Business Context and Reporting Period
Taboola.com Ltd. is an Israel-based technology company providing AI-powered content and advertising recommendations across the Open Web, including e-commerce advertising. Revenue is generated primarily from advertiser clicks, purchases and impressions, with a portion shared with digital-property partners. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. Amounts are in thousands of U.S. dollars unless otherwise stated.
In January 2023, Taboola completed a 30-year exclusive commercial agreement with Yahoo. Taboola issued Yahoo 39.5 million Ordinary Shares and 45.2 million Non-voting Ordinary Shares, valued at $288.1 million, and recorded a $289.5 million commercial agreement asset.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $327.7 million | $354.7 million | Down 7.6% |
| Gross profit | $89.6 million | $112.0 million | Down 20.0% |
| Gross margin | 27.3% | 31.6% | Down 4.3 percentage points |
| Operating loss | $(28.8) million | $(7.7) million | Loss widened |
| Operating margin | (8.8%) | (2.2%) | Down 6.6 percentage points |
| Net income (loss) | $(31.3) million | $3.9 million | Turned to loss |
| Diluted EPS | $(0.09) | $0.01 | Declined |
| Adjusted EBITDA | $10.1 million | $34.9 million | Down 71.0% |
| Adjusted EBITDA / ex-TAC gross profit | 8.7% | 25.2% | Down 16.5 percentage points |
| Net cash from operating activities | $17.5 million | $8.1 million | Increased |
| Free cash flow | $11.2 million | $1.2 million | Increased |
Traffic acquisition cost was $211.9 million, or 64.7% of revenue, compared with $216.5 million, or 61.0%, in Q1 2022. Other cost of revenues was $26.1 million in both periods. Operating expenses totaled $118.4 million, including research and development of $32.0 million, sales and marketing of $60.6 million, and general and administrative expense of $25.8 million.
Cash, cash equivalents and short-term investments totaled $274.4 million at March 31, 2023, compared with $262.8 million at December 31, 2022. Cash and cash equivalents were $218.8 million, and short-term investments were $55.6 million. Total assets were $1.77 billion and shareholders’ equity was $1.11 billion.
Debt principal outstanding under the long-term loan was $234.2 million at March 31, 2023, including $33.0 million classified as current maturities. The company had no borrowings under its $90.0 million revolving credit facility and was in compliance with its debt covenants. In April 2023, it voluntarily prepaid $30.0 million of long-term debt.
Material Changes Versus the Prior Comparable Period
- Revenue declined $27.0 million, primarily because existing digital-property partners generated approximately $65.1 million less revenue due to lower yields and weaker advertising demand. New digital-property partners contributed approximately $38.1 million on a 12-month run-rate basis.
- Gross profit and ex-TAC gross profit declined because of lower yields, weaker advertising demand and a mix shift toward lower-margin digital properties.
- Guarantee-related costs increased to approximately 19% of traffic acquisition costs from 10% in Q1 2022, contributing to margin pressure.
- Research and development expense increased 5.2%, primarily due to higher employee-related costs and headcount. Sales and marketing expense decreased 1.3%, while general and administrative expense decreased 7.6%.
- Finance income and expenses shifted from $11.2 million of income to $3.2 million of expense. The prior-year period benefited from a $14.0 million decrease in the fair value of the warrants liability; the current period benefit was $1.7 million.
- Operating cash flow increased to $17.5 million, aided by a $44.4 million decrease in trade receivables, while investing cash flow was positive primarily because of $41.9 million in proceeds from sales and maturities of short-term investments.
- Share count increased substantially following the Yahoo transaction. Weighted-average diluted shares increased to 333.4 million from 260.0 million in Q1 2022.
Outlook, Commentary, Risks and Unusual Items
Management stated that macroeconomic and geopolitical uncertainty, inflation, rising interest rates, the war in Ukraine and weaker advertising demand have negatively affected advertiser spending and yields. The company is reducing discretionary spending and slowing hiring to control operating expense growth, but it cannot predict the extent to which these actions will offset weaker demand.
First-quarter results are seasonally weaker in the digital advertising industry, while the fourth quarter is typically strongest because of holiday-related advertising. Management expects to continue investing in research and development, platform infrastructure and technology, and may pursue strategic acquisitions.
Management believes available liquidity and expected operating cash flows are sufficient to meet working capital and capital expenditure needs for at least the next 12 months. Contractual obligations at March 31, 2023 included $234.2 million of debt principal, $84.0 million of operating-lease commitments and $24.1 million of non-cancelable purchase obligations. Digital-property guarantee arrangements may create gross losses where guaranteed payments exceed generated revenue and are not included in the contractual-obligations table.
The company disclosed exposure to foreign exchange, interest-rate, credit, privacy and digital-advertising regulation risks. It maintains foreign-currency hedges, primarily for NIS-denominated expenses. Cash balances at certain banks exceeded applicable deposit-insurance limits. The company reported no material impact from the Silicon Valley Bank failure and stated that its deposits were transferred to First Citizens Bank.
The U.S. Department of Justice is conducting a criminal investigation into hiring activities in the industry, including Taboola; the company is cooperating and does not believe its conduct violated applicable law. Management reported no legal proceedings expected to have a material adverse effect. Disclosure controls and procedures were deemed effective as of March 31, 2023.
Important Facts for Investors to Verify
- Whether the Yahoo commercial agreement produces the anticipated revenue, yield and margin benefits, including the effect of the substantial share issuance and dilution.
- Whether advertising demand and network yields recover, and whether the higher level of digital-property guarantee costs persists.
- The sustainability of positive operating cash flow and free cash flow despite GAAP losses and significant non-cash amortization and share-based compensation.
- The company’s ability to service and further reduce variable-rate debt while maintaining liquidity and complying with credit-facility covenants.
- The effect of macroeconomic conditions, privacy changes, platform policies and competition from large advertising ecosystems.
- The outcome and potential financial or reputational impact of the Department of Justice hiring investigation and other contingent matters.
- The impact of future equity compensation, outstanding options, RSUs and warrants on diluted share count and per-share value.