Outbrain (OB) - 2023 Q1 - Quarterly Report

Part I - Financial Information This section presents condensed consolidated financial statements, management's discussion of financial condition, results of operations, market risks, and controls. Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements and accompanying detailed notes. Condensed Consolidated Balance Sheets | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Cash and cash equivalents | $73,214 | $105,580 | $(32,366) | | Total current assets | $480,787 | $500,504 | $(19,717) | | Total assets | $745,766 | $781,148 | $(35,382) | | Total current liabilities | $275,213 | $300,105 | $(24,892) | | Total liabilities | $537,845 | $563,362 | $(25,517) | | Total stockholders' equity | $207,921 | $217,786 | $(9,865) | Condensed Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------------- | | Revenue | $231,774 | $254,216 | $(22,442) | -8.8% | | Total cost of revenue | $190,619 | $200,285 | $(9,666) | -4.8% | | Gross profit | $41,155 | $53,931 | $(12,776) | -23.7% | | Total operating expenses | $50,465 | $53,857 | $(3,392) | -6.3% | | Loss from operations | $(9,310) | $74 | $(9,384) | N/A | | Net loss | $(5,605) | $(1,890) | $(3,715) | 196.6% | | Basic Net loss per common share | $(0.11) | $(0.03) | $(0.08) | 266.7% | Condensed Consolidated Statements of Comprehensive Loss | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------------- | | Net loss | $(5,605) | $(1,890) | $(3,715) | 196.6% | | Foreign currency translation adjustments | $(1,220) | $(741) | $(479) | 64.6% | | Unrealized gains on available-for-sale investments | $420 | $0 | $420 | N/A | | Total other comprehensive loss | $(800) | $(741) | $(59) | 8.0% | | Comprehensive loss | $(6,405) | $(2,631) | $(3,774) | 143.4% | Condensed Consolidated Statements of Stockholders' Equity | Metric | Balance – January 1, 2023 (in thousands) | Balance – March 31, 2023 (in thousands) | Change (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Additional Paid-In Capital | $455,831 | $458,726 | $2,895 | | Treasury Stock (Amount) | $(49,168) | $(55,523) | $(6,355) | | Accumulated Other Comprehensive Loss | $(9,913) | $(10,713) | $(800) | | Accumulated Deficit | $(179,024) | $(184,629) | $(5,605) | | Total Stockholders' Equity | $217,786 | $207,921 | $(9,865) | - The company repurchased 1,313,073 shares for $6.142 million under its share repurchase program during Q1 2023[22] Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Net cash used in operating activities | $(20,478) | $(2,641) | $(17,837) | | Net cash used in investing activities | $(4,039) | $(40,764) | $36,725 | | Net cash used in financing activities | $(7,411) | $(458) | $(6,953) | | Net decrease in cash, cash equivalents and restricted cash | $(32,364) | $(44,526) | $12,162 | | Cash, cash equivalents and restricted cash — Ending | $73,401 | $411,066 | $(337,665) | Notes to Condensed Consolidated Financial Statements This section details accounting policies, financial instrument valuations, debt, equity, and other significant financial matters. Note 1. Organization, Description of Business and Summary of Significant Accounting Policies - Outbrain is a leading recommendation platform powering the open web, generating revenue from marketers through user engagements with promoted recommendations on third-party media owners' online properties[30] - The company's advertiser solutions are mainly priced using a performance-based model, highly dependent on its proprietary algorithms to generate trustworthy and interesting recommendations[30] - No single marketer accounted for 10% or more of total revenue for Q1 2023 or Q1 2022, indicating diversified advertiser relationships[40] Note 2. Revenue Recognition | Region | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | USA | $72,216 | $85,577 | | Europe, the Middle East, and Africa (EMEA) | $133,754 | $139,675 | | Other | $25,804 | $28,964 | | Total revenue | $231,774 | $254,216 | Note 3. Acquisition - Outbrain acquired video intelligence AG (vi) on January 5, 2022, for approximately $54.2 million, paid in cash and 355,786 shares of common stock (fair value $4.2 million)[49] - The acquisition expanded the Company's video product offerings to include in-stream high-quality video content, aiming for better user experience and advertiser value[49] Note 4. Investments in Marketable Securities | Investment Type | March 31, 2023 Fair Value (in thousands) | December 31, 2022 Fair Value (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Money market funds | $31,566 | $39,198 | | U.S. Treasuries | $23,616 | $31,404 | | U.S. government bonds | $76,315 | $76,360 | | Commercial paper | $43,602 | $42,968 | | U.S. Corporate bonds | $100,947 | $94,934 | | Total cash equivalents and investments | $276,046 | $284,864 | - As of March 31, 2023, the total estimated fair value of debt securities in an unrealized loss position was $225.8 million, with aggregate unrealized losses of $1.5 million, all for less than twelve months[54] Note 5. Goodwill and Intangible Assets - Goodwill balance remained constant at $63.1 million as of March 31, 2023, and December 31, 2022, with no accumulated impairments[56] | Intangible Asset | March 31, 2023 Net Carrying Value (in thousands) | December 31, 2022 Net Carrying Value (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Developed technology | $8,447 | $8,759 | | Customer relationships | $551 | $834 | | Publisher relationships | $9,121 | $9,956 | | Trade names | $3,996 | $4,136 | | Content provider relationships | $214 | $228 | | Other | $654 | $661 | | Total intangible assets, net | $22,983 | $24,574 | - Estimated amortization for identifiable acquisition-related intangible assets for the remainder of 2023 is $2.6 million, totaling $23.0 million through 2027 and thereafter[60] Note 6. Balance Sheet Components Accounts Receivable and Allowance for Credit Losses | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Accounts receivable | $188,934 | $186,770 | | Allowance for credit losses | $(7,452) | $(5,512) | | Accounts receivable, net | $181,482 | $181,258 | - The provision for credit losses, net of recoveries, was $2.794 million for the three months ended March 31, 2023[61] Prepaid Expenses and Other Current Assets | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Prepaid traffic acquisition costs | $25,702 | $23,149 | | Prepaid taxes | $10,507 | $15,280 | | Prepaid software licenses | $3,675 | $2,465 | | Total prepaid expenses and other current assets | $47,562 | $46,761 | Property, Equipment and Capitalized Software, Net | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Computer and equipment | $61,106 | $59,536 | | Capitalized software development costs | $70,836 | $67,685 | | Total property, equipment and capitalized software, net | $40,366 | $39,890 | Accrued and Other Current Liabilities | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Accrued traffic acquisition costs | $70,003 | $73,396 | | Accrued tax liabilities | $9,974 | $15,013 | | Total accrued and other current liabilities | $114,813 | $126,092 | Note 7. Fair Value Measurements | Financial Instrument | March 31, 2023 Total Fair Value (in thousands) | December 31, 2022 Total Fair Value (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Cash equivalents and investments | $276,046 | $284,864 | | Restricted time deposit | $187 | $185 | | Severance pay fund deposits | $5,066 | $5,378 | | Foreign currency forward contract (asset) | $610 | $726 | | Foreign currency forward contract (liability) | $1,165 | $1,463 | - The company uses foreign currency forward exchange contracts to manage foreign currency risk, with net losses of $0.1 million in Q1 2023 and $0.7 million in Q1 2022 from mark-to-market adjustments[71][72] - The company's 2.95% Convertible Senior Notes due 2026 had a carrying value of $236.0 million and an estimated fair value of $180.4 million as of March 31, 2023[73] Note 8. Leases | Lease Type | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Operating lease right-of-use assets, net | $11,381 | $11,065 | | Finance lease assets (Property, equipment and capitalized software, net) | $1,394 | $1,858 | | Total lease assets | $12,775 | $12,923 | | Total lease liabilities | $13,526 | $13,693 | | Lease Cost Component | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Operating lease cost | $1,317 | $1,338 | | Finance lease cost (Depreciation & Interest) | $498 | $1,031 | | Total lease cost | $1,815 | $2,369 | Note 9. Long-Term Debt - The company has $236.0 million aggregate principal amount of 2.95% Convertible Senior Notes due July 27, 2026, with interest payable semi-annually[78][79] - The company maintains a $75.0 million revolving credit facility with First Citizens Bank (formerly SVB), with no outstanding borrowings and $64.8 million available capacity as of March 31, 2023[85][89] Note 10. Income Taxes | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Effective tax rate | 23.4% | 34.3% | - The Inflation Reduction Act of 2022 is not expected to have a material impact on the company's consolidated financial statements based on current income and share repurchase program[91] Note 11. Commitments and Contingencies - The company is not currently a party to any material legal proceedings[93] - The U.S. Department of Justice's Antitrust Division is conducting a criminal investigation into hiring practices in the company's industry, with the company cooperating and believing its conduct did not violate applicable law[94] Note 12. Stockholders' Equity - The Board approved a new $30 million share repurchase program on December 14, 2022[97] | Metric | Three Months Ended March 31, 2023 | | :-------------------------------- | :-------------------------------- | | Shares repurchased | 1,313,073 | | Fair value of repurchased shares (including commissions) | $6.1 million | | Remaining availability under program | $23.9 million | | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Accumulated Other Comprehensive Loss | $(10,713) | $(9,913) | Note 13. Stock-based Compensation | Expense Category | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Research and development | $502 | $537 | | Sales and marketing | $1,026 | $1,173 | | General and administrative | $1,083 | $1,023 | | Total stock-based compensation | $2,611 | $2,733 | - As of March 31, 2023, remaining unrecognized stock-based compensation expense was $1.8 million for unvested stock options and $22.1 million for unvested RSUs[103] Note 14. Net Loss Per Common Share | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss per share (Basic & Diluted) | $(0.11) | $(0.03) | | Weighted-average shares - basic and diluted | 51,435,289 | 57,237,012 | - Approximately 14.7 million shares (including convertible debt, options, warrants, and RSUs) were excluded from diluted net loss per share calculation for Q1 2023 due to their anti-dilutive effect[110] Note 15. Subsequent Events - On April 14, 2023, the company repurchased $118.0 million of Convertible Notes for $96.2 million cash, achieving a 19% discount to principal[111] - This repurchase will result in a pre-tax gain of approximately $22.6 million in Q2 2023[111] - The company redeemed $80.3 million of marketable securities, incurring a $0.6 million loss, to finance the repurchase[111] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operating results, market risks, and future outlook. Business Overview - Outbrain is a leading recommendation platform for advertisers and digital media owners, reaching over one billion unique users globally[115] - The platform provides personalization, engagement, and monetization solutions to thousands of digital media properties and helps tens of thousands of advertisers attract new customers and grow their businesses[115] - Outbrain operates a two-sided marketplace, typically with exclusive control over the user experience, allowing for rapid testing and deployment of new formats[117] Recent Developments Partial Repurchase of Convertible Senior Notes - On April 14, 2023, Outbrain repurchased $118.0 million of Convertible Notes for $96.2 million cash, representing a 19% discount to principal[122] - This repurchase is expected to result in a pre-tax gain of approximately $22.6 million in the second quarter of 2023[122] Impacts of SVB Closure - The closure of Silicon Valley Bank (SVB) on March 10, 2023, negatively impacted Q1 2023 cash flow from operations due to delays in collecting customer payments[124] - Outbrain regained full access to SVB funds, and its revolving credit facility and foreign currency forward contracts remained in effect with First Citizens Bank, which acquired SVB[123] - While Q2 may be impacted by resolving March 2023 delays, the company expects limited to no impact on cash flow for the full year[124] Macroeconomic Environment - Significant instability in worldwide economic conditions, including the Russia-Ukraine conflict, COVID-19 pandemic effects, inflation, increased interest rates, and bank disruptions, has negatively impacted advertisers[126] - These conditions make it difficult to forecast and plan future business activities and could lead to further reductions or delays in overall advertising demand and spending[126] Factors Affecting Our Business Retention and Growth of Relationships with Media Partners - Outbrain's top 20 media partners have used its platform for an average of over seven years, with typical contract lengths of two to four years, often exclusive[128] - Media partner net revenue retention was 80% for the three months ended March 31, 2023, reflecting lower yields due to weaker demand and macroeconomic conditions[129][157] - Revenue generated from new media partners contributed approximately 11% ($28.5 million) to revenue growth for the three months ended March 31, 2023[130][157] User Engagement with Relevant Media and Advertising Content - Outbrain optimizes algorithms for overall user experience rather than just price, aiming to cultivate user behavior patterns that compound engagement and improve long-term monetization[131] - Growth in user engagement is driven by enhancements to the recommendation engine, growth in data assets, and expansion on existing and new media partner properties[132] - Click Through Rate (CTR) for ads on the platform is currently less than 1% of recommendations served, indicating significant opportunity for growth[132] Advertiser Retention and Growth - Outbrain's value proposition to advertisers is to deliver measurable engagement that drives business outcomes and better return on ad spend (ROAS)[120][133] - Over 30,000 unique advertisers were active on the platform in 2022, and the company continues to grow programmatic partnerships to efficiently expand its advertiser base[135] Expansion Into New Environments, New Content Experiences and New Ad Formats - Outbrain plans to expand its platform into new environments such as connected TVs (CTV), screens for autonomous vehicles, and pre-installed smartphone applications[137] - The acquisition of video intelligence AG (vi) in Q1 2022 expanded the company's video product offerings to include in-stream high-impact video formats[137] Investment in Our Technology and Infrastructure - Outbrain continuously invests in technology and infrastructure, including algorithm improvements to deliver more relevant ads and enhance user engagement[139] - The Smartlogic product dynamically adjusts content arrangement and formats based on user preferences and media partner KPIs for a personalized feed experience[139] - The company's proprietary micro-services, API-based cloud infrastructure allows for an average of 300 code deployments per day, supporting scalable and cost-effective growth[140] Industry Dynamics - The digital advertising industry is rapidly evolving, with content consumption shifting online and increasing demand for targeted, performance-driven ads[141] - Regulatory changes, such as Apple's Identifier for Advertisers policy and Google's cookie roadmap, are impacting industry participants[141] - Outbrain believes its innovation focus, deep media partner relationships, and scale position it well to benefit from these industry dynamics and the shift towards accountability in digital advertising[141] Seasonality - The global advertising industry is seasonal, with the fourth quarter typically having the highest advertiser spending and the first quarter the lowest, impacting Outbrain's revenue[142] - Traffic acquisition costs generally increase commensurately with revenue, but may fluctuate due to revenue mix or contracted terms with media partners[142] Definitions of Financial and Performance Measures Revenue - Revenue is generated from advertisers for clicks on and, to a lesser extent, impressions of their ads, recognized in the period the engagement occurs[143] - Revenue generation depends on advertiser demand and is impacted by seasonal factors, with advertisers having flexibility to adjust budgets and pricing in real time[144][145] Traffic Acquisition Costs - Traffic acquisition costs (TAC) are amounts owed to media partners for their share of revenue or based on guaranteed minimum rates for ad placements[146] - TAC are incurred when revenue is recognized and may not correlate directly with revenue fluctuations due to revenue mix or fixed rates with media partners[146] Other Cost of Revenue - Other cost of revenue comprises data center management, hosting fees, data connectivity costs, depreciation, and amortization of capitalized software for revenue-generating technologies[147] Operating Expenses Research and Development - Research and development expenses are primarily personnel and related overhead costs for platform development and enhancement, including amortization of capitalized software for non-revenue generating infrastructure[149] Sales and Marketing - Sales and marketing expenses include personnel, overhead, sales commissions, advertising, promotional activities, and facilities costs for marketing, client services, and brand promotion[150] General and Administrative - General and administrative expenses include personnel, overhead, professional fees (accounting, audit, tax, legal, IT, consulting), facilities costs, insurance, and certain taxes[151] Other Income (Expense), Net - Other income (expense), net, includes interest income from cash and investments, interest expense on debt and leases, and foreign currency exchange gains and losses[153] Benefit from Income Taxes - Benefit from income taxes is based on the annual estimated effective tax rate, adjusted for discrete items, and includes federal, state, and foreign income taxes, deferred taxes, and valuation allowance changes[154] - Realization of deferred tax assets depends on future taxable income, considering historical and projected income, tax attributes, and net operating loss carryforwards[155] Results of Operations Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 Revenue | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------------- | | Revenue | $231,774 | $254,216 | $(22,442) | -8.8% | - Revenue included net unfavorable foreign currency effects of approximately $5.8 million in Q1 2023[157] - On a constant currency basis, revenue decreased by $16.6 million, or 6.5%, compared to the prior year period[157] - Net revenue retention on existing media partners was 80%, contributing to a $51.6 million decrease in revenue, while new media partners contributed $28.5 million (11%) in growth[157] Cost of Revenue and Gross Profit | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------------- | | Traffic acquisition costs | $179,576 | $190,696 | $(11,120) | -5.8% | | Other cost of revenue | $11,043 | $9,589 | $1,454 | 15.2% | | Gross profit | $41,155 | $53,931 | $(12,776) | -23.7% | - Traffic acquisition costs as a percentage of revenue increased to 77.5% in Q1 2023 from 75.0% in Q1 2022 due to unfavorable revenue mix and lower performance[159] - Other cost of revenue increased primarily due to higher hosting fees, increased internal use software amortization, and network security costs[160] Ex-TAC Gross Profit | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------------- | | Ex-TAC Gross Profit | $52,198 | $63,520 | $(11,322) | -17.8% | - Ex-TAC Gross Profit included net unfavorable foreign currency effects of approximately $0.4 million in Q1 2023[162] - The decrease was primarily driven by lower revenue, unfavorable revenue mix, and lower performance from certain deals[162] Operating Expenses | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------------- | | Total operating expenses | $50,465 | $53,857 | $(3,392) | -6.3% | - Operating expenses included net favorable foreign currency effects of approximately $3.2 million in Q1 2023[163] - The decrease was primarily due to lower personnel-related costs ($3.7 million) from headcount reductions and lower professional costs ($1.9 million), partially offset by a $2.9 million increase in provision for credit losses[163] Total Other Income (Expense), Net | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Total other income (expense), net | $1,993 | $(2,952) | $4,945 | - The increase was primarily due to $2.4 million of income from the investment program initiated in July 2022 and a $2.2 million increase in net foreign currency gains[166] Benefit from Income Taxes | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Benefit from income taxes | $(1,712) | $(988) | $(724) | | Effective tax rate | 23.4% | 34.3% | - The lower effective tax rate in Q1 2023 was primarily attributable to a deduction related to foreign-derived intangible income[167] Net Loss | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------------- | | Net loss | $(5,605) | $(1,890) | $(3,715) | 196.6% | Adjusted EBITDA | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------------- | | Adjusted EBITDA | $695 | $11,608 | $(10,913) | -94.0% | | Adjusted EBITDA as % of Ex-TAC Gross Profit | 1.3% | 18.3% | -17.0% | N/A | - Adjusted EBITDA included net favorable foreign currency effects of approximately $2.6 million in Q1 2023[172] Non-GAAP Reconciliations Ex-TAC Gross Profit | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------------- | | Gross profit | $41,155 | $53,931 | $(12,776) | -23.7% | | Other cost of revenue | $11,043 | $9,589 | $1,454 | 15.2% | | Ex-TAC Gross Profit | $52,198 | $63,520 | $(11,322) | -17.8% | Adjusted EBITDA | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------------- | | Net loss | $(5,605) | $(1,890) | $(3,715) | 196.6% | | Depreciation and amortization | $5,941 | $6,268 | $(327) | -5.2% | | Stock-based compensation | $2,611 | $2,733 | $(122) | -4.5% | | Adjusted EBITDA | $695 | $11,608 | $(10,913) | -94.0% | Free Cash Flow | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Net cash used in operating activities | $(20,478) | $(2,641) | $(17,837) | | Purchases of property and equipment | $(3,749) | $(2,809) | $(940) | | Capitalized software development costs | $(2,853) | $(3,445) | $592 | | Free cash flow | $(27,080) | $(8,895) | $(18,185) | LIQUIDITY AND CAPITAL RESOURCES Sources of Liquidity | Metric | March 31, 2023 (in thousands) | | :-------------------------------- | :-------------------------------- | | Cash and cash equivalents | $73,214 | | Short-term investments | $178,529 | | Long-term investments | $65,951 | | Revolving Credit Facility (available capacity) | $64,784 | | Total available liquidity | $382,478 | - Approximately $31.0 million of cash and cash equivalents was held outside the United States by non-U.S. subsidiaries as of March 31, 2023, with no current plans for repatriation[191] Material Cash Requirements Long-term debt - As of March 31, 2023, the company had $236.0 million principal amount of Convertible Notes due July 27, 2026[193] - Post-quarter, $118.0 million of these notes were repurchased, reducing the remaining outstanding principal to $118.0 million[194] Other Contractual Cash Obligations - After the April 2023 repurchase, the remaining long-term debt commitment is $118 million, with annual interest obligations reduced to approximately $3.5 million through 2026[196] Share Repurchases - The company repurchased 1,313,073 shares for $6.1 million under its $30 million share repurchase program during Q1 2023[198] - As of March 31, 2023, $23.9 million remained available under the share repurchase program[198] Capital Expenditures - Capital expenditures were $3.7 million in Q1 2023[200] - Anticipated capital expenditures for 2023 are between $11 million and $14 million, mainly for servers, related equipment, and leasehold improvements[200] Cash Flows Operating Activities | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Net cash used in operating activities | $(20,478) | $(2,641) | $(17,837) | - The increase in cash used was primarily due to a $13.1 million decline in working capital, largely attributable to delays in customer payment collections after the SVB closure[202] Investing Activities | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Net cash used in investing activities | $(4,039) | $(40,764) | $36,725 | - The decrease in cash used was primarily due to $34.2 million less cash used for business acquisitions (vi acquisition in prior year) and $2.9 million net proceeds from marketable securities maturities[204] Financing Activities | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Net cash used in financing activities | $(7,411) | $(458) | $(6,953) | - The increase in cash used was primarily due to $4.6 million higher treasury share repurchases and a $2.3 million decline in proceeds from stock option and warrant exercises[205] Critical Accounting Policies and Estimates - No material changes to critical accounting policies and estimates compared to the 2022 Form 10-K[207] Recently Issued Accounting Pronouncements - Refer to Note 1 for information on recently issued accounting standards[208] JOBS Act Transition Period - As an emerging growth company, Outbrain has elected to use the extended transition period under the JOBS Act for adopting new or revised accounting standards[209] - This election may result in financial statements that are not comparable to companies that have adopted new standards as of public company effective dates[209] Off-Balance Sheet Arrangements - The company does not engage in off-balance sheet financing arrangements or have interests in variable interest entities[210] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, including foreign exchange, interest rate, inflation, and credit risks. Foreign Currency Risk - Outbrain's consolidated results are subject to foreign currency fluctuations, with operating expenses primarily denominated in U.S. Dollars, New Israeli Shekels, British pound sterling, and Euros[213] - A hypothetical 10% change in weighted-average exchange rates would result in a $1.9 million unfavorable or favorable change to operating loss for Q1 2023[214] Interest Rate Risk - Interest rate risk primarily relates to cash and cash equivalents ($73.2 million) and marketable securities ($244.5 million) as of March 31, 2023[216] - Long-term debt of $236.0 million bears a fixed interest rate[215] - A 100-basis point change in interest rates would alter the fair value of the investment portfolio by approximately $1.6 million[217] Inflation Risk - The business is subject to inflation risk, which could lead to higher costs (e.g., wages) and reduced ad spending[218] Credit Risk - Financial instruments subject to credit risk include cash, cash equivalents, investments, and receivables[219] - The company monitors customer credit levels and counterparty creditworthiness for foreign currency forward contracts to mitigate risk[219] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes to internal control over financial reporting. Evaluation of Disclosure Controls and Procedures - Management, including Co-Chief Executive Officers and Chief Financial Officer, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2023[220] Changes in Internal Control over Financial Reporting - No material changes to internal control over financial reporting occurred during Q1 2023[221] Inherent Limitations on Effectiveness of Controls - Management acknowledges that control systems provide only reasonable, not absolute, assurance and are subject to inherent limitations, including resource constraints[222] Part II - Other Information This section covers legal proceedings, risk factors, equity sales and repurchases, and other miscellaneous information. Item 1. Legal Proceedings Legal proceedings information is incorporated by reference from Note 11 of the condensed consolidated financial statements. - Information on legal proceedings is incorporated by reference from Note 11 of the condensed consolidated financial statements[223] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the company's 2022 Form 10-K. - No material changes to risk factors as previously disclosed in the 2022 Form 10-K[224] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms no recent unregistered equity sales, details IPO proceeds use, and provides common stock repurchase data. Recent Sales of Unregistered Equity Securities - No recent unregistered sales of equity securities[225] Use of Proceeds - Net proceeds of $145.1 million from the July 2021 IPO were used for working capital, general corporate purposes, and the acquisition of video intelligence AG[226][227] Purchases of Equity Securities by the Issuer | Period | Total shares purchased (1) | Average price paid per share (2) | Total shares purchased as part of publicly announced plans or programs | Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :---------------------------------------------------------------- | :-------------------------------------------------------------------------------------------------------------------------------- | | January 2023 | 639,008 | $4.31 | 613,992 | $27,366 | | February 2023 | 466,982 | $5.12 | 464,384 | $25,002 | | March 2023 | 255,285 | $4.74 | 234,697 | $23,897 | | TOTAL | 1,361,275 | $4.67 | 1,313,073 | | - The total shares purchased include repurchases under the $30 million program and shares withheld for employee tax obligations on vested awards[229] Item 5. Other Information No other information is reported in this item. - No other information is reported[230] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including the Certificate of Incorporation, Note Repurchase Agreement, and certifications. - The exhibit index lists documents such as the Certificate of Incorporation, Note Repurchase Agreement, and various certifications (e.g., Section 302 and 906 of Sarbanes-Oxley Act)[233] Signatures The report is signed by David Kostman (Co-CEO) and Jason Kiviat (CFO) on May 9, 2023. - The report was signed by David Kostman (Co-Chief Executive Officer) and Jason Kiviat (Chief Financial Officer) on May 9, 2023[236]