Taboola.com Ltd. 10-Q Summary
Business context and reporting period
Taboola operates an AI-powered recommendation and advertising platform across the Open Web, serving advertisers and digital-property partners. This unaudited filing covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Taboola began implementing its 30-year exclusive commercial agreement with Yahoo in January 2023. The transaction included the issuance of 39.5 million voting Ordinary shares and 45.2 million Non-voting Ordinary shares to Yahoo, which became a principal shareholder.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $360.2 million | $332.5 million | $1,019.9 million | $1,029.9 million |
| Gross profit | $100.7 million | $102.7 million | $287.3 million | $331.1 million |
| Gross margin | 27.9% | 30.9% | 28.2% | 32.1% |
| Operating loss | $18.7 million | $21.5 million | $72.5 million | $38.7 million |
| Net loss | $23.1 million | $26.0 million | $85.8 million | $27.2 million |
| Net loss per share | $0.07 | $0.10 | $0.25 | $0.11 |
| Adjusted EBITDA | $22.8 million | $24.2 million | $48.6 million | $93.2 million |
| Free cash flow | $22.8 million | $11.0 million | $41.7 million | $5.0 million |
Traffic acquisition cost was $231.8 million in Q3 and $652.6 million for the first nine months, representing increases of 14.1% and 5.4%, respectively, versus the prior-year periods. Ex-TAC gross profit was $128.4 million in Q3 and $367.3 million for the nine months. Adjusted EBITDA margin as a percentage of ex-TAC gross profit was 17.8% in Q3 and 13.2% for the nine months.
Operating cash flow was $32.5 million in Q3 and $61.6 million for the nine months, compared with $23.2 million and $33.4 million, respectively, in the prior-year periods. Capital expenditures, including capitalized internal-use software, were $9.7 million in Q3 and $19.8 million for the nine months.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $238.3 million at September 30, 2023, compared with $165.9 million at December 31, 2022.
- Cash, cash equivalents and short-term investments totaled $250.7 million, compared with $262.8 million at year-end 2022.
- Long-term loan principal outstanding was approximately $202.7 million, including $53.0 million classified as current maturities. The company had no borrowings under its $90.0 million revolving credit facility.
- Taboola prepaid $30.0 million of term debt in April 2023 and prepaid an additional $50.0 million in October 2023, after the reporting date.
- The company was in compliance with its term-loan and revolving-credit covenants at September 30, 2023.
- Shareholders’ equity was $1.067 billion, including a $23.2 million reduction for treasury shares repurchased during 2023.
Material changes versus the prior comparable periods
- Q3 revenue increased 8.3%, but nine-month revenue declined 1.0%. Management attributed the nine-month decline to lower revenue from existing digital-property partners, partly offset by newly added partners and growth in bidding and e-commerce.
- Gross profit declined 2.0% in Q3 and 13.2% for the first nine months. Management cited yield compression, a mix shift toward lower-margin properties and higher payments under partner guarantees.
- Guarantee payments represented approximately 20% of traffic acquisition costs in both Q3 and the nine-month period, versus 12% and 10%, respectively, in the prior-year periods.
- Operating expenses declined 3.8% in Q3 and 2.7% for the nine months, reflecting continued cost discipline and lower sales and marketing and general and administrative costs, partly offset by Yahoo-related expenses and higher credit-loss expense.
- Nine-month net loss increased substantially, partly because the prior-year period benefited from a $27.0 million warrant-liability revaluation gain; 2023 also included higher finance expense and lower operating profit.
- Taboola repurchased 6.7 million Ordinary shares for $23.2 million during the first nine months at an average price of $3.45 per share. Approximately $17.0 million remained authorized at September 30, 2023. The board subsequently authorized an additional $40.0 million of buybacks in November 2023.
Guidance, outlook, risks and unusual items
The filing does not provide a clear formal revenue or earnings outlook. Management expects advertising seasonality to continue, with results generally strongest in the fourth quarter and weakest in the first quarter. Management expects continued investment in research and development, platform infrastructure and potential strategic acquisitions.
- Macroeconomic uncertainty, inflation, rising interest rates, foreign-exchange volatility and weaker advertising demand may reduce advertiser spending and yields.
- Partner guarantees can create gross losses on individual digital-property accounts when guaranteed payments exceed generated revenue.
- The company is exposed to variable interest rates on its term loan and to foreign-exchange movements, particularly involving the Israeli shekel. It uses foreign-currency derivatives to hedge certain forecasted cash flows.
- The October 2023 war in Israel could disrupt employees, facilities, operations and contractual performance. The filing states that operations had not been materially adversely affected as of its filing date, but the duration and severity of the conflict were uncertain.
- Israeli court approval was required for continuing certain share repurchases and net issuances related to equity compensation beyond November 16, 2023; the company had requested an extension, but no assurance was provided regarding timing or approval.
- The company had $19.0 million of non-cancelable purchase obligations, total contractual obligations of $302.4 million, and additional commercial commitments involving partner guarantees that were not included in the contractual-obligations table.
- The previously disclosed U.S. Department of Justice investigation into hiring activities no longer considered Taboola a subject or target as of July 2023.
Most important facts for investors to verify
- Whether Yahoo-related activity produces sustained incremental revenue and improves, rather than dilutes, margins.
- Whether yield compression and elevated guarantee payments stabilize or continue to pressure gross profit and ex-TAC margins.
- Progress toward positive GAAP operating income and net income, given the $85.8 million nine-month net loss.
- Cash conversion after debt repayments, share repurchases, capital expenditures and required working-capital funding.
- Remaining debt maturities, variable-rate exposure and compliance with leverage and other credit-agreement covenants.
- Effects of the Israel conflict, including employee availability, operations, court approvals and any impact on customer or partner commitments.
- Dilution from approximately 25.4 million exercisable options, 25.4 million outstanding RSUs and other potentially dilutive securities.