Outbrain (OB) - 2023 Q2 - Quarterly Report

Part I - Financial Information This part provides Outbrain Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis for the periods ended June 30, 2023 Item 1. Financial Statements This section presents Outbrain Inc.'s unaudited condensed consolidated financial statements and related notes for the periods ended June 30, 2023 Condensed Consolidated Balance Sheets This statement provides a snapshot of Outbrain's assets, liabilities, and equity as of June 30, 2023, and December 31, 2022 | Metric | June 30, 2023 (In thousands) | December 31, 2022 (In thousands) | Change (vs Dec 31, 2022) | | :-------------------------------- | :----------------------------- | :------------------------------- | :----------------------- | | Cash and cash equivalents | $59,802 | $105,580 | -$45,778 | | Short-term investments | $113,168 | $166,905 | -$53,737 | | Accounts receivable, net | $168,879 | $181,258 | -$12,379 | | Total current assets | $389,185 | $500,504 | -$111,319 | | Long-term investments | $44,828 | $78,761 | -$33,933 | | TOTAL ASSETS | $633,606 | $781,148 | -$147,542 | | Accounts payable | $140,918 | $147,653 | -$6,735 | | Total current liabilities | $267,178 | $300,105 | -$32,927 | | Long-term debt | $118,000 | $236,000 | -$118,000 | | TOTAL LIABILITIES | $413,387 | $563,362 | -$149,975 | | TOTAL STOCKHOLDERS' EQUITY | $220,219 | $217,786 | +$2,433 | Condensed Consolidated Statements of Operations This statement details Outbrain's revenues, expenses, and net income or loss for the three and six months ended June 30, 2023 and 2022 | Metric (In thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $225,800 | $250,883 | $457,574 | $505,099 | | Total cost of revenue | $181,779 | $202,164 | $372,398 | $402,449 | | Gross profit | $44,021 | $48,719 | $85,176 | $102,650 | | Total operating expenses | $51,680 | $51,598 | $102,145 | $105,455 | | Loss from operations | $(7,659) | $(2,879) | $(16,969) | $(2,805) | | Gain on repurchase of convertible debt | $22,594 | — | $22,594 | — | | Total other income (expense), net | $23,004 | $(5,781) | $24,997 | $(8,733) | | Income (loss) before income taxes | $15,345 | $(8,660) | $8,028 | $(11,538) | | Net income (loss) | $11,282 | $(10,318) | $5,677 | $(12,208) | | Basic EPS | $0.22 | $(0.18) | $0.11 | $(0.21) | | Diluted EPS | $0.21 | $(0.18) | $0.11 | $(0.21) | Condensed Consolidated Statements of Comprehensive Income (Loss) This statement presents Outbrain's net income or loss and other comprehensive income or loss for the three and six months ended June 30, 2023 and 2022 | Metric (In thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $11,282 | $(10,318) | $5,677 | $(12,208) | | Total other comprehensive loss | $(1,291) | $(1,996) | $(2,091) | $(2,737) | | Comprehensive income (loss) | $9,991 | $(12,314) | $3,586 | $(14,945) | Condensed Consolidated Statements of Stockholders' Equity This statement outlines changes in Outbrain's equity accounts for the periods ended June 30, 2023, and June 30, 2022 Stockholders' Equity (In thousands) | Metric (In thousands) | Balance – January 1, 2023 | Balance – June 30, 2023 | Balance – January 1, 2022 | Balance – June 30, 2022 | | :-------------------------------- | :------------------------ | :---------------------- | :------------------------ | :---------------------- | | Common Stock (Amount) | $60 | $61 | $58 | $60 | | Additional Paid-In Capital | $455,831 | $462,209 | $434,945 | $449,282 | | Treasury Stock (Amount) | $(49,168) | $(56,700) | $(16,504) | $(26,076) | | Accumulated Other Comprehensive Loss | $(9,913) | $(12,004) | $(4,474) | $(7,211) | | Accumulated Deficit | $(179,024) | $(173,347) | $(157,250) | $(169,458) | | Total Stockholders' Equity | $217,786 | $220,219 | $256,775 | $246,597 | - Total Stockholders' Equity increased by $2.4 million from December 31, 2022, to June 30, 2023, primarily due to net income of $11.3 million in Q2 2023, partially offset by treasury stock repurchases and other comprehensive loss[22] Condensed Consolidated Statements of Cash Flows This statement summarizes Outbrain's cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2023 and 2022 | Cash Flow Activity (In thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(18,651) | $(1,130) | | Net cash provided by (used in) investing activities | $79,398 | $(51,309) | | Net cash used in financing activities | $(105,277) | $(7,690) | | Effect of exchange rate changes | $(1,246) | $(3,875) | | Net decrease in cash, cash equivalents and restricted cash | $(45,776) | $(64,004) | | Cash, cash equivalents and restricted cash — Ending | $59,989 | $391,588 | - Net cash used in operating activities increased significantly in H1 2023 compared to H1 2022, primarily due to lower profitability and timing of payments - Investing activities shifted from a net cash outflow to a net cash inflow, driven by proceeds from sales and maturities of marketable securities - Financing activities saw a substantial increase in cash used, mainly due to the repurchase of convertible debt[214][216][217] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of Outbrain's accounting policies, significant transactions, and financial instrument details - Outbrain is a leading technology platform providing personalization, engagement, and monetization solutions to digital media properties, primarily using performance-based and programmatic advertising models[30] Revenue by Geographic Location (In thousands) | Region | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | USA | $68,889 | $85,079 | $141,105 | $170,656 | | Europe, the Middle East and Africa (EMEA) | $134,486 | $140,293 | $268,240 | $279,968 | | Other | $22,425 | $25,511 | $48,229 | $54,475 | | Total revenue | $225,800 | $250,883 | $457,574 | $505,099 | - The Company acquired video intelligence AG (vi) on January 5, 2022, for approximately $54.2 million (cash and stock) to expand its video product offerings[48] - On May 31, 2023, Outbrain announced a global workforce reduction of approximately 10%, incurring pre-tax restructuring charges of $2.3 million in Q2 2023 and $3.1 million for the six months ended June 30, 2023[51][52] - In April 2023, the Company redeemed $78.9 million of available-for-sale marketable securities, resulting in a gross realized loss of $0.6 million, to finance the partial repurchase of its Convertible Notes[55] - Goodwill remained stable at $63.1 million. Net intangible assets decreased to $22.1 million as of June 30, 2023, from $24.6 million as of December 31, 2022[58][59] - On April 14, 2023, the Company repurchased $118.0 million principal amount of its Convertible Notes for approximately $96.2 million in cash, recognizing a pre-tax gain of $22.6 million. $118.0 million principal remains outstanding[81] - The U.S. Department of Justice informed the Company on July 11, 2023, that it is no longer pursuing the criminal investigation into hiring practices in the Company's industry[94] Stock-based Compensation Expense (In thousands) | Expense Category | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development | $1,037 | $756 | $1,539 | $1,293 | | Sales and marketing | $1,222 | $1,410 | $2,248 | $2,583 | | General and administrative | $1,237 | $1,191 | $2,320 | $2,214 | | Total | $3,496 | $3,357 | $6,107 | $6,090 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Outbrain's financial condition, results of operations, key business developments, and non-GAAP reconciliations Business Overview Outbrain operates a two-sided marketplace, providing personalization and monetization solutions to digital media properties and advertisers globally - Outbrain is a leading technology platform that drives business results by engaging people across the open Internet, reaching over a billion unique users globally[111] - The Company operates a two-sided marketplace, providing personalization, engagement, and monetization solutions to digital media properties and helping tens of thousands of advertisers attract new customers[111][113][116] - Outbrain's platform is mobile-first, generating 72% of its revenue in 2022 from mobile apps and websites of media partners[112] Recent Developments This section highlights Outbrain's recent product launches, workforce adjustments, debt repurchases, and impacts from bank closures - Outbrain launched 'Onyx by Outbrain™' on June 14, 2023, a new branding platform leveraging AI for awareness and consideration campaigns, offering custom large ad formats and high-impact display experiences in dedicated in-article environments[118] - On May 31, 2023, the Company announced a global workforce reduction of approximately 10% to enhance operating efficiencies and support strategic growth, resulting in $2.3 million in pre-tax charges during Q2 2023[119] - On April 14, 2023, Outbrain repurchased $118.0 million principal amount of its Convertible Notes for $96.2 million cash, realizing a pre-tax gain of $22.6 million[121] - The closure of Silicon Valley Bank (SVB) in March 2023 negatively impacted Q1 2023 cash flow from operations due to collection delays, though these were largely resolved by June 30, 2023, with limited full-year impact expected. The Revolving Credit Facility was assumed by First Citizens Bank[122][123] Macroeconomic Environment This section discusses how global economic instability, including conflicts, inflation, and interest rates, impacts advertising demand and spending - General worldwide economic instability, including the Russia-Ukraine conflict, COVID-19, bank closures, inflation, and increased interest rates, has negatively impacted advertisers and could lead to further reductions or delays in advertising demand and spending[124] Factors Affecting Our Business This section details key drivers of Outbrain's business, including media partner retention, ad optimization, market expansion, and AI technology investments - Media partner net revenue retention was 78% for Q2 2023 and 79% for H1 2023, indicating strong existing relationships. New media partners contributed 12% and 11% to revenue growth for the three and six months ended June 30, 2023, respectively[127][128] - Outbrain's algorithms optimize for overall user experience and engagement, not just ad price, leading to better ROAS for advertisers. The Click Through Rate (CTR) for ads on the platform is currently less than 1% of recommendations served, indicating significant growth potential[129][130] - The Company is expanding into new environments (e.g., CTV, autonomous vehicles, pre-installed apps) and new ad formats (e.g., high-impact video via vi acquisition, Onyx for brand advertisers) to diversify and grow its addressable market[135][136] - Outbrain heavily invests in AI technology, making approximately 1 billion predictions per second to enhance recommendation engines and user engagement. Its proprietary micro-services, API-based cloud infrastructure allows for scalable and cost-effective deployment[138][139][141] Seasonality This section explains how the global advertising industry's seasonal trends impact Outbrain's revenue and traffic acquisition costs - The global advertising industry experiences seasonal trends, with the fourth quarter historically showing the highest advertiser spending and the first quarter the lowest, impacting Outbrain's revenue and traffic acquisition costs[143] Definitions of Financial and Performance Measures This section defines key financial and performance metrics used by Outbrain, including revenue, operating expenses, and other income/expense - Revenue is generated from advertisers based on clicks or impressions, with amounts fluctuating due to demand and seasonality. Traffic acquisition costs (TAC) are payments to media partners, which may not always correlate with revenue fluctuations[144][147][148] - Operating expenses include Research and Development (platform enhancement), Sales and Marketing (client services, promotional activities), and General and Administrative (executive, finance, legal, professional fees). Personnel costs are the largest component[150][151][152][153] - Other income (expense), net, comprises interest income (from cash/investments), interest expense (on debt/leases), and foreign currency exchange gains/losses, including mark-to-market adjustments on forward contracts[154][155] - Provision for income taxes includes federal, state, and foreign income taxes, deferred taxes, and valuation allowance changes. Realization of deferred tax assets depends on future taxable income[156][157] Results of Operations This section analyzes Outbrain's financial performance, including revenue, gross profit, operating loss, and net income, for the reported periods Key Financial Highlights (In thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $225,800 | $250,883 | $457,574 | $505,099 | | Gross profit | $44,021 | $48,719 | $85,176 | $102,650 | | Loss from operations | $(7,659) | $(2,879) | $(16,969) | $(2,805) | | Net income (loss) | $11,282 | $(10,318) | $5,677 | $(12,208) | | Ex-TAC Gross Profit (Non-GAAP) | $54,576 | $59,329 | $106,774 | $122,849 | | Adjusted EBITDA (Non-GAAP) | $3,503 | $5,864 | $4,198 | $17,472 | - Revenue decreased by 10.0% to $225.8 million in Q2 2023 (from $250.9 million in Q2 2022) and by 9.4% to $457.6 million in H1 2023 (from $505.1 million in H1 2022), primarily due to lower net revenue retention on existing media partners and weaker demand, partially offset by growth from new media partners[159][174] - Net income for Q2 2023 was $11.3 million (vs. net loss of $10.3 million in Q2 2022) and $5.7 million for H1 2023 (vs. net loss of $12.2 million in H1 2022), largely driven by a $22.6 million pre-tax gain on the partial repurchase of Convertible Notes[167][172][182][185] - Adjusted EBITDA decreased to $3.5 million in Q2 2023 (from $5.9 million in Q2 2022) and to $4.2 million in H1 2023 (from $17.5 million in H1 2022), primarily due to lower Ex-TAC Gross Profit, despite lower operating expenses[173][186] Non-GAAP Reconciliations This section provides reconciliations of non-GAAP financial measures such as Ex-TAC Gross Profit, Adjusted EBITDA, and Free Cash Flow to their most comparable GAAP measures - Outbrain uses non-GAAP financial measures like Ex-TAC Gross Profit, Adjusted EBITDA, and Free Cash Flow to provide supplemental metrics for evaluating operating performance and trends, as they are used by management for decision-making[188][189] Ex-TAC Gross Profit Reconciliation (In thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Gross profit | $44,021 | $48,719 | $85,176 | $102,650 | | Other cost of revenue | $10,555 | $10,610 | $21,598 | $20,199 | | Ex-TAC Gross Profit | $54,576 | $59,329 | $106,774 | $122,849 | Adjusted EBITDA Reconciliation (In thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $11,282 | $(10,318) | $5,677 | $(12,208) | | Adjustments (e.g., gain on debt repurchase, interest, taxes, D&A, stock-based comp, severance) | $22,594 (gain) | $16,182 | $22,594 (gain) | $29,680 | | Adjusted EBITDA | $3,503 | $5,864 | $4,198 | $17,472 | Free Cash Flow Reconciliation (In thousands) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(18,651) | $(1,130) | | Purchases of property and equipment | $(5,091) | $(10,355) | | Capitalized software development costs | $(5,503) | $(6,333) | | Free cash flow | $(29,245) | $(17,818) | LIQUIDITY AND CAPITAL RESOURCES This section discusses Outbrain's sources of liquidity, including cash, investments, and credit facilities, and its ability to fund operations and debt obligations - Outbrain's primary sources of liquidity include cash and cash equivalents, marketable securities, and its revolving credit facility. The Company believes its current liquidity is sufficient to fund anticipated operating expenses, capital expenditures, debt payments, and share repurchases for at least the next 12 months[200][201] Available Liquidity as of June 30, 2023 (In thousands) | Source | Amount | | :-------------------------- | :------- | | Cash and cash equivalents | $59,802 | | Short-term investments | $113,168 | | Long-term investments | $44,828 | | Revolving Credit Facility (available capacity) | $60,056 | | Total | $277,854 | - Following the partial repurchase, the remaining long-term debt commitment for Convertible Notes is $118.0 million, with annual interest obligations reduced to approximately $3.5 million through 2026[208] - Under its share repurchase program, Outbrain repurchased 1,513,073 shares for $7.1 million in H1 2023, with $22.9 million remaining available as of June 30, 2023[210] - Capital expenditures for H1 2023 were $5.1 million, with full-year 2023 capital expenditures anticipated to be between $10 million and $13 million, primarily for servers and related equipment[212] Critical Accounting Policies and Estimates This section confirms no material changes to the Company's critical accounting policies and estimates compared to its prior annual report - There have been no material changes to the Company's critical accounting policies and estimates compared to those described in its 2022 Form 10-K[219] Recently Issued Accounting Pronouncements This section states that recently issued accounting pronouncements are not expected to materially impact Outbrain's financial statements - The Company has concluded that no recently issued accounting pronouncements are expected to have a material impact on its results of operations, financial condition, or cash flows[43][220] JOBS Act Transition Period As an emerging growth company, Outbrain utilizes the JOBS Act extended transition period for new accounting standards, potentially affecting comparability - As an emerging growth company, Outbrain has elected to use the extended transition period under the JOBS Act for complying with new or revised accounting standards, which may result in its financial statements not being comparable to other public companies[221] Off-Balance Sheet Arrangements This section confirms that Outbrain does not currently engage in off-balance sheet financing arrangements or hold interests in variable interest entities - Outbrain does not currently engage in off-balance sheet financing arrangements and has no interest in variable interest entities[222] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details Outbrain's exposure to and management of market risks, including foreign currency, interest rate, inflation, and credit risks Foreign Currency Risk Outbrain is exposed to foreign currency fluctuations, particularly in operating expenses, and may use forward contracts to manage this risk - Outbrain is exposed to foreign currency exchange rate fluctuations, particularly as operating expenses are denominated in various currencies (e.g., New Israeli Shekels, British pound sterling, Euros). The Company may use foreign currency forward exchange contracts to manage this risk[225] - A hypothetical 10% increase or decrease in weighted-average exchange rates would result in a $1.8 million unfavorable or favorable change to operating income for Q2 2023 and $3.6 million for H1 2023[226] Interest Rate Risk Outbrain's interest rate risk primarily relates to its cash, cash equivalents, and marketable securities, while long-term debt bears a fixed rate - The Company's exposure to interest rate risk primarily relates to its cash and cash equivalents ($59.8 million) and marketable securities ($158.0 million), which include U.S. Treasuries, government bonds, commercial paper, and corporate bonds[228] - A 100-basis point change in interest rates as of June 30, 2023, would change the fair value of the investment portfolio by approximately $1.1 million[229] - Long-term debt (Convertible Notes) of $118.0 million bears a fixed interest rate, limiting interest rate exposure on this debt[227] Inflation Risk Outbrain's business is subject to inflation risk, which could increase costs and reduce advertising spending, negatively impacting financial performance - Outbrain's business is subject to inflation risk, which could lead to higher costs (including wages) and reduced advertising spending, negatively impacting financial performance[230] Credit Risk Outbrain is exposed to credit risk from cash, investments, and accounts receivables, and mitigates this by monitoring customer and counterparty creditworthiness - The Company is exposed to credit risk from cash and cash equivalents, investments, and accounts receivables. It monitors customer credit levels and counterparty creditworthiness for foreign currency forward contracts to mitigate risk[231] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting Evaluation of Disclosure Controls and Procedures Management, including co-CEOs and CFO, concluded that Outbrain's disclosure controls and procedures are effective at a reasonable assurance level as of June 30, 2023 - As of June 30, 2023, management, with the participation of co-CEOs and CFO, concluded that Outbrain's disclosure controls and procedures are designed at a reasonable assurance level and are effective[232] Changes in Internal Control over Financial Reporting No material changes to internal control over financial reporting occurred during the three months ended June 30, 2023 - There were no changes to internal control over financial reporting during the three months ended June 30, 2023, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[233] Inherent Limitations on Effectiveness of Controls Management acknowledges that control systems have inherent limitations and cannot provide absolute assurance against all errors and fraud - Management acknowledges that no control system can provide absolute assurance that all errors and fraud will be prevented, as control systems have inherent limitations and are subject to resource constraints[234] Part II - Other Information This part provides additional information including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings Outbrain is not a party to any material legal proceedings, and a previously disclosed DOJ criminal investigation has concluded - The U.S. Department of Justice informed the Company on July 11, 2023, that it is no longer pursuing the criminal investigation into hiring practices in the Company's industry[94] - The Company is not currently a party to any material legal proceedings[92] Item 1A. Risk Factors No material changes have occurred to the risk factors previously disclosed in Outbrain's 2022 Form 10-K - No material changes to risk factors as previously disclosed in Item 1A of Part I of the Company's 2022 Form 10-K[236] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms no unregistered equity sales, details IPO proceeds use, and provides information on share repurchase activities - There were no unregistered sales of equity securities[237] - Net proceeds from the July 2021 IPO ($145.1 million) were used for working capital, general corporate purposes, and the acquisition of video intelligence AG, with no material change in the planned use of proceeds[238][239] Share Repurchase Activity (Three Months Ended June 30, 2023) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased under Publicly Announced Plans | Max Remaining under Plans (in thousands) | | :----- | :--------------------- | :--------------------------- | :---------------------------------------------- | :--------------------------------------- | | April 2023 | 23,563 | $4.39 | — | $23,897 | | May 2023 | 2,458 | $3.72 | — | $23,897 | | June 2023 | 216,044 | $4.93 | 200,000 | $22,912 | | TOTAL | 242,065 | $4.86 | 200,000 | | - As of June 30, 2023, $22.9 million remained available under the Company's $30 million share repurchase program[95][241] - The Company withheld 42,065 shares ($0.2 million fair value) and 90,267 shares ($0.4 million fair value) during the three and six months ended June 30, 2023, respectively, to satisfy employee tax withholding obligations on vested awards[96][211] Item 5. Other Information No other information is reported under Item 5 - No other information is reported under Item 5[242][243][244] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including agreements, certifications, and XBRL documents - Key exhibits filed include the Note Repurchase Agreement (10.1), First Amendment to the Second Amended Restated Loan and Security Agreement (10.2), various certifications of principal officers (31.1, 31.2, 31.3, 32.1), and XBRL financial data files (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[247] Signatures This section contains the required signatures for the financial report