Good day, and welcome to Outbrain, Inc. Second Quarter 2024 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I’d like to turn the call over to Outbrain’s Investor Relations. Please go ahead.

Good morning, and thank you for joining us on today’s conference call to discuss Outbrain’s second quarter 2024 results. Joining me on the call today, we have Outbrain’s CEO, David Kostman, and CFO, Jason Kiviat. During this conference call, management will make forward-looking statements based on current expectations and assumptions. These statements are subject to risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. These risk factors are discussed in detail in our Form 10-K filed for the year ended December 31, 2023, as updated in subsequent reports filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the call’s original date, and we do not undertake any duty to update any such statements. Today’s presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company’s second quarter earnings release for definitional information and reconciliations of the non-GAAP measures to the comparable GAAP financial measures. Our earnings release can be found on our IR website, investors.outbrain.com under news and events. With that, let me turn the call over to David.

Thank you, Sam. Good morning, and thank you for joining us today for our second quarter 2024 earnings call. Last Thursday, we announced a definitive agreement to acquire Teads, combining the two companies into a platform that we believe will define the next generation of Open Internet advertising. This is a transformative merger that positions us as one of the largest Open Internet advertising platforms. It dramatically changes our financial profile in terms of profitability and growth opportunities. We believe the combination will deliver significant accretion to our shareholders through synergies and the financial leverage of the transaction. The two companies have amazing teams of talented, innovative, driven people that have been instrumental in establishing our two companies as category creators and leaders — Outbrain in performance and Teads in branding. Together, we believe we will create a scaled global platform that can deliver outcomes for advertisers currently only rivaled by walled gardens. We’ve been clear that our vision is to become a true end-to-end full funnel platform for the Open Internet, with the level of service and standards centered on serving brand needs. The news of our merger with Teads allows us to take a massive step forward in executing this strategy. The reception we’ve seen from many industry players reinforces our confidence in the merger’s rationale. Many of our partners from media owners to brands and agencies expressed their excitement about the opportunities the new company would create. For example, Peter Wurtenberger, Executive Vice President at Axel Springer wrote to us: 'This is a significant milestone for both companies, and we are thrilled to see your expanded capabilities. We look forward to seeing the positive impact this partnership will have on the industry and on our collaboration.' And another one, Alexandra Chabanne, CEO of GroupM France, one of our agency partners, wrote: 'This merger of the leaders in performance marketing and video branding promises to be an exciting and transformative alliance.' These statements are just two of many examples of the overwhelmingly positive feedback from so many of our clients, and I want to take this opportunity to thank them for that and for their continued partnership. The two companies will continue to operate as stand-alone businesses as we prepare the post-merger integration plans. Closing, which is subject to regulatory approval, shareholder vote and other standard closing conditions, is expected by Q1 2025. Now I want to provide an update on Q2 and the progress on our 2024 growth drivers. For Q2, I’m pleased to report that we delivered ex-TAC gross profit of $56 million towards the high end of our guidance. We significantly exceeded our adjusted EBITDA guidance with $7.4 million, and we generated positive free cash flow for the fourth consecutive quarter. These results are driven by positive trends in our core business and the momentum in our growth drivers. As you may recall, these growth drivers we talked about revolve around three pillars. The first pillar refers to expanding our share of wallet with advertisers across both brands and agencies as well as performance advertisers. Onyx direct sales continued to grow through the combination of new clients, new markets, and rebookings. We successfully launched Onyx in Israel and Spain, and have several campaigns live in both countries. This is in addition to the U.S., U.K., Germany, Italy, and Japan. In addition, Onyx has continued to see a strong rebooking rate of nearly 40% in Q2, reflecting the business impact Onyx has delivered for our clients. Notably, we secured multiple campaigns from enterprise partners such as Disney+, Purina, and Nissan, including a great campaign promoting the Taylor Swift Online Store. Sorry, I had to mention this campaign to get some credit with my daughter. On the performance side of our business, one of our main initiatives is shifting certain buyer profiles to our DSP, Zemanta. Our DSP enables these clients to drive return on spend at a larger scale on the Open Internet, allowing us to capture a larger share of wallet from these clients at a higher ex-TAC margin. In the first half of 2024, we achieved remarkable growth on our DSP with advertiser spend growing by approximately 50% in comparison to the first half of 2023. Moving on to our second pillar, we’ve continued to expand our supply footprint outside of our traditional feed, enabling advertisers to reach consumers with a range of placements across the entirety of the Open Internet. These revenues, which are on inventory beyond our traditional feed, represented approximately 27% of our revenue in Q2 2024 versus 24% in Q2 2023. Our third pillar, we continue to invest in deepening our partnerships with top premium media owners. We signed new exclusive feed partnerships, among others, with EBRA in France and The Daily Beast in the U.S. We also renewed several partnerships, including Ad Alliance in Germany and Vox in the U.S. This resulted in retention of 99% in Q2. Also, Keystone saw continued adoption by some of our top premium publishers. Let me share a few highlights on our product and our goals. We launched a new AI-driven targeting solution, predictive demographics. Predictive demographics enable our clients to reach relevant demographic audiences without relying on third-party cookies. Outbrain-predicted demographics are establishing themselves as a real option for demographic targeting among Zemanta buyers, with early data showing an adoption rate surpassing traditional third-party targeting segments by up to 40%. For one of our recent clients, a public health campaign in the U.S., predictive demographics drove 2.7x higher click-through rate in comparison to campaigns using third-party demographic segments. We are encouraged by these results, which signal to us that advertisers are looking for privacy-forward audience solutions that can drive results. On the heels of Google’s announcement to reverse their plans to deprecate third-party cookies in full, we remain committed to driving results with contextual and privacy-centric signals. The successful launch of predictive demographics is a reflection of this. On the algorithm side, our click-through rate has witnessed double-digit growth in the first half of 2024. And we’ve also witnessed our third consecutive quarter of year-over-year RPM growth, sustaining our upward momentum. In conclusion, our second quarter has been marked by growth, new partnerships and innovative strides in improving campaign performance and user engagement. I’m confident that our trajectory remains strong and that we are well positioned for sustained success in the future. We are thrilled to embark on the next chapter with Teads and a focus on executing our strategy to build towards becoming the preferred full funnel platform for brands on the Open Internet. With that, I’ll turn it over to Jason.

Thanks, David. As David mentioned, we achieved our Q2 guidance for ex-TAC gross profit and exceeded our Q2 guidance for adjusted EBITDA, generating positive free cash flow for the fourth consecutive quarter. And overall, we feel we have made updates to our revenue mix and cost structure that are having a positive impact on our profitability now and we expect that to continue in the future. Revenue in Q2 was approximately $214 million, reflecting a decrease of 5% year-over-year. New media partners in the quarter contributed 6 percentage points or approximately $14 million of revenue growth year-over-year. Net revenue retention of our publishers was 89%, which reflects continued headwind from the impact of the demand environment on pricing as well as downward pressure of ad impressions from certain key supply partners as noted in the prior quarter. Consistent with recent quarters, logo retention was 99% for all partners that generated at least $10,000, and our five largest partners amounted to only two combined percentage points of year-over-year headwind on NRR. With respect to advertising demand, pricing remains low relative to our history. And while it remains down year-over-year, we have seen positive trends over the course of Q2, improving month-over-month. This, along with continued improvements in click-through rates, drove acceleration in RPMs, which have now seen growth year-over-year for the third consecutive quarter. Ex-TAC gross profit was $50 million, an increase of 3% year-over-year, outpacing revenue for the fifth quarter in a row, driven primarily by a net favorable change in our revenue mix and improved performance from certain deals. As noted previously, the investment areas we are focused on are largely areas that we expect will drive a higher ex-TAC take rate, and these areas are helping bring that to fruition. While ex-TAC gross profit returned to year-over-year growth in Q2 on the strength of these accelerating growth areas and the positive momentum of RPMs, over the past two quarters, we’ve noted volatility from one of our key partners transitioning to a new bidding technology, Outbrain being one of the first partners to complete this transition in early May. The transition involves access to new supply opportunities for us, and we remain focused on the optimization and rescaling of our demand. This volatility impacted our ex-TAC gross profit in Q2 by a high single-digit percentage. Our overall Q2 ex-TAC gross profit would have grown double-digit percentage year-over-year, excluding this one isolated headwind. Moving to expenses. Operating expenses decreased by approximately 1% year-over-year to $51.2 million in the quarter as we continue to balance investments in our strategic priorities with continued cost discipline. The OpEx decline year-over-year was driven by compensation and bad debt savings as well as timing benefits of expenses shifting from Q2 into H2, offset partially by the increased professional fees related to our announced anticipated transaction with Teads. As a result, we doubled our adjusted EBITDA year-over-year to $7.4 million. Moving to liquidity. Free cash flow, which, as a reminder, we define as cash from operating activities less CapEx and capitalized software costs, was approximately $300,000 in the second quarter as a result of offsetting the impacts of profitability, strong collections of receivables, timing of income tax and other payments and seasonality. As a result, we ended the quarter with $229 million of cash, cash equivalents and investments in marketable securities on the balance sheet and $118 million of long-term convertible debt. In December 2022, the company’s Board of Directors authorized a $30 million share repurchase program. And in Q2, we purchased approximately 0.5 million shares for $2 million. As of June 30, we have $6.6 million remaining under our current authorization. Given the pending acquisition of Teads, we currently do not intend to continue repurchasing shares. Turning to our outlook. In our guidance, we assume regular seasonality and as noted in the prior quarter, continued execution of our growth drivers. Additionally, our guidance reflects Outbrain as a stand-alone business with the assumption that the announced transaction with Teads will not close before year-end. With that context, we have provided the following guidance. For Q3, we expect ex-TAC gross profit of $58 million to $62 million, and we expect adjusted EBITDA of $8 million to $10.5 million. We maintain our previous full year 2024 guidance for ex-TAC gross profit of $238 million to $248 million and are increasing our guidance for adjusted EBITDA to $31.5 million to $36 million. Now I’ll turn it back to the operator for Q&A.

Thank you. (Operator Instructions) And we’ll take our first question from Andrew Boone from JMP Securities. Please go ahead, Andrew.

Good morning. And thanks very much for taking my questions. You highlighted the growth in RPMs in the quarter. Can you talk about the drivers of that and your confidence that this can continue? And then, Jason, can you wrap that into the implied guidance for Q4 and talk about your confidence, just given the implied acceleration that full year guidance implies for Q4? And then David, just stepping back, can you talk about the conversations that you’re having with advertisers just in the last week, understood still very new. But what’s the reception been to the announcement of the Teads acquisition? Thanks so much, guys.

Sure. Thanks, Andrew. It’s Jason, and I’ll take the first couple there. So as far as what’s driving RPMs, it’s the third quarter in a row that we’re seeing yields or RPMs up year-over-year. One constant driver has been the click-through rates, which we’ve been, each quarter, breaking our previous records as far as just how high those click-through rates are. A lot goes into that: algorithmic improvements, use of additional data signals, and optimizations like some of our dynamic placements that we’re using, which are helping drive higher click-through rates. So click rates have been a positive trend for us for a long time and are moving in the right direction. The one kind of new thing I’d say this quarter was we started to see a better trend on cost per click, on CPCs, which have been a headwind and remained a headwind year-over-year in Q2. But over the course of the quarter, we started to see it going in the right direction as far as just narrowing the headwind year-over-year. So that was a real positive. It comes with some market dynamics and also some changes we made internally as well. So good things there for RPMs, and we obviously see it not only driving better revenue but also better margins. And then as far as the confidence in the back half and Q4, we do expect acceleration in Q3 versus Q2 and also Q4 versus Q3. We saw 3% ex-TAC growth in Q2. We get to, I think, 6% in Q3 at the midpoint and 17% in Q4 at the midpoint. So a lot of the good things that we see driving the success in Q2 and into Q3 we see continuing into Q4. A big piece of the step-up from the 6% growth to 17% is coming from year-over-year comps. So 8 points of that is easing comps in Q4 versus last year. Last year, we didn’t have a normal Q4. It started with the attack on October 7 and the war and the impact on our war-related usage, page views, and just advertising demand. Also, we saw headwinds from the key tech partner transition that began in Q4 of last year. Those two things combined ease the comps for Q4 and are driving about eight points of improvement as compared to Q3. Continued success of the growth drivers we’re already seeing and the RPMs acceleration are additional contributors. Those are the main drivers and assumptions that factor into our guidance.

Andrew, I’ll take the second one. Thanks. It’s been a very exciting week with overwhelmingly positive feedback from players in the industry, both advertisers and media owners and publishers. On the advertiser side specifically, they really view this as a huge opportunity to have one player that can provide the full funnel solution on the Open Internet. When we talk about full funnel, that means branding, consideration, and conversions on an end-to-end basis due to the advantage of the combined capabilities. Both on the Teads side and on our side, people are expecting us to close this as quickly as possible and be able to bring them the value proposition we’re talking about, which is really the combination of leaders in performance — that’s us — and leaders in branding — that’s Teads. So, it’s been great, and it’s been a very exciting week as you can imagine.

Thank you. And we will take our next question from Ygal Arounian from Citi. Please go ahead, Ygal.

Hey, good morning, guys. Here’s Matt on for Ygal. I guess, first, maybe just start with what you’re seeing in the ad macro. It seems like maybe it’s been a little more mixed. But what you’re seeing now and kind of how you see that playing out through the rest of the year, if there’s anything maybe geographical or vertical to call out?

Sure. And I can start with that. So yes, we did see continued RPM and CPC gains over the course of Q2, which is a combination of a lot of factors. It’s hard to know how much of it is macro versus internal or specific to us, but we did see positive things during the quarter, which is a good sign. Geographically, I’d say we see strength in Europe, particularly Germany, which is our second largest market, and Spain; those were a couple of our stronger markets throughout the quarter. Going forward, it’s hard to predict macro trends, but we obviously hope to see the continued acceleration of what we saw through Q2. We are not overly relying on that in our guidance.

Okay. Thanks, Jason. That’s helpful. And then maybe just spending a little time on Zemanta. Obviously, some good growth there. Is there anything specific you can call out on what’s driving this? And then maybe just the bigger picture — in a combined company, how do you see Zemanta fitting in with Teads and maybe with the ex-TAC too as you look to combine, obviously early days, but any early thoughts on how you think about combining those going forward?

Sure. On Zemanta, it’s been one of our growth drivers for this year. Our goal has been to broaden our share of wallet with performance advertisers by delivering superior results and allowing them to spend more across the entirety of the Open Internet, which aligns with our vision of becoming the main gateway for the Open Internet for both brand advertisers and performance buyers. We started last year to migrate some types of clients that saw better performance on the Zemanta platform, and that caused two things: a) they spend more because they still spend on our brand publisher network, and b) they also can spend on third-party platforms through Zemanta. That grows our share of wallet and, for us, it’s a margin enhancer. We have seen about 50% growth in spend on Zemanta and I think that will continue to be one of the main growth drivers for the company as a standalone. As to the combination with Teads, it’s a little early days. We have not yet gone deeply into detailed product planning. We just started post-merger integration planning. Generally, I would say the Zemanta platform is very focused on performance buyers, and I believe that will continue to be part of our growth drivers in the future for those types of buyers.

Thank you. And we will take our next question from Laura Martin from Needham. Please go ahead, Laura.

Yes. I also have two. The first one is, when you think about revenue synergies, is it a bigger upside driver that Teads will be able to sell in performance advertising from the Outbrain core business or the reverse, Outbrain sells more upper funnel from the Teads client base?

Hey Laura. It’s actually both sides. What we heard and saw throughout the process is Teads was moving toward mid-funnel and conversions, primarily with enterprise brand buyers. That customer base has different objectives for their campaigns, and we see a huge opportunity — and Teads’ management sees a huge opportunity — to leverage our prediction technologies and algorithms to drive better conversions and more lower-funnel business for brand advertisers. At the same time, about 40% of our business today is with brand and enterprise clients that are largely performance-oriented. For example, an automotive client like Audi can have us as the partner for the entirety of the funnel. So I think it’s both directions. When we gave the synergy number that we announced — the $50 million to $60 million — that doesn’t include meaningful top-line synergies; it’s mostly around operating synergies and other opportunities across the two networks.

Okay. Thanks. And then, Jason, for you, the gross revenue came in really light, but the net revenue, which is how we generally value the business, came in right in line with our estimates. So is that related to this unique partner that had an impact, and did it impact gross revenue more than net revenue? Is that how I should interpret your commentary about the one-time disruption of, I assume, Microsoft?

Yes. So the partner transition impacted both lines; it’s not just one or the other. A lot of the things we are focusing on right now are higher-margin segments or drivers, and these can have different accounting recognition. For example, the Zemanta DSP business is recognized on a net revenue basis — the fees charged for customers to use the platform and buy media are recognized net of media spend. So you might see trade-offs between gross revenue and ex-TAC depending on the mix of business. That accounting treatment explains some of the difference you observed.

Thank you. And we will take our next question from James Heaney from Jefferies. Please go ahead, James.

Great. Thank you, guys. Could you just talk about the growth that you saw from Onyx in the quarter? And maybe if you could comment on your pivot from being more of a performance ad platform to servicing more upper funnel objectives? And I have another follow-up.

Yes. Onyx had strong re-bookings and good adoption in the quarter. We don’t break it down specifically, but adoption has been strong and we launched into more markets, so we’re excited about its trajectory into the second half. Onyx addresses upper funnel opportunities with large agencies, so it is focused on that enterprise brand segment. I also note it could be somewhat impacted by the Teads merger in the second half since Teads also addresses upper funnel and branding with large agencies and enterprises. We will manage that in our integration planning.

Great. And then, Jason, just on your full year EBITDA guide being raised, I am curious where you are seeing the majority of the cost savings in the business, and broadly how to think about balancing growth and profitability? Thank you.

Sure. We’ve focused the last couple years on improving our business model, both by changing our revenue mix toward higher-margin areas and by controlling costs. That has included being disciplined on where to invest and scrutinizing spend. We’ve been outperforming our plans on costs. You should expect a step-up in some costs in the second half of the year because some hiring for investment areas occurred in Q2 and that hiring will have a bigger impact in H2. But overall, the combination of a better revenue mix and cost discipline is what has allowed us to raise the adjusted EBITDA guidance and still invest in growth. We think we’ve set up a good balance of growth and profitability.

Thank you. And we will take our next question from Zach Cummins from B. Riley. Please go ahead.

Hi. Good morning. Thanks for taking my questions. Jason, I was curious what assumptions you are baking in for Microsoft in the second half of the year? Are you assuming you are relatively stable from these Q2 levels, or any sort of improvement baked into the second half?

Yes. We are watching this closely. We believe we were the first native partner to complete this transition with the partner, and we’ve been focused on driving the rescaling. Right now, we’ve seen volatility, and that’s reflected in our forecasting approach for H2 by assuming a wider range of variability. On one hand, we do see upside potential; on the other hand, we have seen volatility, so the best approach is to provide guidance that accounts for that variability.

Understood. And in terms of just your overall footprint on the Open Internet, you mentioned that revenues on inventory beyond the traditional feed represented 27% of revenue. Could you speak to the ideal mix over time for the standalone Outbrain and how you are continuing to drive that strategy?

We are trying to build ourselves as the main gateway to the entirety of the Open Internet. We have a strong asset in the bidding technology we acquired through Zemanta that allows us to go beyond just our publisher base. Ideally, we grow both premium publisher revenue and third-party supply where performance buyers want to buy. We had strong wins on the premium publisher side this quarter, and we remain focused on our core supply base and premium demand. At the same time, Zemanta enables performance buyers to access other third-party supply. Overall, we see ourselves growing the total budgets we can address both on our publisher base and on other third-party supply, and that remains our strategy going forward.

Understood. Well, thanks for taking my questions and best luck with the rest of the quarter.

That will conclude the question-and-answer session. I would like to turn the floor back to David Kostman for closing remarks.

Thank you, Karen. Thank you all for joining us today. We appreciate your support and partnership and look forward to the exciting journey ahead together with all our shareholders. Thank you very much.

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.