Business Context and Reporting Period
Taboola.com Ltd. filed its annual Form 20-F for the fiscal year ended December 31, 2021, prepared under U.S. GAAP. The filing does not provide a standalone fourth-quarter income statement; fourth-quarter operating metrics are discussed within the annual report. Taboola operates an AI-powered recommendation and advertising platform for websites, devices and mobile applications, and expanded into e-commerce through its September 2021 acquisition of Connexity.
Taboola completed its business combination with ION Acquisition Corp. on June 29, 2021, began trading on Nasdaq under TBLA and TBLAW on June 30, 2021, and had 234.0 million ordinary shares outstanding at year-end.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $1,378.5 million | $1,188.9 million | Up 15.9% |
| Gross profit | $441.1 million | $319.5 million | Up 38.1% |
| Gross margin | 32.0% | 26.9% | Up approximately 5.1 percentage points |
| Ex-TAC gross profit | $518.9 million | $382.4 million | Up 35.7% |
| Net income (loss) | $(24.9) million | $8.5 million | Declined by $33.4 million |
| Adjusted EBITDA | $179.5 million | $106.2 million | Up 69.0% |
| Net cash from operating activities | $63.5 million | $139.1 million | Down $75.6 million |
| Free cash flow | $24.5 million | $121.3 million | Down $96.9 million |
| Cash, cash equivalents and short-term deposits | $319.3 million | $242.8 million | Up $76.5 million |
Traffic acquisition cost was $859.6 million, or approximately 62.4% of revenue, compared with $806.5 million, or approximately 67.9% of revenue, in 2020. Guarantee costs were approximately 9% of traffic acquisition costs in 2021 versus 13% in 2020. Adjusted EBITDA represented approximately 34.6% of ex-TAC gross profit, compared with 27.8% in 2020.
Operating expenses increased 54.9% to $454.3 million, including research and development expense of $117.9 million, sales and marketing expense of $206.1 million, and general and administrative expense of $130.3 million. Operating loss was $13.3 million compared with operating income of $26.2 million in 2020.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $319.3 million at December 31, 2021; restricted deposits totaled $4.9 million.
- Taboola generated $63.5 million of operating cash flow and used $620.5 million in investing activities, principally $583.5 million for the Connexity acquisition and $39.1 million for property, equipment and capitalized internal-use software.
- Financing activities provided $631.1 million, including $339.3 million from the ION merger and related transactions and $288.0 million of net proceeds from debt financing.
- The Connexity acquisition was partly financed with a $300.0 million senior secured term loan. The loan had $299.3 million of scheduled principal payments remaining at year-end, bears interest at a variable rate, amortizes at 1% annually, and matures in 2028. Management stated that the facility has no financial maintenance covenants.
- Management believes available liquidity and expected operating receipts are sufficient for working capital and capital expenditures for at least the next 12 months, while noting that additional financing may be required for future growth investments or acquisitions.
- No dividends are expected in the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated to 15.9%, while gross profit grew faster than revenue because of improved network yield, lower guarantee costs as a percentage of traffic acquisition costs, and a mix shift toward higher-margin digital properties.
- GAAP profitability deteriorated despite stronger operating scale. The company recorded a $24.9 million net loss, primarily reflecting substantially higher operating expenses, amortization from the Connexity acquisition, and public-company and transaction-related costs.
- Share-based compensation increased to $128.0 million from $28.3 million, with a substantial majority related to equity awards vesting upon the company becoming public.
- Sales and marketing expense rose 54.1% and general and administrative expense rose 116.7%, reflecting public-company costs, transaction expenses, legal and regulatory consulting, insurance, Connexity integration and equity compensation.
- Cash generation declined materially because of higher prepaid amounts to digital property partners, increased trade receivables and capital expenditures, notwithstanding improved earnings before non-cash charges.
- Connexity contributed $37.7 million of revenue during the four months following the September 1 acquisition. E-commerce advertising represented approximately 15% of fourth-quarter 2021 revenue, according to management.
- Goodwill increased to $550.4 million and net intangible assets to $250.9 million following the Connexity acquisition, creating substantial future amortization expense and impairment exposure.
Guidance, Outlook, Commentary and Risks
- Management expected network yield to increase during 2022 at rates consistent with pre-COVID historical levels, although it provided no formal quantified revenue or earnings guidance in the provided text.
- Taboola began piloting new technology on Microsoft digital properties in the first quarter of 2022 under an agreement extending through July 2024. The rollout could expand inventory but may temporarily reduce financial performance or require higher costs.
- Taboola News generated more than 400 million average monthly editorial engagements in the fourth quarter of 2021, up more than 125% year over year. The company also highlighted partnerships with Samsung Brazil and Xiaomi.
- Key operating risks include dependence on digital property partners and advertisers, minimum-guarantee arrangements, intense competition from Google, Meta and Amazon, seasonality, economic weakness and reduced advertising spending, credit losses, and execution risks from integrating Connexity.
- Privacy regulation and the reduction or elimination of third-party cookies could impair targeting, measurement, personalization and monetization. Relevant regimes include GDPR, CCPA/CPRA, UK GDPR and China’s PIPL.
- The U.S. Department of Justice Antitrust Division is conducting a criminal investigation of hiring activities in the industry, including Taboola. The company is cooperating and states that it does not believe its conduct violated applicable law.
- A digital property’s appeal remained pending after a Paris Commercial Court dismissed a claim for approximately $0.7 million concerning minimum-guarantee payments and ordered the digital property to pay approximately $0.01 million in costs.
- Taboola disclosed that an unknown entity exploited the Log4Shell vulnerability. Management stated that mitigation steps were taken and that the incident had not caused a material adverse effect to date.
- Variable-rate debt exposes the company to interest-rate risk; a one-percentage-point increase in the variable rate was estimated to increase annual finance expense by approximately $3 million.
- Management identified foreign exchange, inflation, labor costs, cybersecurity, geopolitical events including the Russia-Ukraine conflict, and rapidly changing digital advertising regulation as additional risks.
Most Important Facts to Verify
- Whether Connexity achieves expected revenue growth, cost synergies and integration benefits, and whether the substantial goodwill and intangible assets remain recoverable.
- The sustainability of gross-margin improvement and the effect of minimum guarantees, partner renewals and Microsoft’s new technology rollout on future margins.
- Whether operating cash flow and free cash flow recover after the acquisition-related working-capital and capital-expenditure outlays.
- The maturity, variable interest rate, covenants and mandatory-prepayment provisions of the $300 million secured term loan.
- The outcome and potential financial or reputational impact of the DOJ hiring investigation and the pending French litigation appeal.
- The effect of privacy laws, browser changes and third-party-cookie deprecation on targeting effectiveness, advertiser demand and monetization.
- The extent of recurring versus one-time expenses, particularly the $128.0 million of share-based compensation and acquisition, public-company and regulatory costs.
- Potential dilution from 47.5 million outstanding options, 21.6 million outstanding RSUs, 12.3 million warrants, additional Connexity holdback shares and future equity awards.