market. The second is how do we expand to recommend even more things, so our platform becomes more valuable to users, our clients, and our yield goes up. We're making good progress here. E-Commerce is already 50% of our business, and brands and agencies account for another 50%. The third one is how can we bring our partners, clients, and technology through a command whenever people spend their time. In our core markets, the open web is still monetized using traditional ads, which provide limited value to users. Nobody opens their browser looking for a great banner; it's just never going to happen. While people do actually interact with Google ads or Amazon ads, which do a great job, honestly, of recommending whatever people want. On Amazon, some of the product recommendations are organic, and some are sponsored. But they're all relevant to both advertising and user experience. I think a lot of the $64 billion market should look like Amazon, and Taboola can power it. Taboola offers more than just traditional advertising products. We offer users a mix of Taboola recommendations bundled with paid recommendations, all natively rendered. When you search on Google, some of the results are organic, and some are paid, but they're all related to what you want to do next. We're not stopping here. Over the next 10 to 20 years, Taboola will recommend anything and be anywhere. Our aspirations are to be on every connected TV, every mobile device, and every car, much like cars now arrive with Spotify for music in them. Cars should be shipped with Taboola inside for local national news or for podcast recommendations. We see tremendous opportunities to grow in new ways to take our contextual signals, AI, and our data superpower to new places to disrupt the traditional advertising ecosystem and capture a larger share of the $64 billion plus open web market. As we think about the future, beyond the core, we want to keep diversifying what's recommended as well as ensure we're integrated wherever people spend their time. This is the foundation of our 'Recommend Anything, Recommend Anywhere' strategy. And before I pass it to Steve, let me just say what a good time it is to be in our space and at Taboola; we're kicking off 2022 on the back of a very strong 2021. We're executing, we're energized to keep innovating on the product front, and we're excited to work with incredible partners all over the world. We're growing fast; we generate over 30% EBITDA margin, which generates cash, allowing us to invest in recruitment, M&A, and other things. In 2022, we intend to grow over 20% of our employee base around the world. We have delivered it to keep innovating and redefine our dream. Lastly, as we look for where we stand in the broader market, we're driven by contextual signals that help us navigate well the evolving privacy dynamics. We're among the biggest companies in the open web and in e-commerce already. And in the aftermath of the pandemic, we're all buying more things online and we'll never go back to how we used to in 2019. We are already in the future, and Taboola is ready for it. I will now hand it over to Steve, who will dive into deeper details on our financial performance and guidance. Thank you.

Thanks, Adam. And good morning, everyone. As Adam shared, we had a strong fourth quarter to end 2021. As you'll see in our earnings release, we beat our Q4 guidance on all measures. As Adam referenced, we're raising our 2022 guidance. Since we are still relatively newly public, I will remind everyone of how we look at and measure our business. We're focused on achieving profitable growth. We measure our performance against this goal by looking at two measures. To measure growth, we look at 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. Adjusted EBITDA margin is our adjusted EBITDA divided by our ex-TAC gross profit, similar to how SaaS businesses have a rule of 40, where they always want the growth rate plus their profit margin to exceed 40%. We want the sum of our ex-TAC growth rate and our adjusted EBITDA margin to exceed 40%. So now on to our Q4 and full-year 2021 results. Revenue in Q4 was $408 million. Ex-TAC Gross Profit was $169 million, and adjusted EBITDA was $65 million. This represented ex-TAC growth of 54% year-over-year, or 22% on a pro forma basis with Connexity, and a 38.6% ratio of adjusted EBITDA ex-TAC Gross Profit, or what we often refer to as adjusted EBITDA margin. All of the measures I highlighted are record levels. This performance propelled us to full-year 2021 revenue of $1.4 billion, ex-TAC Gross Profit of $519 million, and adjusted EBITDA of $179 million. This represented ex-TAC growth of 36% year-over-year on a reported basis and 25% on a pro forma basis, and an adjusted EBITDA margin of 34.6%. The 25% pro forma growth rate and over a 34% margin put us well above our rule of 40 company target. I'll also note that our 25% pro forma growth rate is significantly better than our original 2021 PIPE deck projections, which would have had us growing ex-TAC at around 16% in 2021. The same goes for our adjusted EBITDA margin of 34.6%, which was well above our PIPE deck projection of 28.6%. As Adam shared, we are seeing continued good progress in the business, winning new customers and growing our existing customer relationships at a good pace, primarily through growing yield and executing on our recommend-anything and recommend-anywhere growth initiatives. Of the Q4 gross revenue growth of $56 million, $21 million came from new digital property partners, and $35 million came from the growth of our existing digital property partners. Our Q4 ex-TAC Gross Profit was $169 million and was up $59 million or 54% year-over-year. This growth came from three sources: the addition of new digital property partners to our network, growth of our existing digital property partners, and the addition of Connexity to our business. The 54% growth rate also benefited from a soft comparable quarter due to $17 million in guaranteed TAC payments withheld in Q2 and Q3 of 2020 and repaid in Q4 of 2020. Looking at our single quarter growth rates is somewhat deceiving in 2021, because of the withholding of the guarantees in Q2 and Q3 of 2020 and subsequent repayment in Q4. To better understand our growth rate, I've consistently pointed to the full-year ex-TAC growth, which was 36% reported and 25% on a pro forma basis. For the full year, our ex-TAC net dollar retention for our publishers was extremely strong at 116% for Taboola on a standalone basis. Looking now at operating expenses, they were up $38 million year-over-year driven by growth and investments in our business, the inclusion of Connexity, higher depreciation and amortization from intangibles coming from the Connexity acquisition, and expenses related to being a public company. We generated adjusted EBITDA of $65 million in Q4, an increase of $32 million year-over-year. Margins remained very strong as our adjusted EBITDA margin was 38.6% in Q4, which exceeded guidance. The fourth quarter is our seasonally highest margin quarter given the higher revenues, which is why it's good to also look at the full year from a margin standpoint; our adjusted EBITDA margin was 34.6%, above our long-term target of 30% and also an increase from 2020, which was 27.8%. It is worth noting that we had a net income of $600,000 in Q4, compared to a net income of $2.8 million in 2020. You can look at the net income to adjusted EBITDA reconciliation to see that the two biggest factors year-over-year that contributed to offsetting net profit growth were higher depreciation and amortization of $15.9 million, driven by the intangibles from the Connexity acquisition, and higher tax expense of $15.4 million in 2021 due primarily to the fact we exhausted certain tax credits. In terms of cash generation, we have been consistent in saying that we expect our ratio of free cash flow to adjusted EBITDA to be around 60% over any reasonably long period of time. In 2021, we generated $24 million of free cash flow. If you look back at the last 24 months, our free cash flow was $146 million, or 51% of our adjusted EBITDA over that period. Excluding M&A costs and the one-time cost of going public, that ratio would have been 61%. So in line with our expectations, we continue to expect free cash flow to be approximately 60% of our adjusted EBITDA over any reasonably long period of time. We ended 2021 with a strong balance sheet position with a positive net cash position. Our cash balance of $319 million was above our debt balance of $285 million, so a good position that provides us ample financial flexibility. Following our strong Q4 In 2021, we are raising our expectations for 2022, as highlighted earlier. I won't go through the Q1 guidance which we are issuing for the first time, though I will note that Q1 is seasonally the lowest revenue quarter for us. In addition, Q1 2022 is a challenging comparable quarter because ex-TAC Gross Profit grew 54% year-over-year in Q1 2021, which was an exceptionally strong performance. However, as you can see from our guidance, we still expect strong growth for 2022 as a whole. I also wanted to provide a rough breakdown for seasonality, given we are still new to some investors and now have Connexity results which will change our seasonality profile. We expect ex-TAC for the year to break down approximately as follows: 20% in Q1, 23% in Q2, 25% in Q3 and 32% in Q4. For adjusted EBITDA breakdown, we expect to be approximately 16% in Q1, 20% in Q2, 22% in Q3, and 42% in Q4. Note that there is a higher seasonality for adjusted EBITDA, given that costs are relatively stable, but revenue and ex-TAC increases considerably in Q4. For the full year of 2022, we are now projecting ex-TAC Gross Profit will be $661 million to $669 million, which represents growth of 27% to 29% versus 2021 or 15% to 17% on a pro forma basis. That is an increase from our previous guidance of $645 million to $665 million. We're expecting 2022 Full-year adjusted EBITDA to be $195 million to $213 million. This demonstrates a very healthy adjusted EBITDA margin, meaning adjusted EBITDA divided by ex-TAC Gross Profit of over 30%. As I stated previously, we expect the margin to be closer to our model target of 30%. As we ramp up investments in our core business, as well as our growth initiatives. We are planning on growing headcount by 23% over the course of the year, with a heavy emphasis on increasing our R&D capacity. 2022 operating expenses are also proportionately higher than 2021 as we factor in a full year of public company costs and return to more normal operating expenses post-COVID. We are also introducing, beginning with Q1 2022 earnings, a non-GAAP net income reporting metric. We believe this can be helpful in modeling our business as well as for providing comparability to peers. As you can see in our release, we are guiding for 2022 non-GAAP net income to be between $111 million and $129 million. We will be filing with our 20th Annual Report historical results for this new measure. To wrap up, we are focused on continuing to execute and to build on the significant progress we made in 2021. We see tremendous opportunities to grow our core business by bringing on more digital properties and by growing the revenue from our existing partners, both by continuing to grow our yield and by continuing to offer additional products and services. We have a strong foundation for new growth from our recommend anywhere and recommend anything growth strategies. E-Commerce now makes up over 15% of our ex-TAC Gross Profit. Brands and agencies are also over 15%, and Taboola News is gaining scale.

Thank you. Our next question or comment comes from the line of Justin Patterson from KeyBanc. Your line is open.

Great, thank you very much. Adam, you made a lot of progress with Taboola News this past year. What are the next big initiatives to expand reach? And what are the factors you're looking at to determine the right monetization model? And then for Steve, good progress of high-value segments about 30% of ex-TAC gross profit growth or ex-TAC gross profit. As we look toward 2022, how are you ramping up these segments, and how is that contemplated in guidance? Thank you.

Hi, Justin. Good morning, everyone. Thanks for the question. Thanks for joining us. So we're seeing – in Taboola News, we’ve seen a lot of good momentum. You've seen some of the announcements last year with Samsung Brazil and Xiaomi all around the world. And we've also, in my letter, I wrote about our monthly engagement, that is growing around 25% year-over-year. So we're seeing consumers interacting with Taboola News in a growing way, which is exciting. The reason, by the way, it's important to us not only because it can be a revenue generator, which I'll speak about in a second, but also because strategically, every time the consumer opens their Samsung and clicks on a piece of content, we open the browser and send that person straight to the publisher, which is a different experience than Apple News, which keeps you within the Apple ecosystem. That means that we're slowly becoming a more significant source of traffic to publishers in the open web, which is very powerful. If you compare us to SEO or social traffic, that's something publishers perceive as very important in terms of going to our monthly readership. So that's why that is not only financially exciting but also strategically important for us. Now, what's interesting is that Taboola News, it's a multi-year startup. So it’s a startup within Taboola, but it's starting to be also financially interesting for us. In fact, some of what we're seeing in our 2022 model is actually including some growth engine dollars that we're seeing; it's already in the millions of dollars Taboola News and expect this to continue to grow. The way we generate revenue from Taboola News is in one of two ways. One, at times, when you swipe right to see a feed of news—much like when you have on Twitter or other social networks—that feed incorporates paid advertising from our advertising community. So you might see three or four recommendations from news that you like, and then the fifth one would be paid. If you click on that, it generates revenue, and we share that revenue with the OEM; that's one way we generate revenue. The second way is, every time you click on a piece of content, you land on an article or a video that has a Taboola feed on it, which we monetize very well, as you know, that's our core business.

And then, in terms of the high-value segments that you asked about, so I think, first of all, we're very excited about the progress we've made there. So you noted, Justin, that each of those is now over 15% of our ex-TAC, which is great to see. In terms of going forward, the Connexity or the e-commerce portion of our business is over 15% already, and we're excited about where we're going with that. So we're seeing good progress in terms of capitalizing on the synergies. And that's one area that you're going to see that in our forward-looking guidance as we obviously projected about $6 million of synergies from Connexity this year and we expect to continue to grow those over time. We've said that we think that can be $100 million of ex-TAC in four years, so that's the biggest impact that you're going to see on the e-commerce side. For brands and agencies, you've seen a lot of announcements from us recently about becoming certified as a brand-safe channel for brands and agencies. I think you'll see more announcements in the near future about partnerships that we're building with agencies and with brands to bring them on. And I think where both Connexity e-commerce and the brands and agencies kind of impact our business in terms of our guidance is in terms of growing our existing base. So they're great upsell opportunities with our existing base for high impact placements. For homepage for you, which also gives us high-impact placements and will help us work with brands and agencies. So it's an upsell opportunity. You'll see it in that 60% of our growth that we expect to come from growing our existing base. Like I said, Connexity, you'll also see in terms of how we ramp up the synergies there; that will impact our financials as well. Also, I've mentioned one other thing, which is that we're also excited by Taboola News, our other growth initiative with Taboola recommending anywhere. So Adam just talked a little bit about that. But I think we're very excited that that's actually we're seeing it in the financials now. So it was part of our beat in Q4, and we're seeing that it's going to become a more material part of our business over time.

Great. Thank you.

Thank you for the question. Operator, next question?

Thank you. Our next question comes from the line of Andrew Boone from JMP Securities. Your line is open.

Hi, guys. Good morning, and thanks for taking my questions. Two, please. The first on Dimensions. Can you talk about any early results there that you're seeing from advertisers? And just how are the conversations going as advertisers are adopting the product? And then secondly, going back to Connexity, I think you talked about the sales that are in EMEA and APAC. I believe that there were just two U.S. salespeople. Can you just talk about the domestic kind of go-to-market and where you guys are in terms of integrating your own Salesforce and Connexity’s products? Thanks so much.

Yeah, Andrew, good morning. Love SmartBid. So let's start with that. So what we've seen in Q4, if you remember, we announced, I mentioned, and what was interesting, if you recall quickly is a reminder for everyone, Dimension basically allowed SmartBid to bid in a more granular way when you saw that it made sense. So as an example, if before SmartBid, an entertainment website would not get insurance ads or high-intent ads because SmartBid would think that it doesn't make sense to bid in that environment. From Dimension - once Dimension was introduced, SmartBid started looking at a more granular way, and even one article on an entertainment website that spoke about insurance, Sony would receive high bids from those types of advertisers. And that was new. What happened is that and that's the power of AI and deep learning. We started to receive new types of conversions from those environments in a more granular way. SmartBid essentially starts teaching itself something new, which is, again, the beautiful part about AI. We saw that in Q4, especially SmartBid starts collecting new types of conversions that we never got before. They're able to correlate short-term intent. So, it started—SmartBid started seeing that because of those conversions, people that read about certain types of things tend to buy something in a short term. It kind of almost like semi-retargeting, but using what I read, and that was something that SmartBid was teaching itself, which is very powerful. We start seeing early performance from advertisers that are doing really well. We have some numbers, but we haven't released them yet. But we're seeing good results from advertisers that our conversion rates are at a much better level in terms of CPA and cost per acquisition. That's something that will scale in 2022, I expect. But what's interesting is that SmartBid is teaching itself things based on new types of data that it's collecting, which is really the power of our investment in AI. And again, we are seeing the yield improvement. So as you saw, we beat our yield in Q4, and some of that was thanks to Dimensions. I'm very excited to see how we can scale that learning of this semi-retargeting using the context of the page, which is especially relevant in a cookieless world. So SmartBid is pitching itself and preparing itself, I guess, for a cookieless future.

Yes, by the way on the international piece, we've actually had multiple wins now in China, for instance, that was the synergy that we highlighted last quarter that we didn't actually expect, but we've had multiple merchants now sign up for eCommerce services through Connexity in China. So it's a—we're seeing progress on that.

Thanks, Andrew. Operator, next question?

Thank you. Our next question or comment comes from the line of John Blackledge from Cowen. Your line is open.

Great. Thanks. Two questions. Could you discuss the publisher extensions, like the new Microsoft deal, and any other new publishers added in the quarter? And then are there any big publisher deals up for renewal this year? And then on the iOS changes, any shift has been towards Taboola or more open platforms, given the recent iOS changes? Thank you.

Yep. Hi. Good morning. Thanks for the question. So Microsoft, we're still aiming to, as you saw in our announcement, we're excited about the bigger technology. We're working with Microsoft in support of designing that to launch Microsoft by the end of the quarter, which we're excited about, because we believe that is going to enable growth avenues for both of us as it relates to sources of inventory we did not get exposed to beforehand. So that is exciting. We have great momentum and partnership with Microsoft. As you know, we've been friends since 2015 or so. So I'm excited about that, and still on track to launch by the end of the quarter. I'm excited about what's to come on the other side in the years to come. We've extended that relationship to 2024. So we have a lot of time to keep working together on growing. So that's on that front end and just as a reminder, much like Google did with GDN, as an extension of their network. My expectation is that this will not only be an opportunity with Microsoft, but also, we could take that into other sources of inventory that historically we did not tap into—social networks, display inventory, and other things. So we do have, as you know, 90% of our revenue comes from advertisers who work with us direct. We have a huge advantage in the sense that we're not just programmatic in the sense that we hope for the best that advertisers will come our way; we control our fate by having advertisers working with us directly, which will enable us to extend our reach to other sources of inventory. So that just on the bigger one, and we are seeing early signs, I'm going to thank, we've updated the number of advertisers now working with us, that's growing nicely.

Thank you, John. Operator, next question?

Thank you. Our next question or comment comes from the line of Laura Martin from Needham. Your line is open.

Good morning. Can you hear me okay, Adam?

Of course. How are you? Good morning.

Hi, great numbers. Congratulations.

Thank you.

My first question is on OpenPass. So Trade just said they’re integrating this new product OpenPass, which is designed to get rid of some of the bad players in the middle of the ad tech ecosystem? And could you remind us how much of your demand—I know your two-sided platform—but how much of your demand comes from third parties like the Trade Desk and other DSPs? And is this bad for you this OpenPass where they are going directly to publishers? Or is it good for you somehow? But that's my first one.

Okay, let me start with this one. In general, and I wrote about that in the letter, I think it's great to see that supply-side companies are talking about supply path optimization, which means that they want to have more direct relationships with advertisers so that most of the revenue is direct versus programmatic. Now we're seeing demand-side companies hoping to work with publishers directly. What we're seeing is that supply-side companies want to become Taboola, and demand-side companies want to become Taboola. Because Taboola right now, all of our publishers are direct, exclusive, and long-term, and 90% of our revenue—so about 10% is programmatic—comes from third-party companies who buy Taboola in that way, and about 90% is direct. This means they use SmartBid to optimize on the Taboola network, which makes us much more like Google or Amazon in the sense that we're almost like a big consumer company. On the one side, we have publishers direct with us, and that’s a long-term agreement so we see people today; we’ll see them tomorrow. And on the advertiser side, 90% is direct. So I think these are good dynamics because they show that other companies appreciate Taboola’s current configuration, and I think they're driving towards the same future, which is publishers direct, advertisers direct, with some programmatic. Those are the Trade Desk. They're a friend and a partner. We work with them, work with Google, we work with many great demand-side companies. That mainly is good for us because they can participate in our auction and drive better yield when that happens, and some of that specific strategy. I don't think this specifically affects us in the short term because I’m not sure they haven't disclosed what type of inventory exactly they're going to go after. So I don't really know what their strategy is. But overall, I think that based on what we now do with the Trade Desk, I think we're more friends, and it can drive growth for publishers the way I see it as of now.

Okay, perfect. And then my second was on China. So I thought it was interesting in your notes that when you were talking about Connexity, you said that the momentum of selling Connexity in Taboola is starting in China, and soon in the US. I was curious, you now have 15% of your revenue from Connexity. How much of that is sitting in China? And do you feel any qualms about the rising geopolitical tensions between the US and China?

Yeah, so right now a very small percentage of our revenue from Connexity is in China, where we're in the early stages of selling to the Chinese market, basically to the Chinese merchants as we call them, the e-commerce advertisers. So we have—we’ve won a few deals, but we're very early. So it's a de minimis part of their revenue today. We do think it can be substantial in the future. I guess in terms of the rising geopolitical challenges, we're going to watch it closely and make sure that nothing comes up. But I think as of now, our perception is that China is such an important part of our overall economic system in the US that I don't foresee a time when a good Chinese merchant who happens to sell into the US is going to be blackballed because of that or other tensions. I am not sure that we see a short-term impact, but we obviously have to watch that closely as we go forward.

Okay, thanks, guys.

Operator, next question?

Thank you. Our next question comes from the line of Jason Helfstein from Oppenheimer. Your line is open.

Hey, thanks. I'm just trying to think about how we all think about a multi-year road story here. Whether it's thinking about the number of advertisers, the number of publishers. In the release, you talked about new digital revenue partners, which were $21 million of growth and existing partners $35 million. So should we think about maybe trying to model like the existing property partners and just think about a retention rate? You said 110% in a quarter; I don't know if it's kind of how you're thinking about it for the year. But if that's the right way to do a multi-year model to get to the long-term targets that you guys have discussed. And then the second, will you be providing the historical performance with Connexity for all of 2021 so we can think about two quarters organic versus pro forma growth? Thanks.

In terms of the multi-year model, I think the way we've spoken about this, and the way we think about this is that we expect about 40% of our growth going forward to come from new publishers that we bring on, our new digital property partners, and about 60% to come from growing existing partners. When we model our business internally, we look at it as a run-rate business, where next quarter equals this quarter plus new revenue we bring on, plus our net revenue from our existing publisher base. That obviously takes into account any sort of churn. Since we're saying 40% comes from new publisher partners and 60% comes from the growth of existing, you can back into what those numbers look like. But that's how we model our business, and that's the way we think about it. You bring on new supply, but you also grow your existing supply. The only other factor you have to factor in is seasonality, which has changed a bit with acquiring Connexity, which is a more heavily fourth-quarter oriented business than Taboola, although Taboola is also weighted to Q4. That’s the only other thing you have to take into account when you're modeling the businesses. In terms of pro formas, for now, what we will definitely commit to is each quarter will tell you what the pro forma growth rate was. We focus on ex-TAC because Connexity they'll be reported on, and we'll be using that revenue accounting for them. Gross revenue doesn't mean anything for them; so we will give you the pro forma growth rates on ex-TAC every quarter so you can understand how much of the growth came from Taboola versus Connexity, just by looking at the pro forma. We will provide that, and we will consider doing full pro forma financials quarterly for 2021 at some point. The challenge with it—just to be blunt about it—is they're not audited. We have to understand what we're allowed to do, given that I haven't done a full audit on a quarterly basis for them. That's the only challenge there. But in the meantime, we'll give you the pro forma growth rates so you can at least see what's organic and what's from the acquisition in terms of our growth.

And it just said just a follow-up. I think everyone was thinking through the impacts of IDFA. I think it was a pretty minimal impact on Taboola and maybe even positive from benefiting from the inflation in Android pricing. Now that Google is committed to doing something comparable, but probably more powerful, in that they're still going to allow some forms of measurement and targeting but with new rules, just granted it's two years away. But just how are you thinking about that in the impact on Taboola?

I can take this one. Overall, if I look at, you know, Apple blocking cookies and then IDFA starting from, I think, 2017, our yield went up, particularly for Safari. In Q1, we beat our yield expectations, and we feel comfortable raising our guidance. All of those decisions and results are based on the fact that, one, 90% of our revenue comes from advertisers who buy from us direct, so they don't use tracking that is being deprecated and things of that nature; they use our own data and our own AI. So that's a large portion of our revenue. And then, specifically with SmartBid Dimension, we're able to imitate retargeting and things that are sort of intent look likes using what I read and people like me to find similar things. So all of those dynamics are good for us. I think that the more the future is privacy-driven and context-driven, especially with Connexity, we stand to rise on the back of those dynamics out for me and for us. Google changes are good for the industry; they’re good for consumers, and they're good for Taboola.

Thanks, Jason.

Thank you.

Thank you. Our next question or comment comes from the line of Stephen Ju from Credit Suisse. Your line is open.

Okay, thank you. So, Adam, now that you've spent some more time with Connexity, can you talk about the typical sales cycle there versus Taboola? As you talk to advertisers, typically how long do you think it'll take for an average advertiser to test, refine, and get comfortable with Connexity before you start seeing major budget shifts going in that direction? And Steve, you've been doing this before, but I think you're still one of the few CFOs out there offering a full year outlook. You touched on this with a longer term but can you talk about the various inputs that are informing the projection for 2022? Thanks.

Stephen, good morning. Thanks for joining. With regards to Connexity, similar to Taboola, that's a two-sided marketplace when you think about publishers and advertisers. I'll start with the publishers. There's a short-term and long-term weight, its pacing. The short term is whatever content already exists on the publisher side, Connexity is able to monetize that immediately. The midterm and long-term on the publisher side is how do you expand, and we spoke about that on the Connexity to the investor day, how do you expand the amount of content a publisher may have so that a bigger portion of their site has high intent and thus a portion of e-commerce revenue? So if you look at websites like USA Today with review.com, Review.com is a whole world of e-commerce content and high intent content, which they worked on for years creating. Same goes for Meredith's other great publishers. That's still a small subset of the universe of publishers. So what I'm seeing is there's a short-term gain, which is just whatever people have written that has intent, and then over time, they're going to use Connexity publisher solutions to know what to write about that makes sense for them and how to monetize that with us. So that's the publisher side. So there's a short-term and long-term, and then, every synergy, all of what I'm saying can be digested and included in our synergies forecast that you have. On the advertiser side, it is a slow ramp. Two-thirds or so of the businesses are CPC, and those big retailers try for a while to see that it works for them. I can tell you this looking at the past of Connexity; when someone finds success with Connexity, they tend to stay for a very long time. I think the tenure—the average tenure is over ten years for those retailers, and they have some of the best ones. So, it is a slow ramp. They take their time; they're paying very high CPCs. But once it works, it sticks for over a decade. So we're still in terms of seeing new sales cycles. But that's the dynamics I expect to see based on the past.

In terms of your second question, Stephen about how we project growth and give guidance going forward. One of the things we really love about our business is that it's very predictable, especially relative to other advertising-based businesses. That's because we've got committed supply, so we have long-term agreements; the average tenure of our contracts is over three years in terms of a revenue-weighted basis. We have committed supply and then we've got demand that basically scales with us. As long as we are performing for these advertisers, they continue advertising with us. What that does is it makes our model very predictable. We've, as you mentioned, and kind of related to what we were talking about with Jason just a moment ago, it gives us the ability to forecast our business on a sequential basis as we go forward. The way to think about our business is as a run rate. So next quarter, again equals last quarter plus the new business we’ll bring on plus the change in the existing business. Generally speaking, that's all very predictable. If you look back at our historical sequential quarterly rates, you can see that it's fairly consistent. You typically expect about a 16% decline in Q1 because of seasonality; you'd expect some slight growth in Q2 and Q3; you expect to bump in Q4. If you just look at those historical numbers, it's very predictable, and we feel very comfortable because of that history, being able to predict what our future quarters will look like. What's interesting, by the way, is if you do that math and you look back at historical quarters, there’s one quarter historically that stands out sequentially; it's Q1 2020. Q1 2020—sorry, Q1 2021 actually had a much lower decline from Q4 2020 than you would expect; it was only down about 4%, which was a historically very strong quarter and a tough comparison for us this year. Generally speaking, we feel good about being able to predict our business because we have history; we understand where the growth comes from, and we’ve got committed supply and demand that scales with us. It’s a very predictable model, and we feel good about being able to project that out.

Thank you. Operator, I think you have one more question.

Thank you. Your next question or comment comes from the line of Shyam Patil from SIG. Your line is open.

Hi, guys, this is Jared, on for Sean. Thank you for taking the question. One for you. Just on the seasonality that you touched on a little bit there, as well as provided earlier in the call. You're looking into the second half acceleration that you're seeing there. This is definitely more material than especially pre-pandemic. Is that change entirely due to Connexity, or are there other tailwinds that you're anticipating as you look out to the second half?

I think if you, as I just mentioned, if you look at our historical quarters, the acceleration, as you're talking about in the second half, is really not an acceleration in the second half. The only change is that Q1 2021 was exceptionally strong. The dip from Q4 2022 to Q1 2021 was only 4%. Historically, our dip from Q4 to Q1 is around 17%. So it's not really an acceleration of growth as you go throughout the year. It's really just an unusual comparison quarter last year. We can share more numbers on that. But if you listen to my opening remarks, I gave quarterly splits for what we expect this year on ex-TAC quarter-by-quarter. If you do the math on that, you'll see that those quarterly splits align fairly closely with our historical average with a slight, and by slight, I mean, 5% or 6% shift towards Q4, and that is basically the Connexity effect. Connexity is a more heavily Q4 seasonal business than ours. So there's a slight shift there. But mostly, the numbers are consistent with our history.

Great, thanks, Jared. I think this wraps it up. Adam, do you have any closing remarks?

Yeah. Thanks everyone again for joining us, and I hope to see many of you on our Investor Day. I'm really excited about our vision and mission to help people discover things they may like and never knew existed. I'm convinced we have an opportunity to over time become a personalization engine used by billions of people and be integrated wherever people spend our time: every phone, every TV, every audio device, every car. Being a public company for only a few quarters, we had a record quarter and a record 2021. We grew 36%, our ex-TAC in 2021 and 25% performer. Our EBITDA margins are north of 30%. That gives me and us confidence to raise our guidance in 2022, which is such a good start for us as a new public company. Also, I think the world is getting tired of user tracking dynamics, and again, it's a great time to be a company that is driven by contextual signals that are safe for people and works for advertisers. We're exactly where we need to be. I'm looking forward to meeting and engaging with many of you over the next few weeks. And don't forget to tune in to our Investor Day on March 29. We're going to have our management team, clients, and partners, and it's going to be awesome. Thanks, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.