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

Good morning, and thank you for joining us on today's conference call to discuss Outbrain's fourth quarter and full year 2024 results. Joining me on the call today, we have David Kostman and Jason Kiviat, the CEO and CFO of Outbrain, which will operate under the Teads brand. During this conference call, management will make forward-looking statements based on current expectations and assumptions, including statements regarding our business outlooks and prospects and our recently completed acquisition of Teads. 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, in our definitive proxy statement filed with the Securities and Exchange Commission on October 31, 2024, and as updated in our subsequent reports filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the call's original date, and we do not undertake any 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 fourth quarter earnings release for definitional information and reconciliations of non-GAAP measures to the comparable GAAP financial measures. Our earnings release can be found on our IR website, investors.outbrain.com under News and Events. With that, let me turn the call over to David.

Thank you, Meg. Good morning, and thank you for joining us today. On February 3rd, we closed our acquisition of Teads. This merger brings together two open Internet category leaders, combining the extensive expertise of our branding and performance and of Teads in video and branding into a single solution for omnichannel outcomes across the marketing funnel. This new and expanded company will operate under the name Teads. It's a huge opportunity to take advertising on the open Internet to the next level. Today's open Internet platforms focus on scale and efficiency. Marketers have shown us they expect more from their advertising. They need a partner that can surface the meaningful moments in the consumer's buying journey, using a deeper understanding of audience engagement and behavior to identify when they are ready to discover new products or services and evaluate purchase decisions. Our unique dataset and AI-driven prediction technology better positions us to provide these solutions. The new teams will better serve enterprise brands and agencies, as well as mid-market advertisers and direct response advertisers by delivering elevated outcomes from branding to performance objectives. This foundation will enable us to derive new incremental value from the open Internet as a true brand form and solution. Now, let me provide an update on Outbrain's standalone Q4 and full year results. For Q4, I'm pleased to report that Outbrain delivered both Ex TAC gross profit and adjusted EBITDA within our guidance range. We also generated record free cash flow. This is part of our continued trajectory for several quarters. Q4 results were driven by strength in the same key pillars we presented to you over the last couple of years. These will continue to be important drivers of our business. The first pillar, expanding our share of wallet from advertisers. It is important to clarify that we serve enterprise brands and their agencies, both for branding and performance needs, as well as the segment of small and medium enterprises and direct response advertisers that are looking primarily for performance in ROAS. So with brands and agencies, we've seen continued momentum in our performance solutions. Our direct response advertisers have embraced the use of our Outbrain DSP which saw growth of 45% in advertiser spend in 2024 due to the continued delivery of superior performance, both on the Outbrain publisher base and in third-party properties across different formats, such as native, display and video. As a reminder, we have been doing this for several years, leveraging the performance DSP we acquired in 2017, which also provides the value of bidding, edge and DSP capabilities, expanding our platform's reach. The second pillar, expanding beyond our traditional feed. Revenue generated from supply beyond our traditional feed represented approximately 30% of our revenue in Q4 2024 versus 26% in Q4 2023. We have continued to grow this metric quarterly for the last two years, demonstrating our focus on expanding our inventory diversity beyond our exclusive publisher base and expanding the reach for our advertisers to OEMs, apps and other platforms. One of the more exciting developments here was the launch as a beta in September of Moments, our vertical video experience that brings social media experiences to the open Internet. To date, we have more than 40 media owners using Moments, including New York Post, News Australia, RTL and Rolling Stone. Initial user engagement results are strong, with swipe depth growing from about three videos on average to 7.2 and the percentage of people engaging with the experience growing from about 35% to over 47%. In addition, we are encouraged by the interest that legacy feed advertisers have expressed in Moments as it provides powerful video experiences for premium brands. Another example of how this combination will provide meaningful synergy. And the third pillar is deepening our premium media owner partnerships. In Q4, we successfully renewed agreements with some of our important publishing partners, including Spiegel in Germany, Il Messaggero in Italy and Grape in Japan. We also secured new business partnerships from competitors and launched new partners, including Penske Media in the U.S. and Prensa Iberica in Spain. We believe this again demonstrates the significant value proposition we offer when it comes to strategic relationships with premium publishers globally. On the technology front, over 70% of our customer base has used our AI-based Creative Automation suite. As a reminder, the Creative Automation suite uses our algorithms and predictive insights to fuel the product's generative AI, delivering more relevant, highly targeted creatives optimized for consumer engagement. The strong foundation we've built with the AI Creative Automation suite informs how we think about some of the highest potential applications of AI at the new Teads. We plan to leverage AI to create a greater continuity of experience across the consumer journey, leveraging the exclusive inventory environments we own, from CTV home screens to premium publishers, as well as in our in-house Creative Studio that utilizes data and interactivity to deliver video and viewable display assets that deliver on advertisers' KPIs. The new Teads is one of the largest platforms on the open Internet that can curate meaningful audience moments across screens from mobile to CTV to apps and beyond. We believe that the combination of our unique core assets positions us extremely well to capture more and more share of wallet away from other platforms. First, the new Teads combines best-in-class capabilities from our branding and performance to deliver outcomes and superior ROIs. Teads brings extensive expertise in branding and creative capabilities across screens. Advertisers are looking for KPIs way beyond just reach. They want results. It's also evident that the combined performance plus branding strategy can increase return on investment for advertisers, with an independent study estimating a total revenue impact increase by 90%. That's why in the future, brand performance is a huge opportunity. Second, the new Teads has the most direct exclusive supply-path on the open Internet across the digital landscape. As you've heard over the last couple of years, including for many of our peers, this is becoming increasingly important as advertisers are looking for curated premium environments to limit the risk of open exchange buys on DSPs. And we believe that also CTV is becoming a core part of the performance marketing mix. Our CTV presence from the feed side, combined with the leadership with performance marketers that legacy Outbrain brings to the table, positions us well for growth in this area, which is an important element of our combined product strategy. And third, we had exceptional global reach with more than 2 billion unique users and proprietary data signals through our exclusive content page with the most premium media properties. I want to underscore that Teads already has more than 50 joint business partnerships with the leading premium brands of the world, including Apple, Visa, Louis Vuitton, McDonald's, Nissan and many others. These partnerships generate an average of $5 million per year and upwards of $20 million per year. It's important to note that even before the combination with Outbrain, Teads had a significant amount of performance budgets from these advertisers. These types of relationships are the privilege of only the largest players in the digital advertising space. Teads has been growing these direct relationships with advertisers and their agencies for many years, having developed a winning multi-touch strategy of working directly with advertisers and their agencies, which are primarily the largest agency holding companies. The response from these advertisers to the new Teads value proposition of branding and performance has been overwhelmingly positive which bodes well for our cross-sell synergy plan. If you combine these joint business partnerships with a strong focus on small and medium enterprises of the legacy Outbrain, we believe we have a great coverage of the market. I want to spend a minute talking about the status of the post-merger integration. As Jason will discuss, we are also well underway in the realization of the synergies of $65 million to $75 million we presented to you. We had the opportunity to plan the first merger integration in detail for over six months, and as a result, we first executed on the headcount reductions in our plan in the first week which we expect to result in approximately $35 million of just the compensation savings on an annualized basis. Second, we effected the reorganization and combination of the two organizations in the first two weeks, meaning that the merged new company structure with clear leaders and roles and responsibilities is in place. Third, we already implemented certain synergies by connecting the demand and supply of the two platforms where feasible. And fourth, our global sales teams are working on the cross-selling opportunities as one team with aligned incentives and books of business, already testing the water and actually have already sold the first campaigns with key elements of our combined performance and branding value proposition. We've seen strong enthusiasm and confidence in our new combined team since closing the deal, with many already seizing the new business opportunities this merger has unlocked. We expect this to begin positively impacting our Q2 results. Operating, as we say internally, as one team and one dream is underway which I believe will ensure we are ready to capture the large opportunity ahead despite some short-term increased disruptions, which are natural consequences of such quick and decisive moves for merging two same-sized companies. To sum it up, the early momentum is energizing and we're just getting started. Now, I'll turn it over to Jason for a more detailed financial update.

Thanks, David. As David mentioned, we achieved our Q4 guidance for gross profit and adjusted EBITDA, generating significant free cash flow in the quarter and for the year, as we saw solid profitability and cash generation, as we see continued benefits from the changes we've been making to our revenue mix and cost structure as noted on prior calls. Revenue in Q4 was approximately $235 million, reflecting a decrease of 5% year-over-year. Total ad spend was materially flat year-over-year during the quarter and increased year-over-year on a full year basis. New media partners in the quarter contributed 9 percentage points or approximately $21 million of revenue growth year-over-year, and net revenue retention of our publishers was 86%, which reflects downward pressure of ad impressions, particularly from one key supply partner, as noted in prior quarters. Logo retention remained high, finishing for the full year at 98%. We saw CPCs remain stable to positive, netting to a slight increase year-over-year for the quarter for the second quarter in a row. This, along with continued improvements in click-through rates, drove further growth in RPMs, which have improved in each quarter of 2024. Ex TAC gross profit was $68.3 million, an increase of 7% year-over-year, continuing the trend of acceleration and outpacing revenue for the seventh quarter in a row, driven primarily by net favorable change in our revenue mix and improved performance from certain deals. While Ex TAC gross profit continued year-over-year growth in Q4 on the strength of our growth areas and positive momentum of RPMs, as noted in prior quarters, one of our key partners transitioned to new bidding technology and we completed the transition in early May 2024. This volatility continued to impact our overall growth in Q4 by a high single-digit percentage and our overall Ex-TAC Q4 gross profit would have grown in the mid-teens percentage year-over-year excluding this one isolated headwind. We remain focused on rescaling and optimizing this supply. Operating expenses increased year-over-year, predominantly driven by one-time costs of $5.5 million related to our transaction with Teads. As a result, we grew our adjusted EBITDA 21% year-over-year to $17 million, which reflects another consecutive quarter of margin improvement. 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 $38 million in the fourth quarter and $51 million for the year. This is a tremendous outcome and comes as a result of cash profitability, strong working capital performance and timing benefits. As a result, we ended the quarter with $166 million of cash, cash equivalents and investments and marketable securities on the balance sheet and no debt. While we maintain an authorized amount of $6.6 million under our existing share repurchase programs, there were no share repurchases in Q4. Given the finalized acquisition of Teads, we currently do not intend to repurchase shares in the near term as we have previously stated in August when we announced the Teads acquisition. We announced that we completed the acquisition of Teads in February and subsequently completed the private offering of $637.5 million in aggregate principal amount of 10% senior secured notes due in 2030. As I mentioned when we closed the transaction, we are very excited about the combined company's transformative financial profile, including the significant expected impact of synergies on our top and bottom lines. We estimate $65 million to $75 million of an annual impact on adjusted EBITDA, including $60 million from costs to be realized fully in 2026. As David covered, about half of the goal we set for ourselves in annual run-rate was already secured in the first couple of weeks post-closing, focusing initially on cost-related synergies. Naturally, that will have a significantly greater impact on our bottom line as the year progresses. Now turning to our outlook. Given the short time elapsed since we closed the transaction, the fact that the transaction closed almost mid-quarter and our focus on integration and synergy capture, while we are sharing our outlook for both Ex TAC gross profit and adjusted EBITDA for Q1, we are currently only sharing our full year outlook for adjusted EBITDA. Also, I'll provide some points of additional context to help frame how we see this year playing out, and we will plan to update more on our progress and outlook on upcoming calls. In our guidance, we factor in the closing date of the merger of February 3rd and note that the company's accounting is subject to further policy alignment analysis. With that context, we have provided the following guidance. For Q1, we expect Ex TAC gross profit of $100 million to $105 million, and we expect adjusted EBITDA of $8 million to $12 million. For full-year 2025, we expect adjusted EBITDA of at least $180 million. Now a few points of additional context. On a pro forma basis, while we are still expecting an overall year-over-year decline in Ex TAC gross profit in Q1, we have seen improvement in the year-over-year performance of legacy Teads in the first few months of the year relative to Q4 of last year. On a pro forma basis, we expect to see improvement in year-over-year growth rates over the course of 2025 with H2 seeing single-digit positive growth year-over-year. And note, to provide continued transparency, we have provided legacy Teads 2024 quarterly Ex TAC and adjusted EBITDA in our Q4 earnings release. Note that these are as legacy Teads presented them on a non-IFRS basis and reconciled to IFRS measures and potentially subject to further U.S. GAAP and policy alignment. With respect to expenses, we anticipate the synergy realization to increase over the course of 2025 from a few million dollars in Q1 up to Q4, reflecting the run rate of our 2026 estimated synergy amount. Lastly, on a personal note, I'm very excited about the future. The combined company's financial profile is very attractive and the combined team's excitement has never been higher. We look forward to keeping you updated while we continue along this exciting new chapter. Now, I'll turn it back to the operator for Q&A.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. The operator will now provide instructions. Our first question comes from Andrew Boone with Citizens JMP. Please go ahead.

Good morning and thanks so much for taking my question. I wanted to ask about the transition of publishers and advertisers onto what is the combined platform. Can you help us understand where we are in that transition, whether there's any concern around dis-synergies from maybe potential leakage or anything else that you guys are seeing as we understand that 1Q25 guidance? And then a little bit of a bigger picture. Yesterday, you had a competitor talk about potential issues with the TAM of native advertising. David, it would be great if you can just address that. What are you guys seeing around demand for native advertising and that format more broadly? How do you guys think about the opportunity? Thanks so much.

Thanks, Andrew. So I'll take that. First around the transition. Our focus right now was to unify the teams and start cross-selling. We have a very clear roadmap around the integration of the platforms and a strategic roadmap that is focused both on the traditional publisher side and particularly on CTV and the ability to deliver performance on CTV. We've had six months of planning to do this, so we have that in place. Eventually, what we plan to do is deliver a lot of the performance capabilities from Outbrain into Teads Ad Manager, which is the platform where we're going to be serving primarily brands, agencies and SMEs. And we're going to continue to invest in our DSP business for direct response advertisers. The tech transition and integration will take time, but our teams already are cross-selling with the back office supporting that. We already had three cross-selling opportunities that we are addressing, which is super exciting. In terms of the core legacy market, we've been focused over the last two to three years on three core growth drivers. One is expanding beyond the feed. We have already embarked on that journey a couple of years ago; today it's about 30% of our business, beyond the traditional feed. We saw the need to deliver to performance advertisers at larger scale across the open Internet. Second is shifting a lot of the performance buyers, the direct response buyers, into the Outbrain DSP, formerly known as Zemanta. That has been another growth driver; we saw 45% growth in advertiser spend on that platform. And third, if you look at our organic numbers, we've been continuously growing our Ex TAC gross profit and accelerating it. So it's still single digit, but growing nicely toward the higher single digits and we will continue to invest in these growth drivers.

Thank you.

Thank you. The next question comes from James Heaney with Jefferies LLC. Please go ahead.

Great. Thanks guys for the question. In your prepared remarks, you mentioned the impressive growth that you saw in the Outbrain DSP. Can you just talk about some of the drivers of that growth and how we should think about the strategy for Outbrain DSP going forward under the combined company? And then I just had another one. Thanks.

Thank you. So generally, we've owned Zemanta since about seven years ago and we've used its bidding technology and the ability to broaden the capability to get more share of wallet from performance advertisers by bidding not only on Outbrain inventory connected to Amplify, our exclusive publisher base, but also bidding outside that inventory into native, display and video. We've been doing that and it has been a growth driver we identified. Traditionally, we sold it as a mid-market performance DSP competing with other DSPs, and we identified certain segments of buyers where the performance is superior via our direct connection, which allowed us to significantly grow share of wallet with performance advertisers. We will continue to invest in that. We think it's a great platform for performance and that will serve the segment of direct response advertisers. We will consolidate many of the performance capabilities we have from that platform into Teads Ad Manager so that our brand and agency segment and SMEs will also be able to launch campaigns and, in the future, pursue brand performance. The ability to connect, in the same instance, the launch of a branding campaign and a performance campaign has been shown to support each other and increase revenue. We will have the unique capability to link a branding campaign with a performance campaign. Today, our focus is to sell branding and performance and bring a lot of the capabilities that legacy Outbrain has into the Teads Ad Manager.

And just for clarity, when a customer is spending on the DSP, the accounting for it is net revenue recognition as opposed to gross revenue recognition on our core demand platform. That's the biggest driver of the disparity between gross revenue as reported on our P&L being down a few points year-over-year while total ad spend is up year-over-year. That's the big difference; we've actually been growing ad spend overall, and the biggest reason why it might not reflect on the face of the P&L is the shift to the DSP business.

Okay. Yeah, that's helpful. And then just another one on the supply outside of your traditional feed now being 30% of revenue versus 26% last year. How do you envision that progressing over the next few years under the combined company? Does it ever get to a majority or how should we think about that?

I think when we report this number, it reflects legacy Outbrain, so as a percentage of the combined company it will be lower, but we will continue to invest in that capability. We think it's a strong capability for performance buyers who are looking to buy into display and other formats. We expect that to continue to support our overall growth.

Great. Thank you both.

Thank you. Our next question comes from the line of Ygal Arounian with Citi. Please go ahead.

Hey, good morning, guys. Maybe just on the Teads sales force factor as we're transitioning out and that impact in 1Q, you talk about better performance in February. Just how is that trending? And as we look at the full year EBITDA guidance, maybe relative to the initial outlook you had when you proposed the merger, what are the factors there? Is it a slower rollout of the cost synergies? Are there revenue synergies in 2025 at all? Just help us kind of bridge through the integration over the course of the year and into next year?

Sure. I'll take both of those and David can add if he wants. As far as what we've seen with the legacy Teads business, a quick reminder that the closing date was February 3, so our guidance and reporting going forward are effective as of that day. For transparency, we shared legacy Teads 2024 results by quarter in the earnings release because we plan to talk about the combined business going forward. Right now, given how recent the close is, I'll give some color on the two legacy businesses separately for Q1 and the year. In terms of Q4 for legacy Teads, we discussed idiosyncratic drivers like French political instability and sales force decline, and the pending merger impact and distraction that the global team saw as headwinds. We've seen both of those turn around in the last couple of months to differing extents. For France, we saw recovery quickly in January, returning to year-over-year growth, which shows that was a one-time issue that snapped back. In terms of distraction, the global revenue and Ex TAC from legacy Teads has improved in January versus Q4 on a relative year-over-year basis, improved again in February versus January, and we feel good about the March pipeline based on current visibility. We've seen positives from bringing the teams together quickly and energizing the combined team, and that's already showing up in results. Net-net, we expect a year-over-year decline in Q1 from legacy Teads' Ex TAC, but to a lesser extent than in Q4. That's despite an incremental FX headwind in Q1 relative to Q4. On the year, we expect legacy Outbrain to continue the acceleration of growth we saw over the past year through continuous yield improvements and contributions from the DSP and supply outside feeds. We enter the year with that momentum. On the feeds side, trends have been turning positive in the last couple of months. We're early days but expect the cross-selling and synergy capture to play out more over the course of the year and return to overall pro forma growth by the second half of the year. A couple of modeling points: seasonality changes as a combined company, and ex TAC and EBITDA pacing may differ from legacy Outbrain. Historically, average Ex TAC by quarter was roughly 21% in Q1, 23% to 24% in Q2 and Q3, and 32% in Q4, while expenses are more flat through the year, meaning two-thirds of EBITDA typically is recognized in the second half of the year. Between that and the synergy ramp, we expect a few million dollars of synergy realization in Q1, ramping up over the year and finishing the year toward our estimated 2026 run rate. It's early days, and we're focused on integration and will keep you updated on progress. I just want to add a couple of points. One is there is excitement on the sales teams around cross-selling and we've already seen some materializing. Customers' feedback has been excellent. That's not fully baked into the numbers yet. Also, CTV was a strong growth area for Teads last year; it nearly tripled and was roughly 10% of Q4 revenue and could be a higher percentage in Q1. We see a lot of opportunity around CTV as the omnichannel capabilities help online video as well. When advertisers spend both on CTV and online video with Teads, total spend is normally 50% higher than when they spend on only one channel. So CTV growth should support online video growth.

I'll take the CTV opportunity question. We're very excited about CTV and the progress Teads made over the last couple of years, which was mostly focused on branding and leveraging the joint business partnerships Teads had with more than 50 premium global brands doing omnichannel and video. We believe performance is a huge opportunity. Many SME buyers have asked us for video and the ability to deliver on CTV. It's early days, but CTV can drive a lot of value for performance, both for enterprise brands that want to convert awareness into sales and for small and medium enterprises where video production with AI lowers barriers. Part of Teads' strength is the studio, which helps advertisers make assets interactive and drive attention or performance. The combination of Teads' capabilities, exclusive CTV placements, and Outbrain's performance client base creates a unique market offering and is a significant part of our strategic product roadmap investments.

Okay. That's really helpful. Thank you. And maybe just a follow-up on the CTV opportunity, particularly given the strength that Teads is seeing there. Given the shift from where CTV has been historically, more upper funnel and brand, there seems to be growing focus around performance. Is that a learning change for advertisers? Are they knocking on the door to be more performance-oriented on CTV, and what are those conversations like broadly? Thank you.

Thank you. Our next question comes from the line of Laura Martin with Needham & Company. Please go ahead.

Hi there. So I appreciate the synergies; they go up every time we talk. So at the high end, at that $65 million to $75 million of synergies, how much of that is costs and how much of that is revenue synergy at this point?

Sure. We estimate for 2026 an annual number of $65 million to $75 million. Of that, $60 million is cost-related and $5 million to $15 million is the EBITDA impact of revenue synergies. We're being conservative on revenue synergies for the first couple of years. The $60 million of costs breaks down further: about $45 million is personnel-related, and roughly 70-plus percent of this has already been actioned, so it's already secured. We'll have limited impact in Q1 due to timing, but we expect it to play out over the next couple of quarters and reach the target by year-end with high confidence. The other $15 million of that $60 million is a combination of non-compensation items such as software licenses, office consolidation, discretionary spend like marketing, and professional fees—items that will play out over time. The third area is traffic acquisition costs, which is the largest cost for us. There's a significant opportunity to optimize how we place demand on supply to improve margins. We've already connected supply and demand in both directions and have items flowing at a small scale now. We believe we can capture several million dollars in the next couple of years from better optimization.

Just to add context on the top-line synergies, the number we're giving is less than 2% in total, so we believe there's significant upside beyond what we're conservatively modeling.

Okay. Second, in the press release, you said that your go-to-market is going to be Teads. Does that imply we're changing the name of the company and the ticker symbol? Can you expand on this comment in the press release that you're going to market over Teads going forward?

Yes, Laura. When we announced the closing, we said we will move forward and operate under the name Teads. We call it the new Teads. Compared to the old Teads logo and positioning, it's refreshed—combining performance capabilities with branding capabilities and many more formats. We've refreshed the branding and positioning of the company and will be calling it Teads; that will include a name change and, over time, a ticker change. We're excited about the change. Teads is associated with premium brands and video, which aligns with our direction, and legacy Outbrain employees are excited about it as well.

Okay. And then staying with you, David, my last question is about news. The drumbeat of ad agencies talking about needing to fund news is getting louder. Do you see money coming back into news or do we still have agencies that are buying no news regardless of political or war context? Are you seeing any money come back into the news genre?

I would say our inventory mix is well beyond news, but I do see some positive trends. It's early days. There's a lot of industry effort talking to CMOs and agencies about the value of funding news and the positive impact of having brand advertising in news environments. I think it's happening in small steps in the right direction.

Okay. Thanks very much. Appreciate it.

Thank you.

Thank you. Ladies and gentlemen, that brings us to the end of the question-and-answer session. As there are no further questions, I would now like to hand the conference over to the management for closing comments.

So thank you all for joining us. I hope you can see how excited we are about this combination and the new journey we're embarking on. I believe we are very excited about the legacy Outbrain business and the growth drivers. We can see the benefits of the combination already materializing and we look forward to continuing to update you on the progress. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.