Taboola.com Ltd. 2023 Q2 Form 10-Q Summary
Business context and reporting period
Taboola is an AI-powered recommendation and advertising technology company serving advertisers and digital-property partners across the Open Web. Revenue is primarily generated when users click, view, or purchase through advertisements, with a portion shared with digital-property partners. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
In January 2023, Taboola closed a 30-year exclusive commercial agreement with Yahoo to power native advertising across Yahoo’s digital properties. Taboola issued Yahoo 39.5 million Ordinary Shares and 45.2 million Non-voting Ordinary Shares, recorded at an aggregate fair value of $288.1 million.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $332.0 million | $342.7 million | $659.7 million | $697.4 million |
| Gross profit | $97.1 million | $116.4 million | $186.6 million | $228.4 million |
| Gross margin | 29.2% | 34.0% | 28.3% | 32.7% |
| Operating loss | $(25.0) million | $(9.6) million | $(53.8) million | $(17.3) million |
| Net loss | $(31.3) million | $(5.0) million | $(62.6) million | $(1.1) million |
| Diluted loss per share | $(0.09) | $(0.02) | $(0.18) | $(0.00) |
| Adjusted EBITDA | $15.7 million | $34.2 million | $25.8 million | $69.0 million |
| Free cash flow | $7.8 million | $(7.3) million | $18.9 million | $(6.0) million |
Traffic acquisition cost was $208.9 million in Q2 and $420.8 million for the first six months. The cost of guarantees as a percentage of traffic acquisition costs was approximately 20% in both periods in 2023, compared with approximately 10% in 2022.
Cash flow from operating activities was $11.6 million in Q2 and $29.1 million for the first six months, compared with $2.1 million and $10.2 million, respectively, in the prior-year periods. The six-month increase was supported by lower trade receivables and non-cash depreciation, amortization, and share-based compensation charges.
As of June 30, 2023, cash and cash equivalents were $204.6 million and short-term investments were $42.3 million, for combined cash and short-term investments of $246.9 million. Trade receivables were $217.4 million, net of a $9.7 million allowance for credit losses.
Principal debt outstanding was $203.5 million, including $3.0 million of current maturities. Taboola voluntarily prepaid $30.0 million of principal in April 2023. The company had no borrowings under its $90.0 million revolving credit facility and was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Q2 revenue declined 3.1% and six-month revenue declined 5.4%, primarily because existing digital-property partners generated lower yields amid weaker advertising demand and macroeconomic pressure.
- Gross profit declined 16.6% in Q2 and 18.3% for the first six months. Gross margin fell by approximately 4.8 and 4.4 percentage points, respectively.
- Traffic acquisition costs increased despite lower revenue, reflecting a mix shift toward lower-margin digital properties and lower yields on properties subject to guarantees.
- Q2 operating loss increased to $25.0 million from $9.6 million, while six-month operating loss increased to $53.8 million from $17.3 million.
- Finance income and expenses shifted from $4.8 million of income in Q2 2022 to $3.8 million of expense in Q2 2023. The six-month comparison was affected by a substantially smaller warrant-liability revaluation benefit in 2023.
- Sales and marketing expense decreased 7.8% in Q2 and 4.7% for the first six months, while research and development expense was broadly stable. General and administrative expense increased 5.6% in Q2.
- Adjusted EBITDA declined 54.2% in Q2 and 62.6% for the first six months. Adjusted EBITDA as a percentage of ex-TAC gross profit declined to 12.7% from 23.9% in Q2 and to 10.8% from 24.5% for the six months.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear numerical revenue or earnings guidance range. Management expects advertising seasonality to continue, with results generally strongest in the fourth quarter and weakest in the first quarter.
- Management cited inflation, rising interest rates, geopolitical uncertainty, supply-chain disruption, weaker advertising demand, and lower yields as factors that may reduce advertiser spending and margins.
- Taboola is reducing discretionary spending and the rate of hiring in response to macroeconomic uncertainty. The company also implemented a restructuring program in September 2022 that affected approximately 6% of global headcount.
- The Yahoo agreement is a significant strategic opportunity but involves substantial equity issuance, related expenses, and execution dependence on Yahoo’s digital properties.
- Taboola authorized a $40.0 million share-buyback program. During June 2023, it repurchased 1.442 million shares for $4.4 million, leaving approximately $35.6 million of authorization.
- Outstanding contractual obligations included $203.5 million of debt principal, $24.6 million of non-cancelable purchase obligations, and operating-lease commitments. Digital-property guarantees may require payments above revenue-share amounts and are not included in the contractual-obligations table.
- The company uses foreign-currency derivatives primarily to hedge NIS exposure. It remains exposed to variable interest rates on its long-term loan and to concentration and uninsured-deposit risks at financial institutions.
- Subsequent to the reporting date, in July 2023, the U.S. Department of Justice notified Taboola that it was no longer a subject or target of its previously disclosed criminal investigation into hiring activities.
Important facts for investors to verify
- Whether the Yahoo partnership produces the expected incremental revenue, yield, and margin benefits and how quickly those benefits scale.
- Whether advertising demand and network yields recover, particularly for existing digital-property partners.
- The sustainability of positive operating cash flow and free cash flow while the company remains in a GAAP loss position.
- Debt repayment capacity, variable-rate interest exposure, covenant compliance, and the potential use of cash for additional debt repayment or share repurchases.
- The effect of traffic-acquisition guarantees and lower-margin partner mix on future gross margins.
- The dilutive effect of Yahoo-issued shares, outstanding options, RSUs, warrants, and other potentially issuable shares.
- Execution of cost reductions without impairing product development, advertiser growth, or partner retention.
- Management’s disclosures regarding privacy regulation, macroeconomic conditions, foreign exchange, credit losses, and other risks described in the company’s Form 10-K.