Taboola.com Ltd. (NASDAQ:TBLA) Q2 2022 Earnings Conference Call August 10, 2022 8:30 AM ET
Company Participants
Jennifer Horsley – Head of Investor Relations
Adam Singolda – Founder & Chief Executive Officer
Steve Walker – Chief Financial Officer
Conference Call Participants
Operator
Good day, and thank you for standing by. Welcome to the Tabula Second Quarter 2020 Earnings Conference Call. At this time, all participants are analyst in only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speaker today, Jennifer Horsley. Please go ahead.
Jennifer Horsley
Thank you, and good morning, everyone, and welcome to Tabulo’s second quarter 2022 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 after market and it is available along with our Q2 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’ll 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.
Adam Singolda
Thanks, Jen. Good morning, everyone, and thank you all for joining us for our second quarter call. Q2 was another good quarter. We delivered $143 million of ex-TAC, a growth of 22.5% and adjusted EBITDA of $34 million. Both beat the high end of our guidance, which gives us confidence to hold our 2022 full year guidance. While we have seen softness in advertising in the U.S. since the last quarter, over the last few weeks, the effects of the wall in Europe as well as the softness in the U.S. has been stabilizing.
We’re also seeing the benefit from diversity in our business. For instance, we’re seeing strength in our e-commerce business a bit better than we expected as well as we continue to see exponential growth in to Bulnes, which, for the first time, we’re showing the run rate to generate north of $50 million in revenue this year. At the same time, given the challenging macro environment, we’re taking measures to control our operating expenses, prioritizing things that are key and spending less than others. On the business front, we’re seeing good momentum. We’ve spoken this year about the strength of our publisher pipeline and that is translating into many new publisher partnerships. In fact, to forecast that in 2022, we will sign almost as much new business as we did in a record-setting year in 2018. For context, that equates to nearly double the monthly new business we signed in 2021. So this is a big year for us.
This summer has been busy and we recently won incredible partnerships such as PMC, Gray, Fox Sports, Time.com and many others. Gray, the largest owner of top-rated local television stations and digital assets in the U.S. was a competitive win, a new 5-year partnership that includes Tabula feed across all of its digital properties as well as homepages, integrations on more than 100 websites. They also will test additional tabular offerings, including to bilanewsroom, our technology offerings that provides important leadership insights to publishers by using advanced AI and signals for more than 500 million daily active users on the Tubular network. Fox Sports is another new win. It’s a 3-year partnership that includes Tabula feed as well as our high-impact mid-article recommendation real. We’re very excited about this partnership, and it’s a proof of our strength in the sports vertical. We work with many of the major sports networks in the U.S., including ESPN, NBC Sports, CBS Sports, usatodaysports and now FoxSports and many, many others, which give our advertisers great, verticalized reach and value when choosing to work with Tabula.
We’ve also seen many of our existing credible partners rechoosing Tabula and renew with us. For example, Cox Media Group, in cyber media news group through a content group and many, many others. When taking a data-driven view of our publisher momentum, not only are we adding a new record amount of publishers every single month, our churn is also trending under expectation, meaning we’re keeping more partners than what is in our plan. Another highlight that we’ve spoken all over the year is to be a news, our Apple News product, but for Android devices, which I’m so excited about. I always say that Tabula is a start-up of start-ups and Tabula news is turning into a blueprint for how we can scale a new business under the Tabula infrastructure.
We continue to expand the work we’re doing with mobile devices and OEMs, adding new partners, growing in new geographies, expanding how we can recommend personalized news on many screens we’re on, think device home page, wake, screen and so forth. Tabula News is growing triple digit, as I indicated on our last call, and we expect it to reach close to $50 million annual run rate by the end of the year, so becoming a meaningful contributor to our financials. What makes this so exciting is how synergistic it is to the rest of our business by bringing more viewers to our publisher sites. This is huge for them in time where capturing audience attention can be challenging with TikTok and other social networks, and it is huge for us as well because it results in a publisher deepening their relationship with us.
Over time, you’ll see the publishers choose Tabula not only for generating the highest revenue they can generate not only for utilizing editorial technology, but also to drive new audience growth to their site. In some countries, publishers have started proactively reaching out to us to seek for partnerships mainly because of traffic they see going to other publishers in their market. That’s a good sign. Another new offering area where we’re making progress is with our bidder, which we first launched last quarter on Microsoft. We have numerous strategies to increase our share of the $64 billion Open Web market. And while most of those involve converting banners to more native advertising formats, our new bidder will allow us to bid into display inventory and win a portion of that inventory. We think our bidding advantage is threefold.
First, we have a unique CPC advertiser demand. 90% of our revenue is from our own advertisers. Second, we have unique first-party data. We might see a user interact with us in the bottom of the article unit, see what they read in Cleco and then bid on them on a better placement on the home page and such. Third, we have unique AI technology. We have years of deep learning investment, and now we have a team focused exclusively on bidding in the Open Web, perfecting our performance, which is what our Microsoft contract is allowing us to do. or early days. However, we have begun piloting the bidder technology outside of Microsoft in the second quarter, and we’re seeing encouraging results on a handful of publishers, we’re trending to generate a few millions of dollars this year.
The longer-term opportunity is significant when you consider tabelize working with about 9,000 publishers and how this can increase our share of wallet within our publisher partnership. Lastly, I’m also happy to report that we’re seeing good results in our e-commerce business despite the macro pressure. Because our solutions in e-commerce are 100% performance-based were either paid a commission on sale or able to virtually guarantee that the advertiser CPC ad spend will back out to their ROI goals effectively the same commission, we’ve seen little to no pullback in this type of spend. Historically, these types of budgets continue to exist even in a recession.
In fact, in some cases, we’re seeing clients ask us if we can find more opportunities to help them spend as organic traffic has slowed down. I believe consumers are becoming better online shoppers through the pandemic, and those new behaviors are not going to go back. Coming off of a good second quarter and looking at the back half of the year, while there’s a lot going on with the recession and advertising softness, we have the right priorities as a company, the right team that has been executing together for the past decade. The market is big, and we feel optimistic about the tailwinds in business that I mentioned earlier. This is also an election year in the U.S. and the World Cup year, which have historically driven good advertising budgets as well as traffic surges, all of which are giving us confidence to reiterate our full year guidance.
As I finish, I want to tell you, I strongly believe this is a good time for a company to focus on its fundamentals, its competitive advantage to do their work and carry more now than ever about adjusted EBITDA and free cash flow. We always cared about profitable growth. But now more than ever, it is important so we come out even stronger on the other side of this, whenever this ends, I’m proud of Tobira’s north of $150 million in adjusted EBITDA this year, along with our strong cash flow profile. And at the leadership and Board level, we’re already thinking about 2023 and beyond and energized as well as my team.
And now I’ll pass it over to Steve to talk more about our financials.
Steve Walker
Thanks, Adam, and good morning, everyone. As Adam shared, we had a solid second quarter. We met or exceeded our Q2 guidance on all measures despite some macro headwinds. Revenue in Q2 was $342.7 million, ex TAC gross profit was $143.2 million, and adjusted EBITDA was $34.2 million. This represented ex-TAC growth of 22.5% year-over-year or 4.7% on a pro forma basis with Connect — on a constant currency basis, the pro forma growth would have been 7.1%. Our adjusted EBITDA margin or the ratio of adjusted EBITDA to ex-TAC gross profit was 23.9%.
Of the Q2 gross revenue growth of $14 million, $22 million came from new digital properties, while existing digital property partners decreased $8 million. This is obviously a very unusual event to see our existing partners shrink year-over-year. This was driven by the weak macroeconomic situation that started in Europe in Q1 and spread to the U.S. and much of the rest of the world around the middle of June. In our business, this translated to a pullback by advertisers, which resulted in weaker yields and a decline in revenue on those existing property partners. Our Q2 ex TAC gross profit was $143.2 million and was up $26.3 million or 22.5% year-over-year.
Adding Connexity to our business obviously had a positive impact, but we are also seeing the benefits from our diverse revenue base as our growth came from 3 sources. The addition of new digital property partners to our network, growth from new offerings such as Tabula News and the growth from Conexivy. This growth more than offset the impact of the lower yield as well as the anticipated declines in our Microsoft contract as we transition to the new bidder. Our ex-TAC net dollar retention for our publishers was 99% for Tabula on a stand-alone basis, just under 100% driven by the weaker yield I highlighted earlier.
Looking at operating expenses, they were down $28 million year-over-year. The decline was driven by $58 million of lower share-based compensation expenses as the prior year was unusually high as a result of going public. Excluding stock-based comp, operating expenses were higher by $30 million, with slightly less than half of that coming from higher depreciation and amortization from intangibles driven by the Connexity acquisition. The remaining increase came mainly from investments we made in the business, including higher labor expenses reflecting the inflationary environment and tight job market as well as from the inclusion of Connect, which we did not close on until September 1, 2021.
And — as Adam mentioned, given the macro pressures, we are taking actions to reduce operating expenses going forward, including reducing discretionary spend and decreasing our rate of hiring. We generated adjusted EBITDA of $34.2 million, which was above our guidance of $23 million to $28 million, a decrease year-over-year driven by our investments in the business. Adjusted EBITDA margin of 23.9% was lower year-over-year, but in line with our expectations. GAAP net loss of $5 million included warrant liability revaluation benefit of $12 million, share-based compensation expenses of $20 million and intangible amortization of $16 million, all of which were excluded from non-GAAP net income of $15.8 million, which was above our guidance of $6 million to $11 million.
In terms of cash generation, in Q2, we had $2 million in operating cash flow while free cash flow was negative $7 million. Cash flow in the quarter was negatively impacted by approximately $22 million from a combination of onetime tax payments and publisher prepayments. We ended Q2 with a strong balance sheet and positive net cash. Our cash and short-term investments balance of $308.5 million remains above our debt balance of $288 million. We also recently entered into a $90 million 5-year senior secured revolving credit facility, which further improves our liquidity position. Shifting now to our expectations for Q3 and the rest of 2022. I won’t go through all the numbers as they are outlined in detail in our press release.
Overall, our overachievement in Q2 provides us confidence to reiterate our 2022 guidance on ex-TAC and adjusted EBITDA, which are the main metrics we focus on. We are lowering expectations for revenue, mostly due to our mix of business. More revenue is coming from areas with higher ex TAC margins such as Connexity, Tabula News and certain high-margin core regions and less is coming from areas with lower ex-TAC margins. We also anticipate some tailwinds in Q4 from the U.S. elections, the World Cup and strong performance from Connect, which is a Q4 driven business.
I should note that our guidance assumes continued weakness in the macroeconomic environment at current levels. This weakness has translated into the lower advertising demand we experienced throughout the second quarter. Our guidance does not assume a further weakening of demand or a departure from our normal fourth quarter seasonality.
Overall, the fundamentals of our business are strong. We expect over $150 million of adjusted EBITDA for the year and healthy free cash flow. We are seeing near-record new publisher partnership growth, exponential growth in Tabula News and strength in e-commerce. We are being judicious in our investments and managing costs closely while still investing in areas that are important to our strategy and growth. We believe all of this will position us for accelerated growth as we come out of this period of economic weakness.
With that, let’s open it up to questions.
Question-and-Answer Session
End of Q&A
This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
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